Last Updated on 10 February, 2024 by Trading System
There are many types of chart patterns out there that are used by traders to predict the future movements of a market. Often they resemble some type of geometrical shape or form in an attempt to point out market tops and bottoms. Others make use of definitions that try to quantify the market psychology that occurs around market tops and bottoms. The double bottom is such a trading pattern!
A double bottom is a bullish reversal trading pattern that consists of two market bottoms that form around the same level, which are followed by a breakout to the upside. In other words, the double bottom is a bullish reversal pattern that forms in an ongoing bearish trend.
In this guide to the bullish double bottom pattern we are going to cover all the essential aspects of the pattern, and then some more!
Here are some things you’ll get more familiar with:
- How to trade double bottom pattern
- How many traders trade double bottoms
- The psychology behind the pattern
- Some notes on the reliability of double bottoms
Having so much to cover, it’s time to get started!
What Is the Double Bottom Pattern?- Definition
Like we mentioned briefly above, a double bottom signals that there is a change going on in the market, from bearish to bullish market conditions. The pattern is typically quite easy to identify once you’ve got the hang of it, but it may still be beneficial to go through the conditions in more detail. After all, there some things worth noting!
Below we cover the anatomy of a double bottom. You may reference the image above where each point has been marked for convenience.
- The first bottom: The first bottom forms the lowest bottom of the on-going bearish trend to date. At this stage, you see no signs of a double bottom forming, since the new lower close blends in perfectly with the prevailing bearish trend. Typically, market sentiment is bearish, but there is some room for positive swings as the security has become quite oversold. This leads us to the next part of the pattern…
- The trough: Having become oversold, the market now bounces back and recovers some of the losses of the last period. A common number that’s often mentioned when determining an optimal size of the trough, is around 10%-20% between the low of the first bottom and the peak of the trough. This makes sure that we have a real, visible dent that’s big enough for many people to notice, while it’s of a size that won’t offset the meaning of the pattern going forward.
- Another Bottom: With the market having performed the trough, most people now expect that the bearish trend is going to continue, in line with the preceding bearish trend. This assumption holds true as the market turns around and heads towards the previous low. However, unexpectantly it stops around the same price as the previous bottom and reverses. This shows that the first bottom is now acting as support, which in turn tells us that buyers have started to become stronger. This is a positive sign!
- The upturn: With the market having shown strength, more people are becoming convinced that there might be some positive price swings worth catching going forward. As such, buying pressure increases, and drives the market upwards.
- The Breakout: This is the final part of the double bottom pattern, where we see a breakout above the high of the trough, which acts as a resistance level. In essence, the breakout acts to confirm that bulls have finally won the fight, as bears didn’t have the strength to keep the market from advancing past the resistance level. If the market doesn’t fall back quickly below the breakout level, we’ve had a double bottom pattern according to the original definition.
The Direction of the trend
In addition to the pattern itself, it’s worth noting that there needs to be a bearish trend to turn around for the pattern to occur.
According to the original definition, there should be a clear uptrend that should have been on-going for some time. This is to increase the chance that we’re entering trending market conditions, where there is a bigger chance that the coming bearish move will be of significant size.
The Psychology of Double Bottoms
We have already included some details about how market players may reason as the pattern forms, and how it can impact and actually lead the market forward. Just keep in mind that every scenario is different, and that it’s always hard to know exactly what made a market move as it did.
Nevertheless, the most important psychological aspects are the breakout that occurs at the end, and the fact that the second bottom doesn’t go lower than the first low. Both simply show how bears retreated and made room for bulls to enter the scene.
Do Double Bottoms Work?
The most important question you should ask yourself before trading any pattern or strategy, is if it actually works, or just is a figment of one’s imagination.
In general, different types of patterns in technical analysis don’t work that well when just implemented on a random market and timeframe. In other words, you’ll have to find the conditions in which a pattern works before making any decision.
