Double Bottom Chart Pattern: Meaning, Guide and Tips

Like most price patterns, the double bottom patterns came to us from the Western technical analysis. While trading in the financial markets, you have probably come across this pattern, looking like the letter W.

A double bottom chart pattern means a soon trend reversal. It is a signal to open long positions on the asset. The price reaches the low, along which there is a strong support level. That is a critical level below which the price cannot go down, trying in vain to break it out twice. In other words, the support zone provides good prices to buy, followed by a trend reversal at the bottom and profit-taking at the top.

What Is Double Bottom?

A double bottom pattern is a price chart formation that appears at the trend low and signals a soon price movement reversal up. This chart pattern belongs to the Price Action technical analysis technique, which involves analyzing price movements without using additional technical indicators.

The essence of the double bottom chart pattern lies in the name. The pattern is characterized by forming two bottoms located approximately at the same level. Between these two lows, there is a small upward correction, which gives the pattern the final look of the letter W.

What Does the Double Bottom Pattern Tell You

The double bottom patterns on the chart indicate the asset price has reached a strong support level for buyers. This is a reversal pattern that signals a likely bearish-to-bullish reversal. The pattern can be found in any financial markets, including stocks, bonds, Forex, cryptocurrency, and commodity markets.

Detected in daily or weekly charts, the pattern works more accurately in medium and long-term timeframes. However, double bottom patterns are also quite efficient in day trading. 

It should be emphasized that the greater the distance between two bottoms, the higher the probability of a trend reversal and pattern completion. This is because the bulls show their strength and intention to increase the price while not allowing the bears to go below the critical point.

But there are times when buyers fail to hold their positions, and quotes break through the support line under the selling pressure. As a rule, this can occur because of fundamental negative factors for the asset.

In technical terms, double bottom patterns form in a downtrend and signal a soon trend reversal up. 

Examples of Double Bottom Pattern

Let us look at an example of the double bottom formation in the BTC/USD daily chart.

The chart shows the formation of the first bottom, which is the support level.

In addition, the formation of bear traps at this level should be highlighted, which will increase liquidity and send the price higher to an intermediate resistance level or the so-called neckline. After that, the bears again tested the support level, forming the second bottom on the chart. However, the price didn’t break out the support.

Also, note that the distance between the two bottoms is quite long. Following the second bottom, the price grows steadily and without corrections. Thus, the double bottom pattern has completed. 

Another example of double bottom formations is in the H4 META Platforms Inc chart.

Point number 1 marks the first bottom; next, the price goes back to point 2, the intermediary high. Next, the selling pressure increases, and the market again drops to the support level (point 3). 

At this point, a bearish trap appears, followed by a steady price growth to the resistance level. As a result, buyers tested the resistance level and consolidated the price above. Thus, the pattern is confirmed, and one should enter long trades.

How to Identify Double Bottom Pattern

One should know the formation rules to determine double bottom patterns and what the pattern looks like. 

Double bottom patterns are common bullish reversal patterns. The formation appears in the Forex, cryptocurrency, commodity, and stock markets. In addition, the pattern can be formed both in short-term and long-term timeframes, from 5-minute to monthly ones. Note that longer timeframes provide more accurate signals, including reversal ones. 

Parameters of the double bottom patterns

• Double bottom patterns form at the trend’s low; so, look for the pattern in a downtrend, following the price falls. 
• The first bottom in the pattern, in terms of market participants’ psychology, is the support level, and the price shouldn’t go below it. The first bottom is the first price low, after which the price rises. 
• The highest point of resistance when the price rebounds from the first low is the first bulls’ attempt to test the bears’ strength. As a rule, at the same time, trading volumes increase;
• Having tested the upper level, the price goes down to the previous low, forming the second bottom, and tries to break it through. If the price goes beyond the second low, the pattern is canceled. If the price bounces and grows to the resistance level, it means that bulls outweigh bears. The trading volumes also grow. 
• To confirm the trend reversal up, you need to expect the resistance breakout and price consolidation below. The price could test the broken-out level, or it can continue growing without corrections.

How to Identify Double Bottom Pattern

Double bottom patterns in the chart mean a soon trend reversal. It means that the downtrend is exhausting, and the buying pressure is growing. 

The price should rebound up from the support level. Further price growth is stimulated by large purchases. 

Accumulating long positions in the zone between support and resistance levels provides bullish momentum, and the price breaks out the neckline of the W pattern. The price consolidation above the broken-out level is a signal to enter a long trade. 

