The Double Bottom Pattern is a very strong bullish signal as it shows that the market’s sellers have pushed prices to low levels twice, yet failed to continue the rout of the currency pair. The psychological aspect of the pattern is that sellers will find that they simply do not have the power to continue the selling, and that they suddenly find themselves losing money. The fact that they have to buy the pair back in order to cover their shorts only adds to the power of this technical pattern.
The pattern itself starts with a prolonged downtrend, followed by a rise or bounce in the marketplace as buyers come in to offer support. After a while, the bounce dies off, and the sellers come back into control of the market. However, when they push prices back down to the previous lows, they find they cannot continue the bearish run on the currency pair.
The pattern suggests that the trend is changing, and it makes sense if you think about it. The sellers who were once in control are suddenly finding themselves unable to push prices lower. Not only has this happened, but many of them will get caught in the rise up as their positions are suddenly worth much less, or worse – are now losing money. When that happens, most traders will exit their positions, and as mentioned above, have to buy in order to do so. This of course, means more buying pressure.
The pattern looks like a large “W”, and is one of the most powerful trend change signals out there. A conservative trader will wait until the center of the pattern is broken above. In other words, the “hump” in the middle of the “W”. Take a look at the chart below to see the double bottom represented by the two red circles, and the point in which the buy signal is activated represented by the blue circle.
As a general rule, the larger the previous downtrend, the larger the move will be to the upside. Quite often these patterns appear on the larger time frames, and when they do – look out. This pattern is one that will often predicate months if not years of a different trend than what lead into them when they appear on the daily or weekly charts.
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