Double Bottom Pattern in Forex
Discussing the double bottom pattern in forex is the leading technical pattern for spotting the forex market’s potential reversals. Double bottom is generally formed after the extended move down. A trader can use it for buying opportunities on the way up.
It is evident from the name itself that the double bottom pattern includes two bottoms. Both of them are forming a key support level. This action pattern is unique because it simply signals a certain level in the market in which the demand outweighs the supply all at once!
Right through this guide, we will have a quick in-depth discussion about a double bottom pattern, how you can trade it and how it is formed. So let’s dive into the discussion below.
What is a double bottom pattern all about?
Defining a double bottom pattern is the simple trading pattern in forex. These trading setups are generally available at the bottom of the significant moves to its upside. Due to the vast availability of the forex market, this trading pattern can be used frequently across different time frames.
The double bottom pattern is based on four main features, which are:
- Drive down with large retracement to its upside
- Secondly, the price will move back to a similar support area.
- Thirdly the price will push out to that area for another time.
- Price will break itself above the old retracement high or the neckline.
N/A USD 1 1:200
What double bottom pattern tells the investor?
A double bottom chart pattern is beneficial for quickly determining when the index or share is set for a specific price increase. Therefore, when relying on technical analysis, it is essential to figure out when you should pinpoint the double bottom pattern for buying or selling a security.
Generally, the first bottom needs to dip itself at a 10% level, after which a price drop is visible at 20% or even at 30%.
When you plan to buy at the bottom, you will experience tremendous benefits once the stock price increases. But as a beginner, you need to know how to carefully read a double bottom pattern.
A minor dip is witnessed in pricing for determining mid to long-term momentum, which is not more than 5%.
In short, the double bottom is generally based on two distinct lows positioned between the same range and price level.
How is it possible to identify a double bottom pattern?
Into the support zone, the price starts to bounce. This is just because the buyer is buying from the support zone of the market. If the price has started to bounce itself a second time from the zone, it breaks down the last lower high and the neckline breakout. A double bottom pattern is formed straight on a forex chart. In short, a trend reversal is taking place.
For identifying double bottom pattern on the chart, follow the below-mentioned steps:
- There has to be a minor bearish trend just because of the formation of the “W” pattern. This step holds vital importance because the double bottom pattern with the oversold conditions has a considerable probability of winning trading profits.
- You have to draw the support zone which meets the two price touches.
- Mirror the support zone to the higher swing wave, which gradually forms the double bottom pattern.
Possibility of drawing neckline in double bottom pattern
You will notice that the price is always moving forward as in swing waves on the forex chart. The high swing wave will act as the resistance one in the W pattern, and the low swing wave point will act as the support zone.
Resistance zone is generally known as the significant hindrance coming into the way of trading buyers. This zone is nicknamed the neckline of the pattern.
Drawing neckline in double bottom pattern
Thus, market makers attempt to deceive the retail traders by presenting a few false breakouts of different chart patterns. For any new trader, it is essential to identify a valid breakout so you won’t become a victim of market makers.
It would help if you always searched for the big bullish candlestick breaching through the neckline to detect a valid breakout. This bullish candlestick represents a giant buyer’s momentum and will occur only at the key areas on a candlestick chart.
How can you trade forex effectively with a double bottom pattern?
Double bottom patterns have always remained a popular trading strategy among experienced traders. We all know this pattern as the bullish reversal signal. Keeping this fact in mind, you can open specific UP orders on this trading signal.
An optimal and effective trading strategy should ensure take-profit, entry points, and stop-loss in view with forex. Your trading strategy is incomplete if it is not having any of these factors. You can easily open order as soon as the double bottom pattern starts to appear as:
- Entry Point: Once the candlestick which has broken itself out of the resistance level of this trading pattern is fully completed
- Stop-Loss: Positioned at the side of the right bottom of the pattern.
- Take-Profit: When a price has reached a specific increase b from the bottom and move towards the resistance level.
Trade forex with a double bottom pattern
How is a double bottom different from a double top pattern?
The double bottom chart pattern is the opposite of the double top pattern, where both of them are known to be the most crucial chart pattern in a trading journey. A double top pattern occurs when two rounding tops are being formed on a consecutive basis.
These rounding tops will also indicate the bearish reversal after the extended bullish rally. But, on the other hand, the double bottom will have the same interference.
A double bottom pattern is a form of technical analysis describing a specific change happening in a trend. Thus, it even highlights when a stock drops and a new rebound is formed. You will typically see it on the chart in the shape of “W.”
What are the strengths and weaknesses in a double bottom pattern?
The double bottom pattern acts as the powerful reversal pattern in forex trading. Therefore, using this pattern is very effective for successfully predicting a specific change in trend direction.
