What is a double bottom?

A double bottoms pattern is the inverse of a double top pattern. When such a pattern forms, it is a strong signal that a downtrend is reversing.

A double bottoms starts with a prolonged downtrend, followed by a rise and then another drop to about the same level as the original low of the downtrend. Finally, we see another substantial rise from the second low. The double bottom patter should eventually emulate the letter "W".

Double bottom patterns signal that sellers are beginning to get fewer in number and buyers are beginning to show some strength.  With diminishing sellers and increased buyers there is now a high probability for a trend change occurring.

At the completion to of a double bottom pattern it is now time to exit your short sell and look at going long in that particular cross currency.

How to spot a double bottom pattern

It’s important to note that a solid downtrend must have first occurred before a double bottom pattern can be formed. The pattern starts at the low marked point A in the diagram below. Following point A, a short rally takes place to point C before another retreat to point B which is a level close to the original low point A. Then if a rally occurs above Point C a buy opportunity presents itself. You can see from the pattern below why the double bottom is also called the “W” pattern as the shape forms the letter W.

How to trade double bottom FX patterns

The pattern setup is confirmed when the price breaks above point C and at this stage a long position should be entered into. If the cross currency falls just below point B, after entering the trade, then the position should be existed for a loss.

Often there is a second opportunity to enter this trade, and that is when the price rallies back down to the support line which then acts as a resistance level (shown as point D in the diagram below). Therefore a more conservative Forex Trading Strategy would be to only go long after a little reversal and retest of the point C (where point D is) and to then place a stop-loss just below the resistance level as shown in the chart below.

There is a correlation between the magnitude of the initial downtrend and the size of the following uptrend. The larger the initial downtrend the bigger the subsequent rise. Often a profit target is set according to the Fibonacci series with the first profit target being about a 33% increase from the length of the initial uptrend and the second profit target being 50%. Your trading software should allow you to easily plot these Fibonacci lines.

Double Bottom to tips

A word of caution: While the Double Bottom formation may seem straight forward and simple it can be treacherous to trade, partly because of their similarity to triple bottoms and trading ranges. Many false double bottoms can form along the way down, but until key support is broken, a reversal cannot be confirmed so be patient to wait for the support level to be violated (point C on our chart).

To confirm that a double top is taking place it is often informative to examine momentum indicators, such as the MACD indicator, as further confirmation.


Published on 27th of April 2011
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