A Guide on Understanding the Double Bottom Pattern
Cryptocurrency traders have turned to traditional technical analysis tools to track crypto prices due to extreme market volatility in the crypto space. Although crypto prices are highly volatile, they behave similarly to the old principles of traditional markets, and that is where double bottom patterns come in.
Double bottom patterns, otherwise known as W bottoms, are technical analysis charting bullish patterns. Traders regard double bottom and double tops as the most commonly used chart patterns in trading. They are often found on bar charts, candlestick charts, and line charts. So double bottoms and double tops are very crucial to every serious trader out there. Let’s have a detailed look at double bottom patterns for easy understanding.
How Double Patterns Work
The pattern forms after a change in trend and a momentum reversal from the previous leading price action. The pattern is characterized by two consecutive lows that are often equated with a peak between the two lows, hence the W bottom. The peak between the two lows is caused by an area of resistance known as the neckline. One may wonder what these lows indicate.
The first low indicates that the market has bounced higher and has formed a swing low. The market then stops at the first low after rejecting the prior swing low. At this point, the patterns indicate buying pressure, although it is still early to tell if the market will move higher. The market then retraces up to the neckline.
If the momentum goes higher above the neckline, the pattern becomes void, signaling the buyers are in control. Instead, the pattern bounces off the neckline and assumes a downward trend after the first low. The downward momentum eventually stops, and the second low is formed. After the second low formation, the trend experiences a permanent reversal and continues up past the neckline resistance level.
Traders looking to maximize their profits using this pattern open a long position at the second low. They exit their long positions during the early sign of reversal in the predominant trend. In a nutshell, the double bottom patterns indicate the existing bearish trend has bottomed out, and the price is likely to move higher. Double bottom patterns are suitable for traders confident enough to do long-position trading because there are high chances traders may end up trading against the trend.
Suitable Moment to Use Double Bottoms
Although traders can trade the double bottom whenever they see it, the most appropriate time is when the existing bearish trend has hit the oversold level. Traders should employ technical analyst indicators such as the Relative Strength Index or Stochastic.
Crypto traders should also be wary of how the two lows work. The two lows are not always at the same level because sometimes the second bottom goes lower as bears try to break below the previous low.
Note that, sometimes, when such patterns show up, it is likely that the bears have been trapped. The aspect indicates a price rise since bears are down when the price bounces back. Another essential point to note, when the second bottom is lower than the first one, check if the pattern has not formed a bullish divergence with the RSI; this indicates a stronger signal for traders.
Double Bottom Pattern Strategy
When trading with a double bottom, it’s crucial to spot the patterns with large gaps between the lows. Such gaps are easy to spot and increase the chances of neckline breakout leading to a reversal. Most traders tend to enter the market immediately after the price breaks the neckline but forget at this point, the price is likely to reverse towards the lower side. To avoid this, add Moving Average (MA) with period 20. Do not buy the neckline breakout if you find out the price is below the MA. Instead, one should wait and watch the market for a little while.
This strategy allows you to spot visible bullish strength. For this technique to work, this is how to go about it. First, identify a double-forming pattern, then allow the price action to break above the neckline. In the next step, wait for a low-volume pullback (usually a small chain of range candles) to form. Finally, do long position trading when the price breaks the swing high, which coincides with the neckline.
Pros and Cons of Double Bottom Patterns
The positive aspect of these patterns is they are effective in several time frames, whether D1, H1, H4, or M15. This aspect makes double bottoms suitable for swing traders and also position traders. They work well with cryptocurrencies, commodities, stocks as well as forex pairs.
Just like any other charting pattern, double bottom patterns have their limitations too. Their significant disadvantage is that they don’t guarantee the consolidation of the newly formed trend. For instance, bears might push prices lower more than three times and try to break below the support; hence traders must use risk management tools such as stop-loss.
Although double bottom patterns are one of the most convenient and reliable patterns out there, their performance depends on converting their indications into successful trades. These patterns have been in use for years and are suitable for trading in various areas, from crypto trading to forex trading; the technique is the same in all.
Traders should always follow all the steps and strategies illustrated above to avoid losing their assets. Every trader, especially crypto traders, should do more extensive research on using these patterns since the patterns require expertise and experience. With the above insight, any trader can step into crypto trading with confidence, whether experienced or just a beginner. Before you begin trading with real crypto assets, begin trading with a demo account to gain more experience and expertise.