Description:
The Double Bottom is a bullish reversal chart pattern characterized by two consecutive troughs that are roughly equal in depth, separated by a moderate peak. This pattern resembles the shape of the letter "W". The first trough marks the initial low point of a trend, followed by a rebound, a second downturn that tests the initial low, and finally a breakout above the resistance level established by the peak between the two troughs. The Double Bottom signals a shift in momentum from bearish to bullish, indicating that the asset's price is likely to rise.
Input Parameters:
- Retracement: Apply Fibonacci retracements.
- Time Span: Defines lookback period.
- Type: Confirmed, in force, or all.
- Bands: Apply ATR, St.Dev, Constant, or Percentage bands
Use Cases:
- Identifying the Pattern: Look for a significant downtrend followed by two lows at approximately the same price level. The pattern is confirmed when the price breaks above the resistance level— the peak between the two bottoms.
- Entry Point: A common entry point is after the price breaks above the resistance level, confirming the reversal. Traders may wait for a retest of the resistance-turned-support level to enter, ensuring the validity of the breakout.
- Stop-Loss Placement: A stop-loss can be placed just below the second bottom or the lowest point of the pattern to protect against false breakouts and a return to the downtrend.
- Profit Targets: The target can be estimated by measuring the height of the formation (from the resistance level to the lowest bottom) and projecting this distance upwards from the breakout point.
The Double Bottom pattern is a powerful indicator of a potential reversal in downtrends, offering traders clear signals for entry, stop-loss placement, and profit targeting. However, it's crucial to wait for the breakout above the resistance level for confirmation to avoid false signals.
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