Double Bottom Reversal Pattern

This is the third blog post on the series of basic chart patterns. If you haven’t read previous ones, be sure to do it. I am still covering the first big group of the patterns: reversal ones. Today I want to discuss double bottom formation and clarify how you can trade it. It is basically the same structure as double top, except inverted, in the same fashion inverted head and shoulders pattern (bullish) is to head and shoulders (bearish). So, let’s define it!

It is a bullish reversal pattern that is often found at the end of a bearish trend and when validated it often results in a big uptrend. This technical structure consists of two bottoms that are relatively equal in terms of place they form.

So, firstly, there has to be a bearish move before the pattern forms. At some point price reaches important support level, where the first through (bottom) forms and then it starts going up rapidly. After some time price reaches important resistance level and forms the first peak. It entices bearish traders to step in and continue selling as they assume the downtrend will continue. Price collapses back to previous support (through) and fails to break it convincingly. In most situations this bottom will be slightly higher than the first one, in other situations price can break previous bottom by some 3-15 pips and then a sharp reversal will take place. When that happens we can be sure that the second through (bottom) is in place.

Price will start rising again till previous resistance level where it stopped and rallied to form the second bottom. It may linger there for a while, but double bottom pattern is really validated when price breaks up through that resistance and continues going up.

How do you trade it?

One of the best ways to trade the pattern is to place a buy stop order above the first resistance level where price came and then collapsed to form the second bottom. You may wait for the level to be hit second time, retrace a little and then if it starts going up again, place a buy stop order above the resistance with a stop loss order below the most recent support. When the resistance is broken, pattern is validated and you should be in the game of buying.

Where to take profit?

It is not difficult to calculate a minimum expected target. You can do that by calculating the distance from the bottom to the resistance and adding it to the breakout level. If the distance is 500 pips, this is the minimum distance you expect price to go from breakout level upwards.

I want to illustrate how it works by attaching a weekly chart of gbp/usd with a double bottom pattern. When the structure was confirmed after resistance was broken price rallied more than 1400 pips before reversing. The minimum target for the move was measured to be 938 pips. You could have taken that easily and many more had you traded with a few positions.

double bottom pattern