Homeopathic trading is one of the best ways to make a profit. If traders learn to spot new trends early, it provides an opportunity to buy with a good risk-reward ratio. In addition to identifying trends, traders should also be able to identify when the trend reverses.
Although there are several patterns that indicate possible trend changes, the one that is easiest to find is the double bottom pattern. This can help traders change their strategy when the trend changes from bearish to bullish.
Let’s take a look at the double bottom pattern and find some of the best ways to trade.
What is a double bottom?
The double bottom pattern is formed after a downtrend and is composed of two lows. These lows are roughly formed near similar levels, with a small peak between the troughs. When the price breaks through and closes above the small peak after the second trough is formed, the setting is complete. This is a reversal pattern that will lead to mid- to long-term trend changes. Since the pattern is similar to the shape of “W”, some people also call it a W-shaped bottom.
The image above shows the structure of the double bottom pattern. The asset has been in a downward trend, but at a certain price level, the bulls believe that the asset is undervalued and start buying. This helps to form the first bottom where demand exceeds supply and begins to ease the rebound.
However, most shorts still don’t believe that the bottom has been formed, and they open short positions again after the pullback. The price fell, but when it approached the level of the first bottom, the bulls began to accumulate again, which prevented the decline and started another relief rally. A second bottom within 3% of the level of the first bottom is generally considered valid. This is not a fixed number, and traders should exercise caution in real trading.
When the price rises above the resistance line, it indicates that the trend has gone from falling to rising. By calculating the distance from the resistance line to the bottom, and then adding a number to the top of the resistance line, the minimum target goal of the pattern can be reached.
Let’s look at some examples to better understand the concept.
Tezos (XTZ) The price is in a downtrend and then hit the first bottom at $1.78 on November 4, 2020. Since then, the XTZ/USDT currency pair has started a relief rebound and stalled at $2.96 on November 25, 2020. At this level, the bears once again have an opportunity to be optimistic about them and sell aggressively.
Although the currency pair fell below the $1.78 support level and fell to $1.57 on December 23, 2020, the short positions were unable to maintain a low level. The exchange rate rebounded quickly the next day and began to rebound, forming a second bottom.
The bears actively defend the resistance line and try to trap the eager bulls after the break. The bulls bought on dips, and the currency pair broke through strongly on February 5th, starting a new uptrend.
The depth from the resistance line to the bottom is $1.18. Adding this value to the resistance level of $2.96 gives a minimum pattern target of $4.14. However, in this case, the currency pair exceeded the target and rose to $5.64 on February 14.
Double bottoms also appear in the weekly time frame
Like the daily chart, the double bottom pattern also performs well on the weekly chart. This is because when a reversal setting is formed on the weekly chart, it will cause a long-term trend change, and a new uptrend will usually last longer.
Ether (Ethereum) It has been in a strong downward trend since it peaked at $1,440 in January 2018. When the price hit US$81.70 in December 2018, supply exceeded demand, leading to the formation of the first bottom. Since then, the price rebounded to $366.80 in June 2019, and the bears stepped in again.
The subsequent decline formed the second bottom of $86 in March 2020. The duration between the two bottoms is very long, but there is no fixed pattern in trading. Since the two levels are close to each other, the price movement forms an obvious W, which traders can consider as a double bottom.
The bulls pushed the price above the neckline in July 2020, but this did not start a new uptrend as the bears tried again to trap the bulls. The price fell below the breakthrough level, but the bears were unable to maintain a lower level. This shows that market sentiment has changed from selling on rallies to buying on dips.
This completed the reversal, and the ETH/USDT currency pair began a strong upward trend. Although the minimum target of this model is only US$651.90, the currency pair rose to above US$4,300 during the bull market.
This shows that the double bottom is an important reversal pattern, which sometimes leads to a strong uptrend.
Some bottoms may be misleading
Many times, traders grab the double bottom and buy before the price breaks through the resistance line. This sometimes leads to losses, because the pattern may never be completed in the end.
Bitcoin (Bitcoin) It has been in a downward trend since it peaked at US$19,798.68 in December 2017. The buyer stopped falling to US$6,000.01 on February 6, 2018. Since then, the relief rebound reached US$11,786.01 on February 20, 2018. This level proved to be a resistance and on April 1, 2018, the price dropped again to $6,430.
This looks like a double bottom, but the bulls cannot push the price above the resistance level of $11,786.01. This means that the double bottom pattern is not complete.
Although staying at the $6,000 level for a long time, the trend has not changed from falling to rising. Eventually, BTC/USDT broke the support level and resumed its downward trend on November 14, 2018.
A double bottom is a key reversal pattern. It marks a change in trend, but there are some important points to keep in mind.
Before the first bottom is formed, the trend should be downward, because if there is no downward trend, then there will be no reversal. Traders should wait for the pattern to break through the resistance line before buying, because the pattern has repeatedly failed in a downtrend.
When the long-term trend changes direction, it usually exceeds the set model target. Therefore, the trader can use the target as a guide, but should not rush to liquidate only on this basis.
The views and opinions expressed here only represent the views of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading action involves risk, and you should conduct your own research when making a decision.