Like its counterpart, the double top— the double bottom works in a very similar way.
The double bottom reversal pattern appears as follows:
Essentially, the double bottom formation is one of the more common ones that you’ll run into as far as reversal patterns are concerned. It’s a bullish chart formation, which means that it typically indicates that there will be a reversal from a downtrend in the price to an uptrend.
To quote another authoritative source, “The double bottom pattern always follows a major or minor down trend in a particular security, and signals the reversal and the beginning of a potential uptrend. Consequently, the pattern should be validated by market fundamentals for the security itself, as well as the sector that the security belongs to, and the market in general.” — https://www.investopedia.com/terms/d/doublebottom.asp?lgl=rira-layout
Note the two bottoms on the chart posted below:
As with double tops, the bottoms do not need to hit the same value on the support. Along as they are approximately near each other, they can be considered to be ‘double bottoms’.
In order to accurately identify a chart pattern as a double bottom, a set of criteria must be met first (I adopted this criteria format from the website (http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:double_bottom_reversalbut the wording is different):
See the graphic below to get a better idea of what I mean here when I state this (picture derived from http://forextraininggroup.com/trade-double-top-bottom-reversal-patterns/):
If this does not happen, then the chart pattern cannot be deemed to be a true double bottom. See the picture below:
Similar to the Double Top, the Double Bottom should not be traded until after the second bottom has been established and price has once again surpassed the price of the double bottom point. Check out the illustration below for a visual of what I’m talking about:
If you’re someone that prefers to set a stop-loss (I’m not into it), then you should set the stop loss at the price at where the ‘Double Bottom’ label is on the chart above.