Double Bottom, also called 2X Bottom, is a chart pattern used to identify the end of a downtrend. The theory is the same as in Double Top just reversed. Double Bottom tells the trader that the bears cannot any longer push prices lower and thereby losing momentum.
Double Bottom works on any time frame in any market. Double Bottoms can be used either for entry or for trend analysis making it a highly valuable tool in Forex trading.After a Double Bottom is confirmed the trend is up for however long that might be. A Double Bottom pattern is relatively easy to spot as they are made up of two equal (or almost) lows, but some criteria have to be fulfilled.
A significant trend before the chart pattern so a trend reversal can take place. Without a bias, a Double Bottom would just be considered a coincidence in sideways price action. Be aware of this and do not get fooled.
First bottom/low, which would mark the low of the uptrend should stop price from dropping any lower.
This low might be tested a few times before price rallies and establish the next important area; the swing high.
The swing high is the high point between the double bottom. It is here where the bears take on the bulls for the last time and win the battle for a short term. This swing high is now the previous area of resistance.
Second-bottom/low is where price test the first low and stops.Price stops dropping and thereby no longer makes lower lows, which is a must in a downtrend. The downtrend is no longer present.
When resistance/swing high is taken out by price, the downtrend is not only gone but turned into an uptrend. It is by this point the Double Bottom is confirmed by price action, and a new trend has begun; An uptrend.
This pattern is not over as there is still one important feature about this Double Bottom pattern. What was resistance (the swing high) is now support. If price successfully test (or tries too) the support and it holds you have a perfect opportunity to enter a long position.
Double Bottom can be traded in three different ways. One more aggressive than the other. The first entry is actually before the chart pattern is confirmed. It is a very aggressive entry with lower odds of success than the other two entries but with a much better risk/reward. The stop is small, and the target is much bigger than the other two less aggressive entries.
When price slowly begins to form the second bottom/low, many traders choose to enter here. It can be done with, for example, a Stochastic or MACD crossover. The second entry is when the Double Bottom gets confirmed as price takes out the resistance at the swing high between the double bottoms. This is less aggressive but involves a more significant stop (if the stop is placed below the double bottoms).
The third entry is after the Double Bottom is confirmed and price as begun it’s ascent.
Price then pull back up to the area what were resistance is now support. This is the most conservative entry as the trader has got a lot more proof, such a confirmed Double Bottom pattern and uptrend. This extra confirmation does not come for free as price does not always test the support and the trader will never get an entry signal.