What is a double bottom chart pattern and how to trade it?

What is a double bottom pattern?

A double bottom is a bullish reversal pattern. It consists of two consecutive lows (or bottoms) and a neckline (resistance level connecting both lows). When the price moves away from the second bottom, it suggests that sellers may be losing control, and the downward momentum is weakening. A breakout above the neckline confirms the double bottom and signals a potential upward trend. Due to their simple structure, double bottoms are relatively easy to spot.

Is a double bottom bullish or bearish?

A double bottom is strictly a bullish chart pattern, while the bearish variant is known as a double top. Double bottoms signal that downside momentum is fading, and buyers are regaining control.

How to identify a double bottom

The key characteristics of a double bottom are two separate lows that are located at roughly the same level and are separated by a peak and a neckline (the high point connecting the two lows).

The first low usually forms after a significant downtrend and indicates that selling pressure is fading, allowing for a rebound.

After an initial recovery, the price hits a peak, which forms a resistance level. The sell-off continues as the resistance level is not breached, but support at the previous low is strong, allowing a second low to form.

The double bottom pattern is confirmed once the price has breached the neckline (the resistance line between the two lows).

Double bottom vs. double top

A double top chart pattern indicates a negative reversal or the end of an uptrend. Unlike the double bottom, the double top is purely bearish. It typically occurs following a strong upward movement that has lost momentum. The fact that the price stalled at the previous peak indicates that resistance has proven to be too strong, and buyers have lost control.

How to trade a double bottom chart pattern

To trade a double bottom pattern, you must be able to identify it. A double bottom consists of two separate lows at nearly the same price level, separated by a peak.

The neckline is the resistance level that is formed between the two lows. It is a crucial component of the pattern, as the entry signal is generated by a breakout above this resistance level.

Once a breakout has occurred, traders will enter a long position, either by having previously placed a limit order or by buying "on the spot" through a market order.

Waiting for the actual breakout to occur is crucial, as it reduces the risk of a false signal. It can be tempting to enter a long position early, as it would improve the risk-reward ratio, but the pattern is not confirmed until the breakout has occurred.

Using a stop-loss order is crucial, as it can prevent excessive losses. As with any chart pattern, the double bottom is not "perfect," and a false signal can still occur even after a breakout above the neckline.

Where to place the stop-loss order? This can vary from trader to trader, but the general rule is to place the stop-loss order below the second low (bottom).

The take-profit target is calculated by measuring the distance between the bottom and the neckline. For example, if the distance is 100 pips, set the take-profit level to 100 pips above the neckline.

Advantages of a double bottom

Trading a double bottom pattern has several advantages:

1. It may be easier to identify due to its simple structure (two lows and a resistance line connecting them).
2. The neckline provides a well-defined entry point. Traders use different techniques to determine their ideal stop-loss and take-profit levels, but the distance between the neckline and the bottom gives a helpful hint.
3. It is strictly a bullish pattern, signalling a potential uptrend.
4. It can be applied across all timeframes and various trading instruments.
5. It can be combined with technical indicators for additional confirmation.

Disadvantages of a double bottom

That being said, there are also disadvantages:

1. As with any chart pattern, it is possible for false breakouts to occur, leaving traders with a loss.
2. The standard practice of placing the stop-loss below the second bottom and the take-profit based on the bottom-to-neckline distance can lead to a less favourable risk-to-reward ratio due to the wider stop-loss.
3. Chart patterns are not "perfect." The neckline may be less obvious to identify, and the two peaks may not align perfectly.
4. Double bottom patterns are better used in trending markets, as too many false signals can occur during a consolidation.

Ready to trade your edge?

Join thousands of traders and trade CFDs on forex, shares, indices, and commodities!

This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation and needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability with regard to the accuracy and completeness of the content in this publication. Readers should seek their own advice.