Double Bottom Chart Pattern Trading Strategy (Backtest)

Learning how to accurately identify and analyze the double bottom chart pattern trading strategy can help you read market conditions and determine when to look for buying opportunities. But what is this double bottom chart pattern?

The double bottom chart pattern is a price action formation on the chart that consists of two swing lows that end around the same level, and a swing high between them. The pattern is seen in a downtrend and may indicate the end of the downtrend, so it is considered a bullish reversal pattern.

At the end of the article, we provide you with a backtest and a double bottom strategy.

Let’s take a look at this chart pattern to see how it works.

What is a double bottom chart pattern?

The double bottom chart pattern is a price action formation on the chart that consists of two swing lows that end around the same level, and a swing high between them. With the two swing lows ending around the same level, that level becomes an established support level; similarly, the line connecting the swing high with the preceding swing high becomes a resistance level, which is known as the neckline. The pattern is considered completed only when the price breaks above the neckline.

The pattern is seen in a downtrend and may indicate the end of the downtrend or a prolonged pullback in an uptrend, so it is considered a bullish reversal pattern. The pattern shows that the price is about to turn and starts heading upward. Chart pattern traders look for long positions when the price breaks above the neckline.

When trading the pattern, traders estimate the profit target by measuring the size of the pattern and projecting it upward from the neckline. They usually place your stop loss order in the middle of the pattern so they can have a 2:1 reward/risk ratio. Some traders also place the stop loss below the pattern, which is a bit safer, but that offers a poor reward/risk ratio.

Real-World Example

Let’s show you a real-world example of a double bottom:

The chart above is the S&P (SPY) in 1998.

Why Double Bottoms Signal a Reversal

A double bottom is more than just a “W” shape on a chart: it’s a visual representation of market psychology in action. Here’s why it often signals a trend reversal:

1. Sellers Are Losing Control

• The first bottom forms when the price falls and finds support, meaning buyers step in to prevent further decline.
• The second bottom occurs after a small rebound and another attempt to push the price lower.
• If the second bottom is roughly at the same price level as the first, it shows that sellers cannot push the market down any further.
• This weakening of selling pressure is a classic sign that a downtrend may be ending.

2. Buyer Confidence Returns

• After the second low, buyers increasingly see value at that price level and start entering the market.
• The middle peak between the two bottoms (the neckline) becomes the key level — breaking above it shows that buyers have regained control.
• Essentially, the market has “tested the bottom twice” and passed the test, giving buyers the confidence to drive the price higher.

3. Volume Confirms the Shift

• Often, volume is lower on the second bottom than the first, indicating sellers are losing strength.
• When the price finally breaks above the neckline, volume tends to spike, confirming that buyers are dominating.
• This volume pattern reinforces the signal that a reversal is more likely than a continuation of the downtrend.

4. Psychological “Floor” Effect

• Markets are driven by human behavior: fear, greed, and perception of value.
• A double bottom represents a tested support level, showing that the market collectively perceives this price as a “floor.”
• When the market respects this floor twice, traders interpret it as a high-probability reversal zone.

5. Measured Move Potential

• Traders often estimate the potential upside by measuring the height from the bottoms to the neckline.
• This gives a price target for the reversal, helping traders plan entries and exits.

Types of Double Bottoms

A double bottom isn’t always a perfect “W.” Traders often encounter variations that still signal a potential trend reversal. Understanding the types can improve pattern recognition and reduce false signals.

1. Classic Double Bottom (Symmetrical)

• Shape: Two lows at approximately the same price, separated by a moderate peak in between.
• Features:
  • The two bottoms are roughly equal in price.
  • The peak (neckline) is clearly defined.
  • Volume often decreases on the second bottom and increases on the breakout.
• Interpretation:
  • This is the textbook version and is considered the most reliable reversal signal.
  • Breakout above the neckline suggests a change from bearish to bullish momentum.

