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A double bottom pattern is a charting pattern used in crypto technical analysis. It denotes a trend change and a reversal of momentum from prior leading price action. This bullish reversal pattern is commonly seen on bar, line, and candlestick charts. A double bottom is formed when the first bottom, or 'U,' is followed by another bearish rebound on comparable levels, resulting in a 'W' pattern. In today’s article, we will briefly look at the basics of double bottom pattern.
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A double bottom can be described as two well-defined, sharp bottoms at roughly the same price level. The bottoms are distinct and pointed. When prices rise above the formation's highest high, the pattern is complete. The highest high is referred to as the 'confirmation point.' Most technical analysts believe that the first bottom should advance by 10 to 20%. The second bottom should form within 3 to 4% of the previous low. The volume on the subsequent advance should be increasing. In general, the greater the distance between the two bottoms, the more significant the pattern as a good reversal signal.
A higher bottom on an oscillator such as the RSI may indicate bullish momentum. Sometimes, the market may briefly fall below the first low. A minor and temporary break below the first bottom is preferred because it may excite the bears only to cause them to reverse and trend higher. The neckline is formed by connecting the price lows of the two valley bottoms. The double bottom pattern will be confirmed if there is a break above this neckline. A break in the key price resistance level (neckline) located at the high point between the 'bottoms' indicates a bullish confirmation.
In layman's terms, the double bottom pattern occurs when two price bottoms are located at roughly the same level, and a neckline acts as resistance. This pattern appears at the end of a downtrend and indicates its reversal. Given that it is nearly impossible to get two bottoms at the same price, as long as the two lows are at a similar price, it is considered sufficient for pattern validation.
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The BTC/USD chart above depicts a possible double bottom pattern that formed between June 18 and July 3. The second low is slightly higher than the first. The bullish divergence in the RSI has been combined with this double-bottom pattern. If the RSI broke out of its descending resistance line and moved above 50, it would have been confirmed that the trend is bullish. Such patterns result in a breakout from the long-term descending resistance line.
The double bottom pattern always occurs after a major or minor downtrend in specific security and signals a reversal and the start of a potential uptrend. Analysts recommend a 3-month chart at a minimum to identify a double bottom. Long-term traders may even prefer 6-month or yearly charts to identify patterns better. However, the pattern appears in an intraday chart as well. However, in that case the success rate may decrease or remain unchanged. As bears try harder to break below the previous low, the second bottom may drop lower. But if the price manages to recover from the second low, the pattern remains valid and should be taken into account.
Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.