The Double Bottom is one of the most used chart pattern in forex trading and, along with its opposite, the Double Top, is also one of the most frequently observed. This pattern is observable when the price of a currency pair hits a low twice, but than fails to break down lower during the second attempt, while it rises back instead.
The pattern forms according to the following sequence: first, a strong drop in price occurs, followed by a mild upward reversal; then, a second drop occurs soon after to either the same or the similar level as the first before another. It is a stronger reversal than the previous one, so that a letter “W” appears on the chart.
This pattern identifies very strong levels of support and often suggests that a strong trend reversal is going to occur. Double Bottoms form in a downtrend and reverse it to the upside as price breaks through the resistance line. They are considered bullish reversal chart patterns, since the price of a currency pair must hit a low twice before it refers with a higher high. The reversal between the two lows is usually not very strong.
The pattern is confirmed once the price of a currency pair hits a higher high than the top of the bounce between the two lows. When that resistance level is broken, a bullish trend reversal is confirmed. Premature breakouts may be a problem in Double Bottoms analysis, as they occur frequently in daily activity, depending on the bottom shape.