Techical Analysis N°2: Double Bottom

Double bottom is a trend reversal pattern in technical analysis of charts which indicates that the bears are losing control while bulls are gaining momentum and preparing for a possible trend reversal. Double bottom is usually like the “W” alphabet which indicates the bullish reversal of price after hitting a low two times with a small interval between them. After hitting the bottom the first time, volume increases but not significantly during a small bounce. While it goes for a 2nd low, volume usually decreases and there should be a significant increase in the volume after hitting the bottom a second time for a reversal confirmation. 

To qualify for a double bottom it should fulfil the following basic requirements:

• Appears after a drop in the price

• There should be some space between the two lows

• The price of both lows should be roughly equal

• Volume should increase significantly after trouncing the bottom 2nd time

The time duration during which the double bottom pattern forms is also important as the double bottom pattern on a bigger timeframe is considered stronger and may result in a significant reversal of price. Price support where the double bottom is being formed should also be strong to have a significant impact. 

Trading a Double Bottom

Trading a double bottom is easy as shown in the image. The chart provided in the image is just one of the double bottom shapes as there can be various price actions which may also result in a double bottom. But all double bottom patterns should have all the characteristics as written above.

As always before you enter a trade you need to mark the entry point, exit point and determine the stop loss point as well. You can enter when it breaks the neckline pointed out in the image or you can also enter on a retest of the neckline. A retest is not necessary but usually, it happens, and bouncing on a retest is a confirmation that the pattern is playing as expected. 

For proper risk management, you need to size your position properly and set a stop loss below the double bottom or even you can apply the stop loss below the neckline. It’s just a matter of the individual's trading style and how much risk he is looking to take. And the last and most important thing is making a profit. Your 1st target should be equal to the size of the difference between the bottom and neckline. Like if the bottom price is $50 and the neckline price is $65 then your first target will be equal to $80 ($65 + ($65 - $50)). After your 1st target is achieved you should move your stop loss to the neckline and mark the 2nd target point based on price resistance and Fibonacci levels.