Today we continue analyzing various chart patterns
and double bottom technical pattern is the topic of the post. You can find this
structure on various time frames and it is pretty go indication that a trend is
about to change. So, this particular pattern indicates a reversal. You probably
remember that we either have continuation or reversal patterns. This is a
bullish reversal pattern. It means that the bears will probably lose their
fight soon and bulls will start reigning in a particular security double bottom
is formed. Let us look at some necessary conditions that have to be that we
might state that the picture we see is a valid double bottom pattern.
When you finish this article I also highly recommend reading other posts on chart patters:
When you finish this article I also highly recommend reading other posts on chart patters:
Key
components in double bottom pattern
As it is a reversal pattern the first thing that
there has to be is a previous downtrend. The security had to go down for some
time in order for the pattern we are discussing to be formed. Depending on the
structure the downtrend could have been from a few days (weeks, months) to a
year and more.
There has to be the first sharp fall that marks the
first spot in the bottom. It is known as the lowest point in the ongoing
downtrend. At this point we cannot say whether the tendency has changed or not
as there still isn’t any indication of a reversal and increase in demand.
The first rally! Reaching the first bottom the price
of the security rallies upwards. It indicates that smart money assumes it is
good time to accumulate the security and so buying ensues. After some time
(hours, days or even weeks) the first top (or important resistance) is formed.
Back to the bottom! At some point inertia of the
bears kicks in and they continue selling assuming that the downtrend is not
over. So, the price of the security collapses to the first spot of support
(bottom) and this time the spot becomes the second spot of a double bottom
pattern.
The second rally! After hitting the first support
(bottom) the security starts rallying, which indicates that there really is
serious demand for the security at current prices. In most cases the prices
will reach the first spot in resistance. In most cases the price after hitting
the resistance will retrace a little.
Break of the resistance. The two points of
resistance that were made as the security rallied after reaching the bottom is
finally broken. That is the point where the double bottom pattern becomes a
valid one.
Support becomes resistance. That is a classical rule
of technical analysis. It is not a necessity, but a security sometimes comes
back to test previous resistance (that is now support) and if the break was not
fake the support will hold.
Traditional target for the exit of your long trade
is the distance from the break point to the lowest point of the pattern added
to the breakout point. That is the smallest distance that the price is expected
to travel. It may go further, or it may fail to reach the expected target.
However, if you need some guidelines where to exit this could be one of those.
Additionally, you can move your stop below clusters of hourly or daily candles
(depending on the strength of reversal).
Time
frames
As I said, you can find the pattern on all time
frames. The longer the time frames the more valid it becomes. There have been a
few of those patterns (on smaller time frames) in various currencies. Let us
look an example that happened on a small time frame.
gbp/usd
example
After a prolonged move upwards gbp/usd pair started
collapsing on the 9th of May (2013). The downward move continued for
about two weeks till the sharp move down ended on the 23rd of May
(2013) with a strong rally upwards. The rally continued for four days and
formed the first peak or resistance on the 27th of May at 1.5156
level.
The pair then retraced to its’ previous bottom and
failed to break it. On the 29th of May the second point in the
double bottom pattern was formed. On the same day it rallied to previous
resistance and formed second high (resistance) at 1.5145. It then retraced and
consolidated for a few sessions before breaking the resistance and rallying to
1.5240 on the next day. One had to place a buy stop above the resistance
(1.5156) with a stop loss below the bounce after second rally’s high (at
1.5098) and take profit order around 1.5300 level.
According to our rules the exit target should be
around 1.5300 level, so it has not been reached yet. The pair came to visit
previous resistance (now support) and support held. The pair bounced from
1.5140 level.
This week will show whether gbp/usd will reach our
target or not. Looking at technical price action we can see clear demand coming
at previous resistance. So, let us be patient and wait for confirmations during
European session whether we could add to our position or let the pair go down.
Conclusion
Double bottom pattern is a bullish reversal pattern
that can be found on various time frames. The pattern can be found in various securities
regularly. One should wait for a break of resistance to enter market with buy
orders.
Ok, I will finish now. Be sure to read related articles
to learn more on technical analysis. I promise to expand on this in my future
posts.
I hope you benefited from the post. If you liked the
post I would also be happy if you gave a plus on Google+, tweeted, liked it on
Facebook and other social platforms. Have a nice day.
Vytas.
Disclaimer
Trading
financial markets carries a high level of risk, and may not be suitable for all
investors. All information on the blog http://trend0.blogspot.com/ is of educational
nature and cannot be considered as advice, recommendation or signals to trade
in any financial markets.