Learn About The Double Bottom Pattern | ThinkMarkets | EN (2024)

ThinkMarkets > Learn to trade > > Bullish Patterns > Double Bottom Pattern

The double bottom occurs at the end of a downtrend. As the price action moves lower, printing the lower highs and lower lows, the price rebounds higher before returning lower again to retest the previous low.

As the basic rule of the technical analysis says that the twice-touched low becomes a support level, the sellers are unable to print a new low, below the previous low, which provides the buyers with an opportunity to push the price higher. As a result, we have two lows - two bottoms - that resemble the letter “W”.

On the other hand, the highest point of the rebound following the first bottom is considered to be the trigger for the pattern. A horizontal line is drawn at the highest point of a rebound, called the “neckline”.

Given that it’s almost impossible to get two bottoms at the exact same price, as long as these two lows are at a similar price, it is considered to be enough for the validation of a pattern.

Since the pattern is initiated by the downtrend and finalized in an uptrend, the double bottom pattern is considered to be a bullish reversal pattern. The pattern becomes active once the price action breaks above the neckline. As such, the price action shifts from the situation where it creates the lower lows and lower highs, to a situation where it initiates a trend of the higher lows and higher highs.

A double bottom pattern is one of the strongest reversal patterns out there. Since it consists of two bottoms, it’s not a very common pattern. Still, once identified, the pattern is very effective in predicting the change in the trend direction.

Its greatest strength is that it offers clearly defined levels to play against. The neckline marks the risk and it helps determine the take profit once the pattern is activated. Hence, the correct drawing of the double bottom is very important.

However, this proved to be a failed breakout as the price quickly returned below the neckline. This perfectly shows how important the virtue of patience is in trading. Moreover, this also shows why it is important to wait for a close above the neckline before entering the market.

The failed breakouts are usually followed by a sharp move lower to punish the buyers for failing to finalize the initial move higher. This is exactly what happened. However, the buyers regrouped at lower prices, and launched another strong push higher to ultimately break above the neckline around the $1.31 handle.

Hence, our entry is at $1.3110, a level where the USD/CAD closed above the neckline for the first time. The stop-loss should be placed below the neckline, allowing some space for the move similar to a failed breakout where the price action quickly penetrates through the support/resistance without a follow up.

The exact level for stop-loss depends on your risk tolerance, but it can range from 15 to 30 pips below the neckline. Any move and close below the neckline invalidates the activated double bottom pattern.

The take profit is calculated in the same manner as it is the case with the head and shoulders pattern i.e. measuring the distance between the supporting trend line (double bottoms) and the neckline. The same trend line is then copy-pasted from the point where the breakout occurred, with an end point of the trend line being our take profit. In our case, the trend line ends at $1.3180.

Finally, our take profit order is hit a few days later, banking us around 70 pips. Depending on your risk tolerance and stop loss position, we earned 70 pips by risking 15/30 pips, which represents a great risk-reward ratio.