This, of course, applies to the double bottom as well, and the best way to find out if it works with your setup is to study its past performance. Either you choose to manually point out those times when a pattern occurred in the past, or you make use of backtesting to quickly receive a report on the pattern’s historical performance.
Here follow some important tips when it comes to validating and testing the historical performance of any pattern!
1. Remember that definitions vary
Keep in mind that many trading patterns won’t live up to the exact rules of their original definition. As such, the process of finding patterns can be highly arbitrary, which means that the results you get may vary a lot depending on which patterns that meet your conditions, and which ones that don’t.
Keep in mind that it can be very tempting to rule out patterns that weren’t profitable with the advantage of hindsight. However, in reality, it remains highly likely that you would have taken those trades anyways, which is a fact that could render your performance statistics useless!
2. Scroll the chart!
To not rule out trades solely based on that they turned into losers, try to make sure that you never see the moves that followed the pattern, before you decide whether it should be included or not.
This rules out those instances when you unconsciously decide to not include one occurrence just because it turned out to not work well. In other words, scroll the chart and stop as soon as you spot a new pattern. As soon as you’ve decided whether to take or leave the trade, you may scroll on and see the outcome!
3. Backtesting definition
Those of you who are using backtesting to detect historical patterns will have to come up with a rules-based definition of the pattern. Even though it might sound like a more reliable method, it’s very hard to come with a definition that works well consistently, and manages to detect the patterns in a reliable manner. This is a major concern that must be considered carefully!
Another consequence is that you need to be very careful with external data about the performance of any trading pattern. Since there are so many ways you could define one single pattern, the data provider might just have tried countless combinations of rules until he stumbled upon something promising. In other words, in such a case they’ve just curve fit the rules.
How to Trade Double bottoms
Having covered the basic definition, psychology, and whether the pattern is reliable, let’s now look at how some traders choose to incorporate the double bottom pattern in their trading. There is especially one tweak that is considered vital in order to remove as many of those signals that aren’t reliable and only would result in losses.
Let’s have a look at it!
Step 1: Identify the emerging double bottom
Identifying the double bottom should, in theory, be done easily with the help of the criteria you’ve been presented with. However, in the heat of the moment, you don’t have the benefit of hindsight, which will make it somewhat more difficult.
Step 2: The double bottom retest retest
Once the double bottom has been finalized, we’re adding one more condition to improve the accuracy of our trades.
The extra step involves waiting for the market to retest the breakout level. If it holds, it shows us that buyers still remain strong, and are ready to fuel the coming positive trend.
The image below shows this very setup.
Ways to Improve Double Bottom
Now, with this covered, we wanted to show you some extra tips to deal with false signals. These are techniques that we have used successfully in a lot of our own trading strategies, and that we believe can work well with the double bottom pattern as well!
Let’s look closer at them!
1. Comparing lows
If we go back to the original definition of the pattern, it was the fact that two lows occurred around the same level, that gave us the hint that the bearish forces weren’t strong enough to cause a further decline in the market.
With this in mind, a case where the second bottom even recovers earlier than the first bottom, would indicate an even more bullish market state. At least that’s the way some traders choose to interpret such conditions!
The image below shows an example of such a case, where the first low was lower than the second one.
2. Volume patterns and conditions
While a double bottom by its original definition is helped by declining volume throughout the pattern, this doesn’t prevent us from adding more conditions related to volume, to help improve the hit rate.
One example of a common application of volume, conditions is to demand that the breakout which finishes the pattern, is carried out with an extra burst of volume. That way we can become a little more secure that a majority of market participants took part in the move, and are going to support the longer-term market move that might form.
Another approach could be to watch how the volume develops around bottoms and peak. In case there is a lot of activity seen around the lows, with the second low being formed with less volume than the first one, a lot of traders will choose to regard that as a sign that the trend might actually revert soon!
In the image below you see an example of a setup:
3. Adding extra distance to the breakout level
In breakout trading, the biggest concern traders face, is false breakouts. And considering that the double bottom pattern includes a breakout, this is one of the major issues we’ll be facing here as well.
