Double Bottom (Reversal)

Double Bottoms are essentially mirror images of Double Tops and they still alert us to the major factor that the price action is about to change direction (reversal pattern) but this time from a downtrend to an uptrend.

Double Bottoms are formed after an extended downtrend and price action starts to pause then trades in what we call a trading channel.

You can visualise the Double Bottom when analysing your chart because it has two roughly equal consecutive troughs (bottoming pricing action) and a peak in the middle.

There are a few variations of the Double Bottoms and throughout our educational examples you will see how we, as professional traders, analyse them for shorter and longer term trading.

With all the patterns we will be looking at, the Double Bottom does not differ when doing your chart analysis.

1. Establish Trend – Like any other reversal pattern there must be a long term established trend to reverse with the Double Bottom. Double Bottoms have to be formed after a significant Downtrend.
2. First Trough – This will be the low of the price action after the significant downtrend and you will sometimes see price action testing in this area before creating the neckline/peak.
3. Peak – after the first Trough has been rejected and price action starts retracing back to an area of resistance, you will sometimes see a decline in demand which is shown in the volume.
4. Second Trough – now the area of resistance has been created, the price action can begin to test the price of the first trough. Some analysts require price action to be within 3% either side of the first trough price but we think it is entirely up to the individual trader-within reason!
5. Resistance Break – Now that the second trough has been establish and price has been rejected, price will advance to the resistance area of the peak. As the channel has normally been created over a 2 month period, the peaks resistance area will more often than not be tested a few times before breaking. Only after the resistance has been broken and the price action has closed above resistance can we be sure that the pattern is confirmed.
6. Support – What was resistance now becomes support and more often than not will be tested by the price and rejected. This is the chance for you to either exit all long positions from previous uptrend or enter your short position in the market.

Double Bottom Chart Pattern

Styles traded – There are three ways in which the Double Bottoms can be traded:

1. Aggressive – When price action of the second trough reaches the price level of the first trough. This is considered a low odds trade and you will be stopped out more often.
2. Less Aggressive – The price breaks the resistance area and closes above. This has a bigger stop loss but is more confirmation that it’s on its way up.
3. Might Miss – Price retests the resistance area which is now the support area.

Double Bottom Chart 2

All three trading style entries have their strength and weaknesses and will come down to the trading style of the individual trader and their tolerance to money management (R&R).

How To Trade Double Bottoms – Chart Analysis Video