One of the popular reversal price pattern is double bottom pattern. Along with its twin cousin, the two-peak model, these price patterns often appear on technical price charts. Two-bottomed price model Very high application value in forex trading, securities or virtual money ....
Describe the double bottom model
Visually, the two-peak model is shaped like an M. The pattern is often located at the end of a downtrend. It is a sign of a trend reversal from bearish to bullish.
Features of the double bottom price model
Visually, you can see in the image above. However, these are only the most basic descriptions of a double-bottomed model. To better understand, you need to know about the specific characteristics of this model as follows:
- Two bottoms (Bottom 1 and Bottom 2) may be horizontal or slightly higher or lower. When connecting the two bottoms will form a horizontal line or slightly slanting. This horizontal line is also the later support line.
- In between the two bottoms is a temporary peak. This is the natural correction in a downtrend when the price moves a piece.
- A horizontal line that passes through a temporary peak is called a neckline and acts as a support line. This neckline also often passes through a previous bottom in the previous downtrend.
- After a double bottom pattern is formed, that is, when the price has passed through the neckline, it usually returns to test the neckline. When the test is successful, a new uptrend is formed. At this time, the probability of price reversal going up is very high.
Psychological movements in the two-bottom model
Initially the price was in a downtrend. In a downtrend, the lower highs are lower than the previous highs, after the lower highs.
The first bottom (Bottom 1) is formed just like the previous bottoms. The same is true for the temporary peak between the two bottoms. When prices continue to go down the old trend, meeting the first bottom it is not strong enough to overcome, this is the key to start creating a double bottom pattern.
When the price fails to cross the first bottom, the underlying reason may be due to a certain underlying factor affecting it. For example, positive information on the market affects stocks. Or simply technically, investors feel that the price has fallen too much and wants to sell it to make a profit, just like the previous old bottoms, but this time the belief that the price will increase is stronger. The confidence was so strong that the bulls overwhelmed the sellers and the prices rose sharply.
When the price turned to go through the neck line, the sentiment was positive. Besides, it is also heavily influenced by investors who follow the technical analysis school. They saw that the double bottom price model had been confirmed and started competing to buy. The resonance of positive sentiment along with technical analysis caused the price to reverse strongly.
Method of trading with a double bottom pattern
As you know, this is a trend reversal pattern from bearish to bullish. So when the double bottom pattern is formed, we must definitely buy it. But the problem is how to buy strategy effectively?
Here I would like to give a few key points in the buying strategy with this model. This strategy applies to both forex and stock markets. However, for forex market, you must always remember to set stop loss for all buy orders. Refer to how to set a stop loss in a two-peak model.
When this model appears, you should consider buying.
- Once the second bottom is formed, you should consider buying some stocks.
- After forming a bottom and the price goes up past the neckline, you should consider buying a few more stocks.
- After the price has passed the neckline and returned to the test successfully, it is advisable to buy as much as possible, of course, in the allocation of the portfolio of shares allowed.
Double-bottomed price model in practice
Actual price graphs are often more complex and difficult to identify. If you are new, you will often be confused when analyzing models. This requires experience with graphing and analytical skills. However, below I will point out a few situations for your reference.
There is one thing to keep in mind and remember: Technical analysis is not the holy grail that helps you to correctly predict in all cases. Everything is relative! No matter how beautiful or perfect a price model is, there is a probability of being wrong. So don't ever trust a situation and burn your account!
Bottom image: A double bottom pattern is usually more effective if the bottom is higher than the previous bottom
Image below: Bottom not too clear, posterior much higher than previous bottom. At that time it turned into 1 - 2- 3 models.
Figure below: The double bottom pattern, although having the lower bottom, is lower than the previous bottom, but the rear is formed by Pin bar. After the price has broken through the previous bottom, it looks like it continues to go down, but soon it forms the tail of the Pin bar and rebounds. This is a high probability double bottom pattern that prices will form an upward trend.
Below: Although the lower bottom is lower than the previous one, the bottom is V-shaped. If you zoom the price chart again in a larger time frame, you will see that the V turns into a Pin bar candle. At this point it will become a double bottom pattern with the rear of the Pin bar. This is also a quite effective model.
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Author: Pham Khuong
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