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The Double Bottom Pattern is a chart pattern, also known as a reversal bullish pattern in Technical Analysis, which is used to trade reversals on a strong support zone. It is also known as the “W” pattern and indicates a change in momentum and a drastic change in the direction of the stock price, that is, a shift from bearish to bullish.
This pattern is used by professional traders to gain high profits, but correct identification and timing play a crucial role in the execution of the pattern.
What is a Double Bottom Pattern?
The Double Bottom Chart pattern is formed after a long downtrend and results in the uptrend at the end, therefore called a bullish reversal pattern. It is expected to form on a strong support line or zone, as described in the above chart with dotted lines.
The first rebound from the support line is the initiating point for the pattern. The zig-zag movement in price in a particular zone for its neckline is represented by a solid black line in the above picture.
The neckline is the deciding point for traders. Most aggressive traders take entry on the breakout through the neckline. Some conservative traders enter after double confirmation, breakout, and retest. They generally put their Stop Loss just below the support line. The risk to reward ratio is 1:2 for beginners and 3x to 5x for experienced ones.
How to Trade Double Bottom Pattern?
Being a trader, what points you should look upon to trade this pattern-
- We should look for the pattern near some strong support zone.
- Since this is a bullish reversal pattern, it adds more confirmation if it forms after a downtrend.
- We must learn to identify a strong support zone, generally a price point from where the market bounces back more often.
- You should be alert when the price touches such points and plan your trade accordingly.
- You can check for other confluences as RSI should be taking support near or at 40.
- Choose those technical indicators which suit your trading style.
- You are now ready to enter the trade as any bullish signal is shown after the Breakout.
“Trading is Simple but not Easy.” A famous quote, tells you what it takes to become a trader.
A trader is a trader not because of strategies, or chart patterns, but because of his/her mindset.
Why Double Bottom pattern is formed in the market?
Any chart pattern or double bottom stock pattern formed in the market is due to the mass psychology of people operating in the market.
The market consists of Bulls and Bears. Bulls tend to push the price higher while Bears pull the price lower. So there is a tug of war going on between the two parties.
There are buyers and sellers in the market at different price points, but there are points that act as support, which means more buyers are ready to buy at that particular point in comparison to the sellers at that point.
Therefore, the supply is minimum, and the demand is maximum at the support zone, resulting in the reversal of prior price action.
The buyers in this support zone consist of those who have missed the previous opportunity to buy. And Short-sellers who are willing to exit their position at that price point.
The momentum change in the price can also be seen because a large buy order is executed on the Stop-Loss Hunt. Hunt for stop loss is performed by market operators to eliminate impatient traders.
That is why taking the trade at the correct time is also important. These are some of the points which an expert trader is aware of and the newbies get trapped.
This is the reason why 90%-95% of people lose money in the stock market and crypto market.
Examples of Double Bottom Stocks and Crypto
This pattern is formed on the daily chart of Tata Motors on 23rd August 2019. As said earlier in the blog the pattern formed is not clear in the “W” form but, you need to train your eyes to catch up with such pattern formation.
A similar pattern can be seen in BTC’s future daily chart making such a complicated structure in the month of June 2021.
Trading of Double Bottom Stock and Crypto Pattern: Conclusion
In summarizing the blog, I would call this pattern a Bear Trap pattern which looks like a “W” shape and even expert traders get trapped in this. Very profitable if you identify the pattern at the right time and enter with proper timing and low risk.
The pattern forms in Stock Market, Crypto Market, Forex, and commodities. So, you must understand the mass psychology in order to execute it perfectly.