What Does the Double Bottom Signal?
The Double Bottom signals a trend change from bearish to bullish. Many Double Bottom reversals can form along the way up, but until the key support (neckline) is broken, a reversal cannot be confirmed. Here are the 5 key points that signal Prior Trend: With any reversal pattern, there must be an existing trend to reverse. In the case of the Double Bottom reversal, a significant downtrend of several months should First Bottom: The first bottom should mark he lowest point of the current trend. As such, the first bottom is fairly normal and the uptrend is not in jeopardy
- Relief Rally: After the first bottom., there is a sharp spike upwards in price, with a % that varies from every pattern.
- Second Bottom: Support from the previous low should be expected. Even after meeting resistance, only the possibility of a Double Bottom exists. The pattern still needs to be confirmed. The time-frame between bottoms can vary anywhere on any time frame it’s hard to give a time frame for it. While exact bottoms are preferable, there is some leeway. Usually, a bottom tends to end up within 3% of its previous high.
- Reversal from Bottom: The subsequent spike up from the second bottom should witness an expansion in volume, perhaps marked with a gap or two. Such a rally shows that the forces of demand are stronger than supply and a rally is imminent.
- Support Break: Even after trading down to the neckline, level of support, the Double Top reversal is still not complete. Breaking down below the level of support, the lowest point between the peak completes the reversal. This should occur with an increase in volume and a rally.
- Resistance turned Support: Broken resistance becomes potential support on the reversal upwards.
Trading a Double Bottom Pattern
No chart pattern is more common than the double bottom pattern. This pattern appears so often that other patterns are based off of these two such as triple tops, rounding bottom, and head & shoulders.
Trading the SPY on a 4H chart we can see a double bottom formed by the initial descent into a low, forming the first bottom. Next, the SPY reverses upwards until it hits the neckline and from there it starts selling off to create a relatively same low as the first, forming the second bottom in the double bottom.
Looking at the Binance Coin to Tether chart on the 1H you see a bearish momentum followed by a falling knife. BNB finds its bottom around $24, relief rallies to the neckline, and then comes back down to find its second bottom, forming the double bottom. However, this move upwards hasn’t been confirmed yet until it closes over the neckline at $26.938, then it is confirmed as a bullish reversal. This is a very commonly seen pattern in markets, look out for the double bottom reversal pattern its everywhere.
Differences Between the Double Top and Double Bottom Pattern
Although there are many criteria that show similarities between the two, they represent the exact opposite in terms of bullish / bearish reversal patterns. The Double Top signals a potential reversal to the downside, after forming two local highs. On the other hand, the Double Bottom signals a potential reversal to the upside, after forming two local lows. When a double top pattern is formed, take a mental note that the bears have overtaken the bulls and you should start looking for a short position. When a double bottom is formed, take a mental note that the bulls have overtaken the bears and you should start looking for a long position.
Limitations of the Double Bottom Pattern
Double Bottom patterns are highly effective when they are identified correctly. Almost any pattern you can think of: head & shoulders, triple peak, etc. they are all deviations of a Double Bottom. These patterns are game-changers when you know how to use them, but with any game-changing pattern they come with limitations. Don’t automatically default to the conclusion that there are two bottoms that are similar and write it off as a Double Bottom. These patterns can very well have fractals inside the pattern that can push the price of the asset above the previous highs. Another great criticism of trading technical patterns is that these setups always look obvious in hindsight but that executing them in real time is actually very difficult.