2. Unequal Bottoms (Asymmetrical)

• Shape: The second bottom is slightly higher or lower than the first.
• Features:
  • Often seen in volatile markets where exact price equality is rare.
  • Neckline is defined as the peak between the two lows.
• Interpretation:
  • Still signals a potential reversal, but slightly less reliable than the symmetrical type.
  • Traders often use confirmation through volume or oscillators before taking a position.

3. Rounded Bottom / U-Shaped Double Bottom

• Shape: The bottoms are more rounded than sharp, giving a soft “W” or “U-W-U” appearance.
• Features:
  • Indicates a gradual shift in market sentiment rather than a sharp test of support.
  • Usually seen in longer-term charts (daily, weekly).
• Interpretation:
  • Often signals a more sustainable reversal.
  • Can be combined with moving averages or trend indicators for confirmation.

4. Multi-Bottom (Triple or Multiple Bottoms)

• Shape: More than two lows at roughly the same level, forming a “W-W” or “M” pattern.
• Features:
  • Each low represents repeated attempts by sellers to push the price down.
  • Neckline is still the peak between the first and last bottom.
• Interpretation:
  • Strengthens the signal: multiple tests of support indicate strong buyer interest.
  • Can indicate longer-term reversals, but also slower to confirm.

5. Variations by Timeframe

• Short-term double bottoms: Form over hours or a few days — often seen in day trading or swing trading.
• Long-term double bottoms: Form over weeks or months — more reliable but slower to develop.

Example of a double bottom chart pattern

Let’s look at a graphical example of a double bottom:

Take a look at the chart above. As you can see, the trend before the double bottom pattern was bearish, as indicated by the descending yellow trendline. The downward momentum stopped at the first low (first circle around the blue line at the bottom) and retraces up to the downtrend line. It couldn’t break the trendline and it started to decline again, in line with the existing bearish trend.

The decline continued until the price hit the support level established by the first low where the momentum eventually stopped, and the second low was formed. From there, the price reversed again and continued up through the level of resistance as the neckline.

At this point, a trader watching the double bottom pattern would wait to see whether the price would break the neckline, formed by connecting the preceding swing high to the one preceding it. A breakout would be an opportunity to enter long, as you can see in the chart. Notice that the price dropped a bit again to retest the neckline.

Is the double bottom pattern bullish or bearish?

The double bottom pattern is bullish, as it signals a potential upward price reversal. Usually, the pattern is seen in a downtrend or a prolonged pullback in an uptrend and may indicate the end of the price decline. It shows that the price is about to turn and start heading upward. As a result, the double bottom chart pattern is considered a bullish reversal pattern.

How do you trade a double bottom pattern?

There are various ways to trade the double bottom pattern. Some traders can be aggressive, while others are conservative.

Aggressive traders may want to look for a trading opportunity when the price is making the second low. Knowing that the level is an established support level, they would look for signs of price reversal at that level, such as bullish reversal candlestick patterns or an RSI descending into the oversold region and climbing back out of it.

Conservative traders would wait for the price to break above the neckline which acts as a resistance level. For a breakout to be valid, the price must close above the neckline, and there should be a volume increase.

Whichever method you want to use, it is important to backtest it to see if it is profitable. But the problem is that the strategy is pretty difficult to quantify (see more below).

Double bottom pattern trading rules (and settings)

To summarize, here are the trading rules for the double bottom pattern:

1. The trend: There must be an existing downtrend or a prolonged downward movement, even if the overall trend is an uptrend.
2. The first bottom: The first swing low of the double bottom pattern should mark the lowest point of the current downtrend as at the time it was formed — so, the downtrend seems to remain in good shape.
3. The swing up: After that first trough, the price rallies, retracing 38-50% of the swing low before it; this normally happens on normal volume, but a volume increase could signal early accumulation.
4. The second bottom: The decline from the swing up is usually on low volume; it is stopped when it meets support from the previous low — this swing low can be exactly at the same level as the previous one, but anything within 3% of that previous low is fine.
5. The price rally from the second bottom: During this rally, there should be clear evidence that volume and buying pressure are accelerating, perhaps marked with a price gap or two — this indicates a potential change in sentiment.
6. Neckline breakout: The double bottom pattern is not complete until the price breaks the neckline which acts as a resistance level — this should occur with an increase in volume and/or an accelerated ascent.
7. Resistance turned support at neckline: The broken resistance at the neckline becomes potential support. Sometimes, there is a test of this newfound support level with the first correction, which can offer a second chance to open a long position.
8. Price target: The target should be estimated by projecting the distance from the neckline to the lows from the neckline breakout.

