Today, Howtotradeblog will introduce to you the Double Bottom pattern. This is a common bearish-to-bullish price reversal signal in Forex trading. So what is a Double Bottom pattern? How to use it in transactions effectively? I will answer it all through this article.
What is a Double Bottom pattern? Characteristics and common types
Double Bottom is a type of price reversal pattern. The pattern is shaped like a W with 2 deep bottoms of equal prices and a top in the middle. It often appears at the end of a downtrend. It is a warning signal to investors that prices will rise in the future.
The pattern is completed after the price breaks out of the resistance level (going through the middle top) and goes up. In some cases, the price can retest this resistance before creating an uptrend. If you don’t know what retest is, please review the following article: What is Retest?
Common types of the Double Bottom pattern
Based on the shape of each bottom, in Forex and analysis, we have 4 types of Double Bottom pattern. They are Adam – Adam, Adam – Eve, Eve – Eve, and Eve – Adam. Adam represents the pointed bottom shape like the letter V, while Eve represents the rounded bottom shape like the U. Let’s take a closer look at each of the following types.
Adam – Adam
This is the most common type of Double Bottom pattern with two pointed bottoms. When the price reaches the bottom, it immediately rebounds. According to statistics, this is the type offering the worst reversal signal. However, it yields a fairly high average price increase.
A practical example of the Adam – Adam pattern
Adam – Eve
This type of pattern consists of a pointed V-shaped left bottom and a rounded U-shaped right bottom. Research shows that this is the second most accurate one and has the highest average increase among the 4 types of Double Bottom pattern.
A practical example of the Adam – Eve chart pattern
Eve – Adam
In contrast to the second type, it is Eve – Adam. The left bottom of this pattern is a rounded U-shaped one and the right bottom is a V-shaped pointed one. Compared to the other 3 types, the Eve – Adam Double Bottom chart pattern offers average accuracy. It ranks the 3rd out of 4 types in terms of average increase.
A practical example in which the price creates an Eve – Adam chart pattern and then rises again.
Eve – Eve
This is the type of pattern yielding the best accuracy and average increase out of all 4 types of patterns. This pattern consists of 2 rounded U-shaped bottoms.
When you see this pattern on the price chart, pay attention to it.
How to trade Forex and Binary Options effectively with a Double Bottom pattern
Using a Double Bottom pattern in trading is a popular strategy among professional traders. In this section, I will show you how to best trade using it in both Forex and Binary Options.
Notes: This pattern is a bullish reversal signal. Therefore, you can only open UP orders on this signal.
For Forex
Regarding Forex, an effective and optimal trading strategy needs to ensure entry points, take-profit, and even stop-loss. If the strategy does not have enough of these 3 factors then it is not a trading strategy. Here’s how to trade Forex most effectively and profitably with the Double Bottom pattern.
You can open an order when the Double Bottom pattern appears as follows:
+ Entry Point: When the candlestick which breaks out of the resistance level of this pattern is completed.
+ Stop-Loss: At the right bottom of the pattern.
+ Take-Profit: When the price reaches an increase by the distance from the bottom to the resistance level of the pattern.
For Binary Options
In Binary Options trading, everything has to be absolutely precise. Only with a little deviation, you can lose money. The safest entry point with a Double Bottom pattern is the retest of the price after breaking out.
Requirements: A long expiration time (If you use the 5-minute Japanese candlestick chart, the expiration time for a binary options order should be between 30 and 45 minutes.)
How to open an order.
+ Open an UP order when the price retests the resistance level of the pattern after breaking out.
In conclusion
As a strong trend reversal signal, the Double Bottom pattern is used extensively in many trading strategies among professional traders. Get familiar with this pattern on a Demo account carefully before thinking about making money with it.
In the article, I used images taken from the Olymp Trade trading platform. This is a platform supporting both types of Forex and Binary Options (FIXED TIME) trading. It’s very suitable for you to test this pattern. Register now for yourself an Olymp Trade Demo account in the box below. I wish you successful transactions.
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The post What Is A Double Bottom Pattern? How To Use It Effectively appeared first on How To Trade Blog.
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