Double bottom is a technical chart pattern that is commonly used in forex trading to identify a possible trend reversal in a currency pair. This pattern is formed when the price of a currency pair drops to a certain level (support level) twice, bounces off that level, and then rises above the previous high. The double bottom pattern is also known as the “W” pattern because it looks like the letter “W” on a chart.
The double bottom pattern is a bullish reversal pattern, which means that it indicates a potential change in the direction of the current trend. A double bottom pattern is formed when the buyers are able to push the price back up after testing a support level twice, indicating that the sellers are losing their momentum.
The first low of the double bottom pattern is formed when the price reaches a support level and bounces off it. The price then rises to a certain level, which is known as the neckline of the pattern. The neckline is drawn by connecting the high points between the two lows of the pattern. The neckline acts as a resistance level, and the price needs to break above it to confirm the pattern.
After the price reaches the neckline, it retraces back to the support level again, forming the second low of the pattern. The second low should not break below the first low, indicating that the buyers have come back into the market and are willing to buy the currency pair at that level.
Once the second low is formed, the price should start to rise again and break above the neckline. This is the confirmation of the double bottom pattern, and it indicates that the bulls have taken control of the market. Traders can enter a long position at this point, with a stop loss set just below the second low of the pattern.
The profit target for the double bottom pattern is calculated by measuring the distance between the neckline and the first low, and then adding that distance to the breakout point. This gives traders an idea of how much the price could potentially rise after the pattern is confirmed.
The double bottom pattern is a reliable chart pattern, and it is often used by traders to identify potential buying opportunities in a currency pair. However, it is important to remember that no pattern is 100% accurate, and traders should always use proper risk management techniques to protect their capital.
In conclusion, the double bottom pattern is a bullish reversal pattern that is formed when the price of a currency pair tests a support level twice and bounces off it. The pattern indicates a potential change in the direction of the current trend, and traders can enter a long position once the pattern is confirmed. The double bottom pattern is a reliable chart pattern, but traders should always use proper risk management techniques to protect their capital.