Psychology Behind the Pattern

A double bottom isn’t just a chart shape – it’s a reflection of investor behavior and market sentiment. Traders use it to interpret the balance of power between buyers and sellers.

1. Sellers Are Exhausted

• First Bottom:
  • The price falls during a downtrend, and sellers push aggressively.
  • Buyers step in at a support level, creating the first bounce.
• Second Bottom:
  • Sellers try again to push the price lower but fail to break the support.
  • This signals that selling pressure is weakening, the market has hit a psychological floor.

2. Buyers Gain Confidence

• After the second bottom, buyers see that the downtrend may be ending.
• They enter the market more aggressively, often pushing the price toward the middle peak (neckline).
• The breakout above the neckline represents buyer dominance and confirms a shift in sentiment from bearish to bullish.

3. Fear vs. Greed Dynamics

• Fear: During the downtrend and first bottom, fear dominates; traders rush to sell.
• Cautious Optimism: After the first bounce, buyers test the waters, but many remain skeptical.
• Greed / Confidence: After the second bottom, buyers gain confidence that the market will rise, triggering more buying and potentially accelerating the reversal.

4. Market Memory and Support Levels

• Traders remember the first bottom as a key support zone.
• When the price tests the same level a second time, the market collectively perceives it as a “value area”.
• This shared psychology reinforces the support level and makes a reversal more likely.

5. Why Some Patterns Fail

• Sometimes, the second bottom is only a temporary pause, and sellers regain control.
• False breakouts occur when the market doesn’t fully shift in sentiment, or external news triggers renewed selling.
• Understanding psychology helps traders spot weak or failing patterns before entering.

When Does Double Bottom Fail?

A double bottom signals a potential reversal, but no pattern is guaranteed. Knowing why and when it can fail helps traders avoid losses and manage risk effectively.

1. Break Below the Second Bottom

• The classic failure occurs when the price drops below the level of the second bottom after forming the pattern.
• This indicates that sellers regained control and the support level was not strong enough.
• In this case, the bullish reversal signal is invalidated, and the downtrend may continue.

2. Weak or No Breakout at the Neckline

• After forming the two lows, the price must typically break above the neckline (the peak between the bottoms) to confirm the reversal.
• If the price fails to break the neckline or repeatedly tests it without moving higher, the pattern is considered weak.
• Traders often interpret this as insufficient buying momentum, making entry risky.

3. Low Volume on Breakout

• A double bottom breakout is more reliable when accompanied by increased trading volume.
• If the price breaks the neckline but volume is low, it may indicate weak buyer conviction.
• Low-volume breakouts often fail, with the price returning below the neckline shortly after.

4. Occurs in a Strong Downtrend

• Double bottoms are reversal patterns, so context matters.
• If the pattern forms in an extremely strong downtrend, the probability of failure increases.
• Sellers may still dominate, and the pattern can act as a temporary pause rather than a true reversal.

5. Misidentification of Lows

• Sometimes what looks like a double bottom is just price consolidation or a “random W” without meaningful support.
• Large gaps between the bottoms or irregular shapes can reduce reliability.

6. External Market Factors

• Unexpected news, economic events, or market sentiment shifts can override technical patterns.
• Even a textbook double bottom can fail if external factors push the price down forcefully.

Risk Management for Double Bottom Trades

A double bottom signals a potential trend reversal, but no pattern is guaranteed. Effective risk management ensures that if the trade fails, losses are controlled and capital is preserved.

