Double Bottom- Full ExplanationA Double Bottom is considered a bullish signal, indicating a possible reversal of the current downtrend to a new uptrend. Sometimes called an "W" formation because of the pattern it creates on the chart, the Double Bottom is one of the most frequently seen and common of the patterns.
The Double Bottom is a reversal pattern of an downtrend trend in a financial instrument's price. The Double Bottom marks an downtrend in the process of becoming a uptrend.
A Double Bottom consists of two well-defined, sharp bottoms at approximately the same price level. The two bottoms are distinct and sharp . The pattern is complete when prices rise above the highest high in the formation. The highest high is called the "confirmation point".
The bullish momentum may be evidenced through a higher bottom on an oscillator like RSI . Though not required, the market may break below the first low, even if briefly. A slight and temporary break below the first bottom is preferred as it may excite the bears only to reverse and trend higher. The neckline is formed between the price low of the valley between the two bottoms. A break above this neckline will confirm the double bottom pattern. The bullish confirmation is specified by a break in the key price resistance level (neckline) situated at the high point between the ‘bottoms’.
Important Characteristics
Following are important characteristics for a Double Top .
Downtrend Preceding Double Top
The Double Bottom is a reversal formation. It begins with prices in an downtrend. The trend downwards should be fairly long and healthy.
Time between Bottoms
Generally, the longer the time between the two bottoms, the more important the pattern is as a good reversal signal.
Volume
Volume tends to be heaviest during the first bottom and lighter on the second. It is common to see volume pick up again at the time of breakout.
Pullback after Breakout
A pullback after the breakout is usual for a Double Bottom. The higher the volume on the breakout, the higher the likelihood is for a pullback.
Two Peaks at Different Levels
Sometimes the two comprising a Double Bottom are not at exactly the same price level. This does not necessarily render the pattern invalid.
Trading with Double Top:
There are certain rules when trading with Double Bottom chart patterns.
Firstly one should see the market phase whether it is up or down. As the double bottom is formed at the end of a downtrend , the prior trend should be an downtrend.
Traders should spot if two rounding bottoms are forming and also note the size of the bottoms.
Traders should only enter the long position when the price break out from the resistance level or the neckline.
Example:
From the below example of the 15 Min chart of BANKNIFTY we can see how bullish reversal takes places after the formation of the double bottom
Stop Loss & Target :
In the case of a Double Bottom chart pattern, the stop loss should be placed at the second bottom of the pattern and can be trailed at the pullback low as price moves higher but this will be a bit aggressive.
The price target should be equal to the distance between the neckline and the bottoms.
The False Break: How to trade the Double Bottom Pattern and profit from “trapped” traders
Now…
When you trade the Double Bottom, you must pay attention to the time and space between the lows — the larger the “gap”, the better.
Why?
Because when the lows are far apart, it gets the attention of more traders who could push the price higher.
And with this concept, you can use it to profit from “trapped” traders.
Here’s how…
The first and second lows should have time and space between them
Let the price break below the first low
Wait for a rejection of lower prices and then go long
The idea is simple.
As the price breaks below the first low, bearish traders will short the markets and have their stops above the lows.
But if the price quickly reverses higher, the short traders are “trapped”.
And you can take advantage of it by going long, anticipating if the price moves higher, it’ll trigger their stops and push the market in your favor.
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Regards
Omahto
