There are technical traders who completely ignore fundamentals and there are fundamental traders who do not believe in analyzing the charts. However, there are traders that use both methods when predicting the prices. Even if you decide to become a fundamental trader, learning about technicals can help you find the best entry points. Chart patterns, indicators, and levels are what make the technical analysis possible. Let’s take a look at one of the most common reversal patterns, the Double Bottom in more detail.
Double Bottom definition
Double Bottom chart pattern forms after a strong downtrend. It represents the shift in the initiative. The pattern consists of two bottoms, the second bottom fails to break the prior bottom downwards, and the price reverses. For this reason, Double Bottom is known as a reversal and bullish pattern.
Why is Double Bottom important for traders?
- Double Bottoms help traders identify reversals early and help to prepare accordingly.
- Double Bottoms offer great risk to reward ratios to traders.
- Double Bottom patterns are easy to spot on the charts and they are easy to trade.
- The pattern can be combined with various techniques and indicators to increase the likelihood of success.
- Learning about the pattern can help better manage active trades. For instance, let’s say you are shorting a currency pair and notice the formation of the Double Bottom. This might be a signal for you to exit the trade or use a trailing stop.
Thorough Double Bottom Explanation
Double Bottom is a bullish chart pattern and is commonly used by most traders. The pattern is easy to spot and it’s simple to trade. Double Bottom is a trend reversal pattern that enables traders to better position themselves for upcoming new trends. The pattern forms at the bottom of a strong bearish trend. First Bottom is followed by a pullback and the second bottom fails to break the resistance downwards. Bulls take the initiative and reverse the price. Traders have an entry once the price breaks the necklace. This pattern has good accuracy with some studies suggesting that the accuracy is close to 76%. What’s more, the risk to reward ratio is great. Stop losses can be placed outside the Bottoms or more conservative SL can be placed below the necklace.
Example of Double Bottom in Forex
To better understand how this pattern works, let’s look at the Double Bottom example in forex.
In this Double Bottom example, GBP/NZD price dropped to 1.88000 level. It was followed by a pullback and another bottom. The second bottom failed to break the previous one downwards. The bulls took the initiative and hiked the price above the necklace. Once the necklace is broken the traders can open the long positions. In this case, if a conservative Stop Loss was placed right under the necklace, the SL would have been triggered, but a SL placed below the bottoms (below 1.88018) would work perfectly.
FAQs on Double Bottom In Forex
Is Double Bottom bullish?
Yes, Double Bottom is a bullish chart pattern that tells traders about the end of a downtrend and that an uptrend is expected to happen. It has a relatively good accuracy of 76% according to some studies.
Where is a Stop Loss on Double Bottom?
Stop loss order can be placed below the Double Bottom. However, some more conservative traders might go for shorter stops and place SL orders right below the necklace. In any case, the pattern offers a great risk to reward ratio to traders.