In technical analysis, there are sets and groups of indicators that are bundled together. They have the same nature and general characteristics. But of course they offer different forms of information to the forex traders.
Just like that we have the two chart analysis patterns known as double bottom and double top patterns. Both of them can be regarded as indicators of trend and momentum in the market. In this article, however, we want to mainly focus on the double bottom chart pattern and see how you can identify and use this pattern to your advantage in the forex market.
Basic Information about the Double Bottom Pattern
The double bottom pattern is actually one of the most well-known and widely applied chart patterns. It uses recent downtrend info in order to provide predictions about any upcoming trend and price reversals – reversals especially in the market momentum.
As the name suggests, the double bottom is when a trading pair in the forex market, or any other asset in any financial market, has a decline in price and then compensates a little bit upward and then it falls down again, after which it compensates one more time – thus forming a double bottom shape.
As you can imagine the resultant shape looks a little bit like the letter W. Those two low points forming the bottom of the letter W also form a pretty reliable support level.
Now, keep in mind that the support level is likely to maintain as it is. Hence we mentioned the new support level is reliable. But the other side of the equation, i.e. prices going upward, now that could be rather boundless. This is exactly what this chart is trying to tell us. But more on that later.
Like any other technical indicator and chart analysis pattern, one of the most important aspects of these patterns is trying to set a profit target for yourself so you know how far to take the pattern.
Conservatively speaking, with the double bottom pattern, you can place your profit targets as the equivalent of distance between the two lows at the bottom and the intermediate high.
On the other hand, to take things a bit further, you can be a bit more aggressive with the pattern and place your profit targets as twice the distance between the two lows and the high mentioned.
What Information Does the Double Bottom Pattern Provide?
What Information Does the Double Bottom Pattern Provide?
As it is the case with almost all technical analysis patterns and indicators, the double bottom pattern does not just provide a single line of data. In fact, it provides a variety of significant and useful information for the forex traders.
First and foremost, the two lows that form the bottom of the pattern can provide a truly reliable and dependable support level for traders. This means the new low levels can hardly be broken through. As a result, traders can expect retracements to be much higher than these levels. Thus an uptrend can even be expected to occur.
Of course, as we say this for any other chart pattern, always expect that the other side of the coin can be seen as well. So in the case of the double bottom chart pattern, if the new support levels are broken through, you can expect a bearish trend to be on its way.
All in all, as it was mentioned at the beginning, the double bottom pattern is mainly used for market momentum. And market momentum is not something that can go back and forth in the very short term. Therefore, this pattern ought to be used for the medium to long term time frames.
How to Implement the Double Bottom Chart Pattern?
How to Implement the Double Bottom Chart Pattern?
The main use of the double bottom chart pattern is the indication of an uptrend after a downtrend. So at the beginning of the pattern, there needs to be a small or large downward trend in terms of price movement. After such movements, a potential upward movement in prices can be expected.
Of course, just like any other technical analysis pattern, this pattern needs to be confirmed by certain metrics. One of the metrics that can be used to confirm this pattern is a market fundamental metric – i.e. if there is an uptick in users’ profits and earnings, it can be a strong confirmation for the existence and eventual occurrence of this pattern.
Another reliable indicator that can confirm this pattern is an increase in the trading volume – especially after the two low swings that are recorded. When the price goes into compensation mode and rebounds from the two lows, if you can observe an increase in the trading volume, that can be regarded as a good confirmation for the pattern.
As a general rule, if the two lows of this pattern take longer to form and are further apart from one another, then it means that the pattern is much more reliable in terms of whether it would turn out as expected or not.
Useful Tips to Remember About the Double Bottom Pattern
Useful Tips to Remember About the Double Bottom Pattern
Some shapes and patterns in technical analysis are more simple and straightforward than others. They are, in a way, easier to detect and easier to draw onto the chart. Some others, however, might be a bit more difficult. Especially for those traders who are a bit more nitpicky and a little bit more obsessive about the shape, such patterns can be potentially problematic.
For instance, with the double bottom pattern, many traders wonder how far apart should the two lows forming the bottom of the pattern be from each other? First of all, in terms of horizontal distance, as was discussed earlier, the further apart the two bottoms are the better. Of course, there is always a limitation as to how far apart they would actually be.
On the other hand, with regard to the vertical distance between the two lows, they need to be rather close to one another. Remember that the aim here is to detect a W shape. It cannot be too lopsided, otherwise it wouldn’t even form a W.
Though, it doesn’t have to be a perfectly leveled W. In general, the two lows can be between 1 to 4 percent apart from one another in terms of their vertical distance. But no more than that.
Interestingly, data suggests that most of the double bottom patterns have almost the same two low points.
Conclusion
The double bottom is among the most important patterns in chart analysis. In its essence, the double bottom pattern is indicative of a significant low level that can be considered as the new support level for the upcoming price movements – thus paving the way for a prominent upward movement and momentum in the market. Though there is always room for reversals and the unexpected with any pattern, historical data suggests that we can expect a maximum of 20% price increase following the second price compensation in the double bottom pattern.
