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    Dennis Y.

    Crypto Trading ABCs: Double Bottom Pattern Full Guide

    Double bottom pattern guide

    In crypto trading, there are exactly the same technical logic and shapes that are found in trading in other markets: currency/FOREX, commodities, stock markets. But in crypto, these patterns work even better than in traditional markets. Especially when it comes to well-known patterns like Double Top Pattern or Double Bottom Pattern.

    We fundamentally examined the first one in the previous guide, as well as more complex figures (Head and Shoulders or Cup and Handle). Now it's time to study its immediate mirror twin.

    What is a Double Bottom Pattern and how reliable is it?

    Double bottom is one of the most common and considered to be truthful and reliable reversal figures, occurring after a downtrend.

    As you have probably guessed, this figure consists of two approximately equal bottoms, between which there is a small ascent. Basically, it resembles the letter of the Latin/English alphabet "W" because of the obvious similarity.

    As a rule, a classic Double Bottom predicts at least a slight change in the direction of the price movement for an asset. It is important to note that you can see a lot of potential double bottoms in a downtrend (without bullish hints to jump into an uptrend).

    For a certain combination of prices in time to be called a double bottom pattern, it is necessary to confirm (yes, exactly: hypothesis, checking the start, development, and finalization!) and complete the pattern. The main price movement, which confirms the double bottom, is considered to be the resistance crossing from the bottom upwards.

    Neckline: Double bottom pattern

    7 Steps How to Identify Double Bottom Pattern

    1. The downtrend is necessary before the Double Bottom pattern, as Double Bottom is a reversal figure (obviously, the downtrend is necessary to have something to turn around).

    2. The first bottom marks the local minimum and the lowest point of the current trend.

    The first bottom does not jeopardize the trend, as there can still be many outcomes at this stage. (The first bottom marks the bottom support line.)

    1. The ascent must occur after the first bottom; the ascent is usually 10-20% of the price of the first bottom. Climb maxima are often rounded off and equated to form a resistance line.

    2. The second bottom is formed after the ascent and is typically accompanied by low trading volume. As a rule, the second bottom confirms the support line from the first bottom, but small deviations are possible. Typically, for the stock market the time between the two bottoms is considered 1-3 months, but can vary from a few weeks to a year. For crypto, which is a new disrupting market, it can be found for different TFs. And we'd not to advise sticking to some specific terms.
    3. The rise in price after the second bottom should be accompanied by increased trading volume. There may also be "windows" on the upward path after the bottom. At this point, double bottom pattern is almost confirmed; all that remains is to check for resistance.

    4. Crossing the resistance line from the bottom upwards is a full completion and confirmation of the figure. As a rule, the crossing is accompanied by the increased volume of trades and galloping price growth.

    5. Resistance turns into support after the confirmation of the Double Bottom. The price still "tries" to go down, but the new support line does not let it go.

    Double bottom Pattern Price Target

    The price target is the price that the price of an asset is most likely to approach in the near future after the shape's completion. This price is equal to the sum of the resistance line crossing price (RCP) and the difference between the resistance line crossing price (RCP) and the last bottom price (LBP).

    Here's the Formula, according to marked abbreviations:

    The Price Target = RCP + (RCP - LBP)

    This element is completely optional, so if you don't manage to use it, you can ignore it.

    How to Trade Double Bottom Pattern

    Since a potential Double Bottom can be found quite often in a downtrend, experts need to be vigilant and be able to distinguish a real double bottom pattern from a fake one. Usually, there is at least one month between two bottoms in a real double bottom on traditional markets. If this period is shorter, then most likely the two bottoms are simply forming a corridor (with support and resistance).

    The ascent between the bottoms also plays an important role: the price should rise at least 10% after the first bottom, otherwise it will not be a real figure. If the ascent has not increased at least by 10% it means that the demand has not gained enough strength and this figure is not real.

    If the price goes down after the rise, pay attention to the trading volume and the next low: if the trading volume went down and the price at the low is approximately equal to the previous low, then you, most likely, see a real shape in action.

    When analyzing this very pattern, it is important not to rush! Wait until the price crosses the resistance line with high trading volume, and only then confirm the pattern. It may be very appropriate to take a time or price pause after the price crosses the resistance line. During the pause, hold the asset (don't sell or buy) until the price is 3% below support (the price pause). Either of these techniques will allow you to definitively and surely confirm the real valid pattern.

    There are 2 Types of Trading With This Figure. 

    2. Defending the bottom level

    There is some sort of reversal from the level, and there must be volumes. Near these levels, a trader may get his double bottom pattern entry point.

    Remember: buy must be with a stop or must be the first limit order in the trade. 

    Take-Profits at this trade are placed under the nearest resistance and the neck level. If you are sitting near the terminal and monitoring the movement, you can drag the Sell Point Manually. If not, use limit orders. Don't be greedy, don't place them too high. It's better to get a bit lesser than missing the good selling point at all (and see just the reversal and money loss)

    2. Breakout of the neck level

    Obviously, for this, we should first identify the neck level. As you remember, it is the level, from which the asset turns around before going to the second bottom. It also coincides with other resistances (Fibonacci levels, MAs and other tools are helpful too in this case).

    Trade only in the Long approach (buying) with stop orders. Buying is taken only after the breakout of the neck level (horizontal level) and after anchoring there. It is better to wait for the retest of the level to confirm the trade. 

    The price target is the nearest resistance level. Further, take-profit orders are placed only with pulling up of a stop, starting from break-even level (no loss, no profit).

    Neckline breakout

    When Things Don't Go as Planned: an Example of the Importance of Careful Pattern Analysis

    The picture above shows the importance of a complete and thoughtful analysis of all patterns, as well as compliance with risk management and money management (from setting stops to allocating a small percentage of the deposit per trade).

    What we see here: in the first case, after the second bottom, the Ethereum market really went up (though there was no miracle and zero trend reversal happened).

    However, the second figure coincided with another panic sale, which occurred in the second half of January, continuing the methodical decline of the crypto market, which began back in the end of 2021.

    That's why we said at the beginning of this article that there would be many shapes that seem to be similar to the reversal pattern, but not all of them (not really all of them!) will be real. 

    That's why it's so important to protect yourself in case something doesn't go the way you thought it would. This is very important, trust us and be careful.

    Bottom line

    So, we see before us another excellent and understandable figure. If it works out completely and proves each of its elements, it means the change of the mood to a more bullish one. 

    Is the double bottom pattern working better on the bullish or bearish markets? As you can see from the example, it can work out either way. After all, there are local areas on the global trends and TFs for which this model can be applied at a particular moment in time. But the more essential is a deep understanding of the movement.

    Have you defined it accurately? Did each of the elements work out? If so, then the probability that everything will go according to the scenario increases tangibly. So again: any good pattern requires confirmation, a balanced approach to risk management, and money management.

    And when it does, the number of your profitable trades will be greater.

    The content of this article is for informational purposes only and should not be construed as investment advice. We ask you to do your research. This text is not a guide to action. The author's opinion may not coincide with the opinion of CoinJoy.