Earlier we discussed how you may use a revisit to the breakout level as confirmation, to help mitigate this issue. Another common approach that’s used by many, is to add some distance to the breakout level. With the added distance, the market is given more room to carry out its sometimes random swings, and will, therefore, be less inclined to hit the breakout level due to random swings.
To calculate the distance you should be adding, one common approach is to use a multiple of the Average True Range. That way you adapt the breakout distance to the current situation with regards to market volatility, which could be quite beneficial in many cases!
Bearish Double Top
The double top is an inverted double bottoms pattern and signals the end of the current bullish market trend.
Our article on the double top pattern covers this pattern in-depth!
Here are some great resources if you want to learn more about building your own trading strategies, and becoming a profitable trader!
FAQ
What is a double bottom pattern in technical analysis?
A double bottom pattern is a chart formation that occurs when an asset’s price falls to a low point, bounces back up, and then falls to a similar low point again before eventually rising again. This pattern is often seen as a bullish sign, as it indicates that the asset may be ready to start a new uptrend.
How is a double bottom pattern formed?
A double bottom pattern is formed when an asset’s price falls to a low point, bounces back up, and then falls to a similar low point again before eventually rising again. This pattern is typically identified by two distinct troughs in the price chart, with a peak in between.
What does a double bottom pattern indicate?
A double bottom pattern is often seen as a bullish sign, as it indicates that the asset may be ready to start a new uptrend. This pattern can be seen as a sign that the asset’s price has reached a level of support, and that there may be strong buying pressure at these levels.
How do traders interpret a double bottom pattern?
Traders often interpret a double bottom pattern as a sign that the asset’s price has reached a level of support, and that there may be strong buying pressure at these levels. This pattern can be seen as a sign that the asset’s price may be ready to start a new uptrend.
What are the key characteristics of a double bottom pattern?
The key characteristics of a double bottom pattern include:
Two distinct troughs in the price chart, with a peak in between
A bounce back up after the first trough, followed by a fall to a similar low point before eventually rising again
A potential reversal of the asset’s previous downtrend
How do traders use double bottom patterns to make trading decisions?
Traders may use double bottom patterns to identify potential entry points in an asset’s price. For example, if a trader sees a double bottom pattern forming on an asset’s chart, they may decide to buy the asset at the second trough, in the expectation that the asset’s price will rise.
What are the risks of trading based on a double bottom pattern?
There are several risks to consider when trading based on a double bottom pattern:
*False signals: A double bottom pattern may not always lead to a reversal of the asset’s trend, and the asset’s price may continue to decline even after the pattern has formed.
*Lack of confirmation: It is important to look for other technical indicators or chart patterns to confirm the validity of a double bottom pattern before making a trade.
*Volatility: The asset’s price may be volatile around the time the double bottom pattern is forming, making it difficult to accurately predict the asset’s future price movements.
What are some variations of the double bottom pattern?
There are several variations of the double bottom pattern, including the triple bottom, the rounded bottom, and the inverted rounded bottom.
What is a triple bottom pattern?
A triple bottom pattern is a variation of the double bottom pattern that is formed by three distinct troughs in the price chart, with two peaks in between. This pattern is often seen as a more bullish sign than a double-bottom pattern, as it indicates that the asset’s price has reached a strong level of support and may be ready to start a new uptrend.
What is a rounded bottom pattern?
A rounded bottom pattern is a variation of the double bottom pattern that is characterized by a more gradual decline in the asset’s price, followed by a slower rise. This pattern is often seen as a sign that the asset’s.
What is a double bottom retest in technical analysis?
A double bottom retest is a chart pattern that occurs when an asset’s price falls to a low point, bounces back up, falls to a similar low point again, and then rises above the peak that occurred between the two troughs. This pattern is often seen as a bullish sign, as it indicates that the asset may be ready to start a new uptrend and that the previous low point may now act as a level of support.
How is a double bottom retest pattern formed?
