Double Bottom chart pattern explained

Chart patterns reflect the psychology of traders. They mirror the war between the buyers and sellers and also give an idea as to what can happen next. Among chart patterns, reversal patterns are particularly famous among traders as it enables a trader to position himself early in the trade and ride bigger chunk of the trend.

Double bottom pattern is one such reversal pattern, however, to take trades based on this pattern, you need to identify, confirm and trade it correctly. This forms the theme of this post. By the end of this post, you will be able to filter high probability double bottoms and take trades professionally.

Let's begin.

What is Double bottom pattern?

A double bottom pattern is a bullish reversal pattern often seen after a downtrend and indicates a reversal to an uptrend might be on the horizon. This pattern looks like letter "W" on a chart. However, every "W" looking pattern on a chart is not a valid double bottom.

A pattern should follow certain structure and rules to be a valid double bottom. We will discuss it in the next section below.

How to identify a valid double bottom pattern?

Beginners mark every "W" shape pattern as double bottom pattern which is wrong. A valid double bottom must satisfy certain rules, which are-

A preceding downtrend- A double bottom must be preceded by a clear and definable downtrend. This means the stock should form a series of lower highs and lower lows with price trading below key moving averages such as the 20 days and 50 days moving averages. Double bottoms formed in a sideways trend are not valid.
The first Trough- The first trough marks the point of maximum pessimism where buyers are fearful and sellers are aggressive. Smart money silently accumulates positions during this period of pessimism.
The neckline peak- Smart money accumulation and short covering triggers a price move on the upside. But this upside is brief and stops at a certain resistance level. The highest point of this retracement is the neckline.
The second trough- Following retracement price once again starts falling usually at lower volume. This fall stops at or near the low of the first trough. This doesn't need to be at exact same level, a small variance of 2-5% is acceptable.
The breakout- The final confirmation of this pattern comes when price breaks through the neckline. The breakout candle should neatly close above the neckline. Wicking or an intraday pierce that quickly reverses does not constitute a valid breakout.

Double bottom pattern variations-

Not all double bottom reversals look the same. Thomas Bulkowski, popularized four kinds of double bottoms based on the shape of two bottoms.

He called a narrow "V" shaped bottom as Adam bottom and a wider "U" shaped bottom as Eve bottoms.

Based on these two kinds of bottom combinations, Bulkowski, classified 4 kinds of double bottoms as shown in image below.

Of these variations, the Adam-Eve pattern is most common, however, Eve-Adam pattern has greatest success percentage as described by Bulkowski. An Eve-Eve double bottom pattern has the least success rate.

How to avoid fake double bottom patterns?

Not all double bottoms lead to reversal. Many turn out to be fake ones. This necessitates the need to apply certain checks to differentiate a fake pattern from a genuine one that leads to reversal. These checks also enable us to employ a "confluence of evidences" to filter out false signals.

Here are some ways to confirm a double bottom chart pattern.

The Volume confirmation-

Volume precedes price, and study of volume patterns with price patterns gives insight that price patterns alone can not provide.

In a genuine double bottom following volume pattern is seen:

First trough- High volume

Neckline- Declining volume

Second trough- low volume

Breakout- Huge volume.

This is shown in the image below.

The RSI confirmation-

Momentum indicators like RSI are leading in nature and often turn before price. The RSI is particularly effective in confirming double bottoms. A bullish RSI divergence along with a double bottom suggests the selling pressure is dying at second bottom and confirms the validity of the pattern.

See the image below.

An RSI breakout above 50 or RSI breaking its own bearish trendline or RSI range shift are another confirmations that some traders look for.

The Moving average confirmation-

The 20 period MA acts as a dynamic resistance and in a strong downtrend price usually respects 20-MA as resistance. A valid double bottom often coincides with the first sustained close above the 20-MA.

Additionally, on higher timeframe, the breakout of the neck often coincides with crossover of shorter term MAs (11-MA crossing above 21-MA).

How to trade double bottom pattern?

So you have found a double bottom that meets the criteria and confirmed it to be a high probability pattern through volume pattern and RSI. Next you need to take trade. Trading is not just about hitting buy button and you are done. Trading means to decide when to buy, where to place stop-loss and when to exit. We will cover this part in the paragraphs that follows.

The anticipatory entry-

This approach involves buying at or near the second bottom before pattern confirmation through neckline breakout. This involves buying when price reaches support area of first bottom and wait for a bullish reversal candle like a Hammer or Engulfing pattern and buy with stop-loss placed a certain tics below the first bottom.

While this approach gives an advantage of early entry and exceptional risk reward ratio, the trade off is high failure rate. This kind of trade must not be done without strict stop-loss and confirmation from lower timeframe.

The Breakout entry-

This is the classic textbook entry, where you buy when a candle has closed decisively above the neckline with stop-loss placed just below the second bottom. This kind of trade approach has fewer failure rate but a disadvantage that the price is already far from the low making your stop-loss wider.

The Retest entry-

This strategy waits for the market to prove the breakout was legitimate. In this approach, you enter the trade once the price pulls back to neckline. The stop-loss placed below the neckline.

This kind of entry has advantage of better entry price and being highly reliable, however, the downside is strong reversals sometimes never lookback and you might miss the trade.

According to one data the throwback or retest occurs in about 64-68% of double bottom breakouts.

The Target in a double bottom pattern-

The standard method for profit taking is 'measured move' objective. To get target level, the distance between bottom and neckline is measured and this same distance is projected upwards from the breakout.

Target = Breakout price + (Neckline - Low of the bottom)

How reliable is Double bottom pattern?

The reliability of double bottom pattern depends on, how you trade this pattern.

Large sample studies suggest that when identified purely by shape (without confirmation), the pattern succeeds only about 30-40% of time, which is close to random market movement. (source- Bapital)

However, applying confirmation rules significantly enhances the reliability of double bottoms. For example, systematic backtest study on S&P 500 stocks (1996-2023) found a win rate of around 51% with a profit factor of 1.4. (source- iQquant)

Another study reports a success rate of 50-70% when the breakout above neckline is confirmed and even 75% plus when volume expansion and higher timeframe is considered.

(source- Gomarket)

These studies suggest that double bottom pattern is not a reliable chart pattern on its own but becomes an useful reversal trading framework when combined with confirmatory tools.

The Bottom Line-

The double bottom is a popular bullish reversal pattern that shows how selling pressure slowly weakens and buyers begin to take control after a downtrend. Although it looks like a simple “W” shape on the chart, not every W-shaped structure is a valid double bottom.

For the pattern to work well, it must follow certain rules, such as forming after a clear downtrend, having two bottoms at similar levels, and breaking above the neckline with confirmation.

In this post, we learned how to identify genuine double bottom patterns, avoid false signals, and improve accuracy using volume analysis, RSI, and moving averages.

We also discussed different ways to trade the pattern, including early entries, breakout trades, and retest entries, along with a clear method for setting profit targets. Overall, the double bottom is not a guaranteed setup, but when traded with patience, confirmation, and proper risk management, it can become a reliable tool for beginners.