1. Setting Stop-Loss Levels

• Below the Second Bottom:
  • A common method is to place the stop-loss just below the second low.
  • Reasoning: if price breaks below the second bottom, it suggests that sellers regained control and the reversal failed.
• Buffer for Volatility:
  • Add a small buffer (e.g., 1–2% for stocks, or a few pips for forex) to account for normal price fluctuations.
• Multiple Timeframes:
  • Check larger timeframe support levels to avoid stops being hit by minor fluctuations.

2. Position Sizing

• Risk a Fixed Percentage of Capital:
  • Common rules: risk 1–2% of total account capital per trade.
• Adjust for Volatility:
  • More volatile markets may require smaller positions to keep risk constant.
• Trade Frequency:
  • Limit the number of open double bottom trades at once to avoid correlated losses.

3. Identifying Failed Patterns Early

• Neckline Rejection:
  • If price fails to break above the neckline after the second bottom, avoid entering.
• Volume Confirmation:
  • Low volume on breakout may indicate weak buyer support. Consider skipping or reducing position size.
• Pullback Strategies:
  • Some traders enter on a pullback to the neckline after the breakout for better risk/reward.

4. Calculating Reward-to-Risk Ratio

• Measure the Pattern:
  • The target price is often estimated by measuring the distance from the bottoms to the neckline.
• Minimum Reward-to-Risk:
  • Only enter trades where potential reward is at least 2x the risk.
• Adjust Exits if Market Conditions Change:
  • Partial profit-taking or trailing stops can protect gains if momentum slows.

5. Diversification and Context

• Avoid Concentration:
  • Don’t rely solely on double bottom trades; include other strategies or instruments to reduce portfolio risk.
• Trend Context Matters:
  • Double bottoms are reversal patterns; using them in a strong uptrend (where a downtrend reversal isn’t established) increases failure risk.

Amibroker code for the double top pattern

It’s not easy to code a double bottom pattern. However, we have a code that marks double tops and bottoms in the chart and that can be modified to perform a backtest. The code is for sale together with all the other code we for our free and profitable trading strategies.

The chart below is an example of what the code looks like:

Double bottom chart pattern strategy (backtest and example)

As mentioned above, to code a double bottom pattern is a bit complicated as the strategy needs many trading rules and settings. Additionally, it takes a lot of time to code. Is it worth the time? We are not sure.

But to get an indication if it’s worth the time to code, we can look at the research of Thomas Bulkowski. He is an engineer that in the late 1990s sat down to quantify win rate and expected gains for a wide range of classical chart patterns and formations. The book, The Encyclopedia of Chart Patterns, was published in 2000 so it’s a bit old, but we assume chart patterns never stop working (?).

Bulkowski did the following: He selected 500 stocks and studied numerous chart patterns over a five-year period. It must be noted that his study may be susceptible to survivorship bias in trading. Furthermore, the study and research cover only a period of 5 years – coincidentally, a time when the market was in a raging bull period (the late 90s). Last, the formations and patterns were, to our knowledge, picked manually. In other words, the study is based on human interpretation. As such, we regard the results as merely an indication.

Bulkowski’s double top pattern strategy is summarized in the table below:

Description	Statistics
#Formations among 500 stocks from 1991 to 1996	542
Reversal or consolidation	170 consolidations, 372 reversals
#False signals	17 (3%)
Average rise of successful formations	40%
Most likely rise	20 to 30%
#Formations that reached the target	370 (68%)
The average length of the formation	70 days
Average price difference between bottoms	19%

The statistics for the double bottom pattern strategy is a lot better than the opposite strategy of double top chart pattern strategy (a short strategy). This is to be expected. A long strategy is “always” better than a short strategy in the stock market because of the tailwind from inflation and increased productivity. We have covered how you can take advantage of this in an article called Night trading strategies.

68% of the formations reach their target, and this is almost twice the number compared to the double top pattern.

Double bottom in the FOREX market

Based on the sources, a study called Charting Technical Trading Rules and the Lottery of Technical Analysis: Empirical Evidence from Foreign Exchange Market by Alexandre Repkine tested technical charting rules on seven major currency pairs in the foreign exchange market from 1999 through early 2007, using trend-following, trend continuation, and trend reversal pattern recognition techniques.

