Double Bottom formations are reversal patterns which are frequently classified among the most common patterns for currency trading. They are identified by two consecutive lows of similar height with a pull back up in between. The double Bottom is considered a major reversal pattern which is formed after an extended downtrend. It is accepted as a sign of existing downtrend reversal. Prices are expected to begin a rally following its formation. And, the longer is the process of pattern formation, the more reliable it is.
Double Bottom Formation
The formation of the double Bottom takes place when a downtrend sets a new low in the price movement. This downward finds support, which prevents the security from moving lower. After finding support the security will rally to a new high, thus forming the security's resistance point which in its turn is the most recent local high. The next step of this pattern is the taking of the security down to the previous low. So it became clear that double Bottom consists of two lows which are nearly at the same price level. Here it’s typical of prices to fall to a support level, rally and pull back up, and then before increasing again fall to the support level. The price dynamics under the pattern is similar to the Latin latter “w”. The two most recent lows of the price represent a strong support area where investors reversed their short positions thinking the asset is underpriced at this level.
The main concept of double Bottom pattern is that demand is greater than the supply. This means that in the market there are more sellers than buyers. However this situation tends to change: more buyers come into the market as a result of which the prices start to rise and supply is no longer bigger than demand. Afterwards the sellers make another attempt to break through the lower level for a second time. They fail to do so and the buyers take the upper hand and the price starts to rise very quickly up to a resistance point. When the market price breaks on the resistance level (plus possible deviation), the formation is considered to be completed and can be interpreted as change in direction of the trend upwards serving as a buy signal.
The price depending on the double bottom pattern formation is generally believed to rise at least to its target level which is calculated in the following way:
T = R + H,
T – target level;
R – resistance level (recent local high);
H – pattern’s height (distance between support and resistance levels).