A double bottom retest pattern is formed when an asset’s price falls to a low point, bounces back up, falls to a similar low point again, and then rises above the peak that occurred between the two troughs. This pattern is typically identified by two distinct troughs in the price chart, with a peak in between, followed by a rise above that peak.
What does a double bottom retest pattern indicate?
A double bottom retest pattern is often seen as a bullish sign, as it indicates that the asset may be ready to start a new uptrend and that the previous low point may now act as a level of support. This pattern can be seen as a sign that the asset’s price has reached a level of support and that there may be strong buying pressure at these levels.
What is a double top pattern in technical analysis?
A double top pattern is a chart formation that occurs when an asset’s price rises to a high point, falls back down, and then rises to a similar high point again before eventually falling again. This pattern is often seen as a bearish sign, as it indicates that the asset may be ready to start a new downtrend.
How is a double top pattern formed?
A double top pattern is formed when an asset’s price rises to a high point, falls back down, and then rises to a similar high point again before eventually falling again. This pattern is typically identified by two distinct peaks in the price chart, with a trough in between.
How do traders trade a double top pattern?
Traders may use a double top pattern to identify potential entry points for selling the asset. For example, if a trader sees a double top pattern forming on an asset’s chart, they may decide to sell the asset at the second peak, in the expectation that the asset’s price will fall. However, it is important for traders to consider other technical indicators or chart patterns to confirm the validity of the double top pattern before making a trade. Additionally, traders should also consider the risks involved in trading based on a double top pattern, such as the possibility of false signals or volatility in the asset’s price.
Final Notes
In this article we have looked closer at the double bottom pattern and how many traders choose to make use of it in their trading. In addition, we’ve covered more techniques that you may use to improve the hit rate and performance of the pattern!
Double bottom patterns are chart patterns that are commonly used in technical analysis to identify potential reversals in the trend of a financial instrument, such as a stock, currency, or cryptocurrency. These patterns are characterized by two downward price swings that are separated by a low point, or “bottom.” The first bottom is typically followed by a rally, which is then followed by another downward price swing that forms the second bottom. The two bottoms should be roughly equal in price, and the area between them is known as the “valley.”
A double bottom pattern can be a useful tool for swing traders, who aim to profit from short-term price movements by buying low and selling high. The pattern can indicate a potential reversal in the trend of the financial instrument and provide an opportunity for traders to enter a long position, or bet on an upward price movement.
There are a few different variations of the double bottom pattern, including the “Adam and Eve” double bottom pattern, which is named after the biblical figures due to the way the pattern is shaped. This variation of the pattern includes a peak, or “neckline,” that forms between the two bottoms and represents a key resistance level that the price must break through in order to confirm the reversal.
Another variation of the double bottom pattern is the “W” bottom pattern, which is similar to the Adam and Eve pattern but with a shallower slope on the neckline. This pattern can be less reliable than the Adam and Eve pattern, as it may be more difficult to confirm the reversal.
There are also indicators that can be used to identify double bottom patterns, such as the double top and double bottom indicator. This indicator uses moving averages and other technical indicators to highlight potential double bottom patterns on a chart.
When trading double bottom patterns, it is important to pay attention to the volume of the financial instrument, as a high volume of trading activity can help to confirm the reversal. It is also important to consider other factors, such as the overall market trend and economic conditions, in order to make informed trading decisions.
In conclusion, double bottom patterns are chart patterns that can be used to identify potential reversals in the trend of a financial instrument. These patterns can be useful for swing traders looking to enter long positions and profit from upward price movements. There are several variations of the double bottom pattern, including the Adam and Eve pattern and the W bottom pattern, and indicators such as the double top and double bottom indicator can be used to identify these patterns on a chart.
Now, as a final note, we’d like to one more time put emphasis on the importance of never taking anything in trading for granted. It’s essential that you always perform your own tests, to ensure that the methods you rely on actually have an edge. Unfortunately, many traders never come this far, and continue to trade losing trading strategies as a result!