The core results are summarized through two stylized facts and the concept of a “lottery”:

1. The Technical Trading Lottery

The study concludes that the persistent popularity of technical analysis among traders may be the result of a “lottery”. While most participants end up with zero profits, the non-negligible amount of strategies that yield statistically significant profits are much more likely to be winning rather than losing.

• In the overall sample of 420 strategies tested (across 7 currency pairs, 5 time horizons, 4 threshold values, and 3 indicators), more than one in three (36.19%) yielded positive profits.

• The share of money-making strategies exceeded the share of money-losing strategies by around four times (9.76% of strategies lost money).

• However, more than half of the technical strategies resulted in zero profits, meaning the returns were statistically indistinct from zero. This finding is generally consistent with the market efficiency hypothesis.

2. Two Stylized Facts

The findings were formalized into two stylized facts:

1. There is no dominating strategy neither in terms of the holding horizon nor the type of technical indicator. The profitability of technical rules varies widely depending on the specific currency pair. For example, simple trend-following strategies worked well for NZD/USD, but continuation patterns worked best for USD/CHF.

2. The share of money-making technical strategies is not negligible and far exceeds the share of money-losing ones.

In conclusion, the study finds that while a significant share of technical strategies does make money, it is “hardly possible to specify one or more money-making strategies in each specific case”.

The problem of identifying a profitable money-making strategy remains similar to “finding a needle in a haystack,” and the specific combination of technical indicator and holding horizon is not robust across currency pairs. The technical trading statistics also did not exhibit any statistically significant predictive power when tested via linear regression, which aligns with the market efficiency hypothesis.

The overall results suggest that technical analysis can be successful sometimes, but since there is no universal rule or indicator that guarantees success across different markets or time horizons, the consistent profitability relies heavily on chance or subjective identification, like winning a specialized lottery where the odds of gaining profit (if any profit is made) outweigh the odds of loss, though the most common outcome is breaking even.

Double Bottoms In Stock Index ETFs

Quantpedia tested how “vague” technical‑analysis pattern definitions (like double bottoms) can be quantified in a systematic way. They picked the double bottom (and double top) because these are very common reversal patterns but often interpreted very subjectively. Rather than discretionary trading (“just eyeballing W-shapes”), they aim to define concrete rules to detect these patterns using data.

This is what Quantopedia did:

1. Pattern‑Detection Methodology
   • They identify local highs and lows in price data using a rolling window: ±30 trading days.
   • To label two lows as a potential double bottom: the distance between these lows must be ≥ 30 days but ≤ 1,000 days.
   • They also apply a vertical tolerance: the two lows must be no more than ±2% apart in price.
   • They use closing prices only, not intraday highs or lows.
2. Trading Strategy Design
   • Universe: 24 Country ETFs (mostly iShares MSCI, plus SPY for U.S.)
   • They only take long trades (no short) when a double bottom is detected on these ETFs.
   • Position sizing: they limit to a maximum of 4 concurrent positions.
   • Leverage: up to 2:1.
   • Entry: place a limit order at the double bottom level.
   • Risk control: fixed stop‑loss of 3%.
   • Profit target: risk‑reward ratio is 1:2, so target is set at +6%.
   • They scan for new double bottom patterns monthly, but trade execution (entry/exit) is evaluated daily.
3. Backtesting & Performance Results
   • Backtest period: from 2000 with starting capital of USD 100,000.
   • Compound Annual Return (CAR): ~ 7.79% p.a.
   • Sharpe Ratio: ~ 0.47 (using their assumed risk-free or volatility base)
   • Annual Volatility: ~ 16.57%
   • Max Drawdown: ~ 30.38%, with a notable drawdown around September 2011.
   • Their equity curve is “steadily rising” according to Quantpedia, though they note a flat/stagnant period during 2010–2015 for country ETFs.

The strategy shows that a purely pattern-based (double bottom) rule can be used in a quantitative system – not just discretionary TA. The relatively moderate Sharpe suggests it’s not a “free lunch”, the pattern provides signals, but with risk.