Double Bottom Pattern vs Double Top Pattern

A double top has an ‘M’ shape and indicates a bearish reversal in trend, like a head and shoulders pattern. A double bottom has a ‘W’ shape and signals a bullish price movement.

The comparison of these two patterns is presented in the table below

	Double bottom	Double top
Pattern construction	The pattern forms at the trend low and signals a bullish reversal.	The pattern forms at the trend high and signals a bearish reversal.
Support	The support level is defined by the pattern bottoms.	The support level is defined by two tops of the pattern.
Resistance	The resistance level is the local high of an ascending correction between two bottoms.	The resistance level is at the local low of a descending correction between two tops.
Entry point	The entry point is above the resistance level or the neckline when the price bounces up.	The entry point is below the resistance level.
Stop loss	A stop loss is set a little lower than the broken-out resistance level according to the trading system’s rules.	A stop loss is set a little higher than the broken-out resistance level according to the trading system’s rules.
Target profit	The take profit level is defined by the height of the preceding downtrend.	The take-profit level is defined by the height of the preceding uptrend.

How to Trade the Double Bottom Pattern

Pattern trading is a well-established system with certain entry/exit points for a trade and a stop loss level. Let us study the Double Bottom patterns trading strategies in more detail using the four-hour chart of the USD/CHF currency pair as an example.

First of all, it is necessary to analyze the price chart and detect the beginning of the pattern formation and the downtrend preceding it. In addition, it is important to mark the levels of support and resistance for the pattern and add a volume indicator to the chart for additional confirmation of the pattern.

After the formation of the first bottom and the price rebound to the intermediate resistance level, it is necessary to wait until the price chart draws the second bottom and turns up again. At this point, it is important not to make impulsive decisions and wait until the price breaks through the neckline. Next, you need to observe how the asset will behave and whether the volumes grow when the price recovers back to the resistance level.

As a rule, after the breakout, there is a short correction. Thus, the price tests the broken-out level, and the pattern continues developing. If the market bounces higher, you can open a long position while setting a stop loss below the resistance level and profit targets above the resistance at the level equal to the range of the preceding downtrend.

W Pattern Trading Tips

Follow these recommendations to avoid mistakes when trading double bottom patterns

• Look for double bottoms only in a downtrend, as this is a reversal pattern that forms at a low. 
• The buy signal provided by the pattern is more accurate in longer timeframes. 
• Double bottom patterns can be detected in any type of market.
• Use volume indicators to confirm the buy signal when trading double bottom patterns.
• It is also recommended to use other technical indicators, such as MACD or RSI, as they allow you to detect the trend low. The longer the timeframe the indicator reaches the lower boundary, the greater the likelihood of a soon reversal and growth to the upper boundary. In particular, this is indicated by the bullish divergence.
• Employ candlestick chart analysis to get additional reversal signals to buy, such as hammer, morning star, bullish engulfing, and other candlestick patterns. 
• Before you enter a buy trade, make sure that the price has broken out the resistance level, consolidated above, and tested the level. Enter a long trade when the market bounces higher.
• Enter a trade only after you received several buy signals from different technical analysis tools.
• Follow risk management rules, and observe the rules to enter and exit trades according to the double bottom patterns. 

Double Bottom Pros and Cons

Like any other technical analysis pattern, double bottom patterns have their pros and cons.

Advantages

• You can trade double bottom patterns in any timeframe, from M5 to D1 or W1;
• Double bottom patterns often appear in the price chart; 
• Double bottom patterns help to define pivot levels, which gives an advantage in analysis;
• you can trade double bottom patterns in Forex, cryptocurrency, stocks, bonds, and commodity market;
• Double bottoms trading has clear rules to determine entry and exit points, which reduces risks.

Drawbacks

• Along with double bottom patterns, there can be false breakouts and bullish traps. In particular, such things can happen in shorter timeframes, as the overall trend remains bearish in a longer timeframe. In this case, you will trade against the trend, which is not safe. 
• There often can form a triple bottom pattern confusing traders. In this case, the trade is entered not correctly. To reduce the risks of losing money, one should always set stop losses.

Conclusion

Summing up, I should note that a double bottom pattern is a strong reversal signal. The pattern forms at the low of the downtrend and signals a soon bearish-to-bullish reversal.

It is important to note that the pattern has its pitfalls, and all possible risks should be studied before trading it. However, this chart pattern has a well-established trading system, following which you can make stable profits.