A double bottom pattern is the mirror image of the double top pattern. It looks like the letter “W” or the tushies of twin babies hugging. It happens when the pair is in a strong downtrend, followed by two consecutive valleys that are approximately equal to each other,with a peak in between.
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Identifying A Double Bottom
The “bottoms” are valleys that are formed when the price hits a certain level that can’t be broken.
Double Bottom formed on USD/CHF 4-Hour Chart
The chart shows the Dollar-Swissy pair on a 4-hour candlestick chart. The story behind this chart is that the pair had been falling rapidly until it hit a support level, the level of the low of the first bottom. Since the pair was very stubborn, it decided to go back, gain energy, and try that level one more time (the second bottom). It’s a shame, but it couldn’t make it. So the U.S. dollar and the Swiss franc got upset and said to each other: “Now that we are not able to continue down even with such a powerful downtrend, let’s just turn around and switch directions and show those traders who they are dealing with!”
And that was the beginning of a new uptrend.
Downtrend Reversal after Formation of a Double Bottom Chart Pattern
Tada! Just as with the double top pattern, we should pay close attention to whether or not the pattern has been confirmed by a subsequent break of resistance (the neckline), which is shown in Figure 12-7. After seeing that, along with other points of the Invest Diva Diamond analysis, we could place a bullish entry order (buy order) above the neckline and enjoy the ride up. Just to be safe, we usually set our limit order the same distance as that between the bottom and the neckline.
Double Bottom Example in Stock Market:
Double Bottom Pattern Example on a Stock Chart
In this example, the price is in a downtrend from point A to point B. It then hit a support level, subsequently rallied back, and was in a trading range for about two months. At point C, the price then retested the low set by point B and rebounded nicely off of it. Afterward, the price rallied strongly as the double bottom began to form. A confirmation, however, would be needed to signal that the trend has indeed reversed, and this may be issued by a break of resistance at a previous high, point A.
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Also Good to Know…
Doubles are typically accompanied by high volume on the first top (or bottom), very light volume on the second, and very heavy volume on the breakout.
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