A drawdown of ~30% is substantial: traders need to be prepared for significant volatility. Because they restrict the strategy to country ETFs, they benefit from diversification (across countries) rather than relying on a single market. The 3% stop-loss / 6% target is quite conservative; it’s a swing-like strategy (not super aggressive breakout play).

Double Bottom vs Other Reversal Patterns

While the double bottom is a common reversal pattern, there are several other patterns traders watch for trend changes. Understanding the differences can improve recognition, reduce false signals, and help with risk management.

1. Double Bottom vs Double Top

• Double Bottom: Forms after a downtrend; signals a potential upward reversal.
• Double Top: Forms after an uptrend; signals a potential downward reversal.
• Key Difference:
  • Double bottom = “W” shape → bullish reversal.
  • Double top = “M” shape → bearish reversal.
• Confirmation:
  • Both rely on a breakout (neckline) and volume confirmation.
  • In a double top, the price breaks below the neckline; in a double bottom, above the neckline.

2. Double Bottom vs Triple Bottom

• Double Bottom: Two lows at similar levels; simpler, quicker to identify.
• Triple Bottom: Three lows at roughly the same level; stronger evidence of support.
• Key Difference:
  • Triple bottom tends to indicate a stronger, longer-term reversal but takes longer to form.
• Trading Implication:
  • Traders may wait for the third bottom to confirm support.
  • Double bottoms are faster to trade but slightly less reliable.

3. Double Bottom vs Head and Shoulders (Inverse)

• Inverse Head and Shoulders: More complex; consists of a lower middle low (head) and two higher lows on each side (shoulders).
• Double Bottom: Only two lows, usually of similar size.
• Key Difference:
  • Inverse head and shoulders is considered a stronger and more reliable reversal pattern.
  • Double bottom is simpler and quicker but may be prone to false breakouts.
• Trading Implication:
  • Inverse head and shoulders often provides a higher reward-to-risk ratio due to measured move projections.

4. Double Bottom vs Rounded / Saucer Bottom

• Rounded Bottom: Gradual U-shaped reversal; less sharp than a “W.”
• Double Bottom: Two distinct lows separated by a peak.
• Key Difference:
  • Rounded bottom indicates slow, steady accumulation and often signals a long-term trend reversal.
  • Double bottom can appear in both short-term and long-term charts.
• Trading Implication:
  • Rounded bottoms are often better suited for long-term positions.
  • Double bottoms are more versatile across multiple timeframes.

5. Summary Table

Pattern	Trend Context	Structure	Reliability	Timeframe
Double Bottom	Downtrend	Two lows, W shape	Moderate	Short- to medium-term
Double Top	Uptrend	Two highs, M shape	Moderate	Short- to medium-term
Triple Bottom	Downtrend	Three lows	Stronger	Medium- to long-term
Inverse Head & Shoulders	Downtrend	Three lows (head lower)	Strong	Medium-term
Rounded / Saucer Bottom	Downtrend	Gradual U-shape	Strong	Long-term

Double bottom chart pattern strategy – ending remarks

Is the double bottom strategy a viable pattern to be traded? Bulkowski’s research might indicate that, but we would rather prefer to have a complete backtest with 100% quantified trading rules and no human interpretation. Bulkowski used manually detection of the patterns. We believe successful trading comes from 100% specific rules and you are trading a little blind if you rely too much on Bulkowski’s statistics (in our opinion).

FAQ:

– How is a double bottom pattern identified?

The pattern is identified by two swing lows at approximately the same level and a swing high between them. The connecting line of the swing lows establishes a support level, and the swing high creates a resistance level known as the neckline.

– When is a double bottom pattern considered complete?

The double bottom pattern is considered complete when the price breaks above the neckline. This breakout is a crucial signal for potential upward movement.

– How do traders trade a double bottom pattern?

Traders can use different approaches. Aggressive traders may look for opportunities during the formation of the second low, while conservative traders wait for a confirmed breakout above the neckline with increased volume.