A double bottom is just like a double top but reversed. It is a bullish reversal pattern formed after an extended downtrend signaling a change in trend and has a shape of a W.
The double bottoms are formed when prices have fallen strongly and hold at certain levels bounce back and then falls again retesting the same price level where it held first (confirmed support zone). When it re-bounces back, it then forms a double bottom.
Just like on the double top, usually the volume is high on the first bottom then it reduces as the pattern forms and again increases as the pattern completes the formation.
The bottoms are usually in the same zone and so can be joined with a line to form a support and the highs joined form a resistance (Neckline). The pattern is considered complete when price breaks the highs or resistance line.
As the price breaks the resistance line , we expect a reversal to the upside. The resistance level commonly referred to as the neckline acts as the trigger line for the confirmation and entry-level in the direction of the reversal breakout. It is drawn by joining the highs on the pattern as we shall see on the examples below.
When a bullish candle breaks and closes above the Neckline, the pattern has confirmed the Buy signal
After entry, your stop-loss level should be set just below the higher bottom (1st or 2nd) of the pattern. The profit target level is got by measuring the height of the pattern (distance from resistance line to the bottom) and then projecting that same distance forward from the resistance line to the upside as shown on the charts below.
Let’s see how you can trade double bottoms on a price chart.
The chart above is a USDJPY, 4-Hour chart. Just like we had discussed, after an extended downtrend a typical double bottom formed as shown above. The Buy entry was at break & close above the neckline.
The Stop loss just below the higher bottom in this case it was the first bottom. The target was got by simply measuring the height of the pattern and projecting that same distance from the neckline upwards. Let’s take a look at another example on the double bottoms;
Below is a chart on AUDUSD, Daily time-frame with a double bottom.
On this above example, Buy signal too was at break & close above the neckline. The Stop loss just below the higher bottom in this case it was the second bottom. The target was got by simply measuring the height of the pattern (H) and projecting that same distance from the neckline upwards.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...