Double Bottom: A Visual Model for Buying

In-Depth Analysis of the Double Bottom Pattern

1. Mechanics and Definition of the Double Bottom

1.1. What is the "Double Bottom" Pattern

The "Double Bottom" figure is a reliable reversal signal that forms after an extended downtrend. The pattern consists of two approximately equal lows separated by an intermediate peak, referred to as the "neckline." The classic structure appears as follows:

1.1.1. First Low

It is observed at the culmination of selling. Often, panic and capitulation occur on the first day, when a significant portion of participants close their long positions and move to cash.

1.1.2. Intermediate Retracement

After the first low, the price corrects upward, testing the resistance level that will later become the "neckline" of the pattern.

1.1.3. Second Low

The price again drops to the level of the first low, but the overall decline occurs with lower volume, indicating seller weakness and the beginning of accumulation by major players.

1.1.4. Breakout of the Neckline

After the second low, the price returns to the neckline. A breakout and a close above this level with increased volume serve as a signal for the end of the downtrend and the beginning of a new upward movement.

1.2. Key Conditions for Formation

For reliability, the pattern must meet several conditions:

• The lows should be at close levels (with a deviation of no more than 2-3%).
• The interval between the lows should be 10-20 candles, demonstrating robust accumulation.

2. Visual Identification and Levels

2.1. Drawing the Neckline

The neckline is a key level: horizontal if the intermediate peak is aligned, or slightly sloped if the local maximum is offset. Its accurate drawing takes into account the candle closes to avoid false signals.

2.2. Measuring Target Growth

The target after the breakout is calculated as the difference between the neckline level and the low. For example, if the low is 100 ₽ and the neckline is 120 ₽, the target is 140 ₽.

2.3. Additional Graphic Methods

To enhance accuracy, the following methods can be utilized:

• Fibonacci Levels. A pullback to 38.2-61.8% between the lows often coincides with a retest of the neckline.
• Channel Construction. Parallel lines through lows and highs help visually assess movement boundaries.
• Volume Cluster Analysis. Footprint or Volume Profile reveal areas of active accumulation.

3. Confirmation of Signals with Volume and Indicators

3.1. Volume

The main indicators of confirmation include:

• Declining volume on the second low relative to the first.
• Sharp volume growth during the neckline breakout, indicating institutional participation.

3.2. RSI and MACD

RSI: Divergence occurs when the second low on the chart is lower than the first while the RSI forms a higher low, signaling a divergence between price and the strength of sellers.

MACD: A crossover of the signal line from below during the neckline breakout strengthens the reversal signal.

3.3. ADX

A fall in the ADX below 25 during the formation of the low indicates a weakening bearish trend, while a subsequent rise in the ADX after the neckline breakout confirms the strength of the upward momentum.

3.4. Multi-Timeframe Analysis

To ensure stability, the signal is checked on higher (daily) and lower (hourly or 15-minute) charts. Synchronization of movements reduces the number of false breakouts.

4. Trading Strategies and Risk Management

4.1. Entering a Long Position

The primary entry point is upon the close of a candle above the neckline with volume above the average. An alternative option is to enter during a retest of the neckline if it holds as support.

4.2. Setting Stop-Loss and Take-Profit

Stop-Loss: ATR×0.5 or 3-5 ₽ below the second low.

Take-Profit: at the target level; part of the position is closed at 50% of the target for guaranteed profit.

4.3. Trailing Stop

The trailing stop follows the neckline or new local lows as the price rises, ensuring profit protection.

4.4. Examples of Trading Scenarios

5. Psychology and Filtering False Breakouts

5.1. Psychological Aspects

On the first day, there is panic; on the second day, there is caution and accumulation. It is crucial for the trader not to succumb to fear and sell during the retest of the neckline.

5.2. False Breakouts

A false breakout occurs when the price briefly exceeds the neckline without volume, quickly returning to the range. Filters to avoid such situations include:

• Volume >120% of the average.
• Candle close above the neckline.
• Confirmation from RSI/MACD.

5.3. Keeping a Trading Journal

Logging the date, time, levels, and volume for subsequent analysis helps identify patterns and minimize emotional mistakes (overtrading, holding losing positions).

6. Practical Cases and Examples

6.1. Sberbank Shares, Spring 2024

Two lows at 265 ₽ and 267 ₽, with a neckline at 285 ₽. The breakout with volume +170% of the average led to a rise to 310 ₽ (+9% in a month).

6.2. Brent Crude Oil Futures, Summer 2023

Lows at $60 and $61; neckline at $65. The breakout with volume +200% resulted in a rise to $72 (+10% in two weeks).

6.3. BTC/USD Pair, Winter 2022

Lows at $16,000 and $16,200; neckline at $18,000. The breakout was accompanied by institutional volume, pushing the price up to $20,500 (+14%).

6.4. Commodity Assets (Gold), Autumn 2023

Lows at $1,700 and $1,710; neckline at $1,750. The breakout and retest resulted in a rise to $1,820 (+4%).

7. Conclusion and Trader Checklist

The "Double Bottom" model, when strictly adhering to conditions and confirming signals, serves as a reliable tool for entering long positions. The recommended checklist includes:

1. Ensure symmetry of the lows (±3%).
2. The interval between the lows is 10-20 candles.
3. Draw the neckline based on candle closes.
4. Check the volume: decrease on the second low, increase on the neckline breakout.
5. Confirm with RSI/MACD/ADX.
6. Enter after the close of a candle above the neckline or during a retest.
7. Set stop-loss at ATR×0.5 below the second low.
8. Set take-profit at the height of the pattern; partially close 50%.
9. Use a trailing stop as profits increase.
10. Maintain a trading journal for analysis and strategy improvement.

A systematic approach and discipline will enable the effective application of the "Double Bottom" model in both Russian and international markets, minimizing risks while maximizing results.