One of the biggest strengths of Double Bottom is its clearly defined levels to play all against.
The neckline will mark the risk. It often determines the ultimate take profit once the trade pattern has been activated. But still, to gain more profits, accurate drawing of double bottom holds paramount importance.
If we talk about the limitations, it acts as a contrarian strategy. It would help if you never neglected that the whole trend is bearish, and you can use it for a long trade.
Before entering the market, a trader should consult a few supporting factors regarding the other technical indicators to avoid market risks.
When to enter a trade?
Besides considering the trade types, it is essential to pay attention to the market entry timings. There are two main approaches that traders can follow when timing the double bottom pattern, which is discussed below:
1. Anticipating the potential double bottom patterns
The first approach is all about anticipating the double bottom pattern. Hence, this will pose a high risk for traders because they have no idea if the pattern will appear or disappear and how the expected bearish or the bullish trend reversal will somehow occur.
For instance, in the double bottom, a trader will always place their buy order above the neckline of the second rounding bottom. But buying at such a level can be a bit risky. Thus, this will cause the asset to experience a particular temporary price bump before continuing with the bearish downtrend.
But by taking a small risk and setting the buy order earlier, a trader can purchase a specific asset at a low price. And this is how they can achieve significant profits quickly. Thus, this will make them exit from the trade profitably if the breakout has not turned out to be a significant one.
Thus, this approach is selected by those traders who are confident about using technical analysis and might go for more enormous risk opportunities.
2. Wait for the double bottom before entering.
This approach is all about waiting for the time when you finally get the confirmation of having double bottom before entering into any trade.
After forming the second rounding bottom, a reactive trader has to set the buy order just around the top or middle bullish trend reversal.
A trader is quite confident about the bullish trend reversal in certain situations. Thus, this is because a double bottom pattern occurs at this stage. But somehow, they might not be able to move into the ideal price and thus reap lesser profits.
When should you exit the trade?
Like the entry, the concept of exit is also based on the risk appetite and trading strategy. Traders with a lower risk appetite will select the stop losses or profit set near the necklines of double bottom patterns.
Thus, traders with a higher risk appetite will be setting their targets much further along. They will also wait for several fluctuations just in the hope of gaining more profits.
One exciting way a trader can use to set the stop losses is through Bollinger Bands. This technique is generally applied when deciding when to exit or enter a bottom. Thus, this is usually done as:
- Isolate the trough or peak of the first bottom, respectively.
- Overlaying the Bollinger Bands with the two consecutive standard-deviation parameters. The cryptocurrency is a high volatile asset; for it, you can select using four standard-deviation parameters. But for the inherently volatile assets, go with the choice of two standard-deviation parameters, which can cause you to exit the trades too early due to inevitable fluctuations.
- Draw a particular line from the first peak or the trough to Bollinger Bands. This point of intersection is known as stop loss.
One significant advantage of using Bollinger Bands over the traditional stop losses is that they are generally set in standard deviations. Hence, this is why they quickly respond to the market volatility and incorporate robust decision-making.
In comparison to the rest of the technical analysis tools, the use of Bollinger Bands is not a foolproof one. However, you can use this method by combining it with the other reliable indicators, including moving average divergence/ convergence (MACD) or the on-balance volume and relative strength index (RSI).
You can use any of these techniques based on your market assessment and trading preferences.
1. Is the double bottom pattern reliable?
Undoubtedly, the double bottom chart pattern has made itself the most powerful reversal pattern. It is included with two bottoms. Once you identify how you use this pattern, it turns out to be effective in predicting specific changes occurring in the trend direction.
2. How important is a double bottom pattern?
The double bottom pattern is also known as the hull. This pattern forms a stiff and has a stronger girder or beam structure based on two hull plating layers. These two layers are lower and upper plated for any composite beam. Thus, this will strengthen the hull within the secondary hull bending and the strength.
3. How can you find a double bottom of stock?
The W-shaped formation is generally used for identifying the double bottom pattern. Correct buy points of this pattern are 10 cents, above the middle peak of this pattern.
4. How to know if you have a double bottom pattern?
To identify the double bottom pattern, you need to identify the two different peaks of similar height and width. Then, make sure that the distance between the peaks should not be too small and needs to be time frame-based.
To end this discussion, we will state that using a double bottom pattern is practical and valuable to fully ascertain a specific shift in the market sentiments in terms of security. But if this pattern is not carefully analysed, then a trader should be prepared to face a considerable loss.
To judge the pattern’s veracity before starting the trade, it is essential to look at the broader market or sectoral indicators. It is displayed during intraday charts; it is favourable to use this pattern for extended time frames.
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Heinrich is a forex and CFD enthusiast with a passion for writing good informative quality content. He strives to showcase the best forex brokers in Africa. Join him on his Journey!
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