Price Action Classic Patterns
Knowledge of current economic events is a fundamental element of effective trading. In the case of currency pairs and indices, the ability to use the calendar is already satisfactory. Nevertheless, to assess market sentiment, it is worth following current events. In the case of instruments such as shares, tracking information from companies is a necessity.
Double Bottom Pattern
Formation: Double Bottom
The Double Bottom formation is a popular trend reversal pattern that signals the end of a downtrend and the potential beginning of an uptrend. This pattern consists of two troughs that are of similar height, forming horizontal support levels.
What the formation looks like:
First trough:The price declines, forming the first trough.
After reaching the first trough, there is an attempt to rally, but usually fails to surpass the previous peak.
Second trough:The price declines again, forming the second trough at a similar level as the first one.
After reaching the second trough, there is another attempt to rally, and this time succeeds in surpassing the previous peaks.
Key points about the formation:
Support level: Each trough of the formation is located at a similar price level, forming horizontal support levels.
Volume: This pattern is typically preceded by an increase in volume around the second trough, confirming the strength of the trend reversal.
Duration: The longer the Double Bottom pattern takes to form, the stronger the potential trend reversal.
How to trade based on this formation:
Confirmation of the formation: Wait for confirmation of a breakout above the neckline as confirmation of the Double Bottom Pattern.
Entering the trade: After the formation is confirmed, consider opening a long (buy) position after the breakout above the neckline.
Stop-loss: Place a stop-loss order below the lowest point of the pattern to minimize risk.
Profit target: The height of the Double Bottom pattern, measured from the neckline to the lowest trough, can be used to estimate the potential price move after the breakout.
Market context and confirmations:
Confirmation with other tools: Before entering a trade, confirm the Double Bottom pattern with other indicators such as oscillators (e.g., RSI, MACD) or candlestick patterns.
Market context: Ensure that the Double Bottom pattern appears in the right market context. For example, if it appears after a prolonged downtrend, it is more reliable.
The Double Bottom Pattern can be a powerful tool in technical analysis, but like any pattern, it requires confirmation and context. Using additional tools can increase the reliability of this pattern.
