Double bottom chart pattern indicator with alert for Ninjatrader 8

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The Double Bottom pattern is one of the most classic and reliable reversal patterns in technical analysis. Its usefulness stems from its ability to signal the potential exhaustion of a downtrend and the start of a new uptrend.

Think of it as a "W" shape on the chart. It represents a market that has tried to break lower twice, failed, and is now preparing to move higher.

Here's a detailed breakdown of why it's an invaluable tool for traders.

1. It Captures a Specific Shift in Market Psychology

The pattern tells a clear story of a battle between bulls and bears that the bulls ultimately win:

• First Low: The price makes a new low point on significant volume. This represents the final wave of panic selling or capitulation, where the last holdouts finally sell.

• Reaction Bounce: The price bounces naturally off this low, finding some temporary buying interest. This forms the middle peak of the "W".

• Second Low: The price declines again, testing the area of the first low. Critically, the volume on this second decline is noticeably lower. This is the key insight: the selling pressure has dried up. Bears cannot force the price to a significantly new low. This is a bullish divergence between price and selling pressure.

• Breakout: The price then rallies and breaks above the reaction high (the middle peak of the "W") on a surge in volume. This confirms that buyers have seized control.

• Why it's useful: It provides a narrative. Instead of just seeing a bounce, you understand that the failure to make a new low signifies a fundamental shift in supply and demand. It helps you distinguish a true reversal from a temporary dead-cat bounce.

2. It Provides a Clear and Objective Entry Signal

The entire purpose of spotting the two lows is to prepare for the potential reversal confirmation.

• What it shows: The pattern is only confirmed and becomes a valid signal once the price breaks above the reaction high (also called the "neckline") on increased volume.

• Why it's useful: This provides a precise, rules-based entry point for a long trade. You are not guessing the bottom; you are buying the confirmed resumption of upward momentum, which is a much higher-probability trade.

3. It Offers a Measured Price Target

This is a critical feature for risk management. The Double Bottom provides a quantifiable profit-taking objective.

• How it works: You measure the vertical distance from the reaction high (neckline) down to the lowest point of the two bottoms. This same distance is then projected upward from the point of the breakout.

• Why it's useful: It allows you to calculate the potential reward before you enter the trade. This is essential for determining if the trade offers a favorable risk-to-reward ratio.

Visual Example:
*(Imagine a chart where a stock declines to a low of $50 (first bottom), bounces to a reaction high of $60, then declines again to $50.50 (second bottom) on lower volume. The pattern is confirmed when it breaks above the $60 neckline. The pattern height is $10 ($60 - $50). This $10 is projected upward from the $60 breakout, giving a target of $70.)*

4. It Enables Excellent Risk Management

The pattern’s structure provides a logical and well-defined level for a stop-loss order.

• How it works: The most logical place for a stop-loss is just below the lowest point of the two bottoms. Since the pattern signals a reversal, a move below the bottoms would completely invalidate the setup.

• Why it's useful: This allows for a clear calculation of risk. Your risk per share is the distance between your entry point (near the neckline) and your stop-loss (below the bottoms). When compared to the measured move target, this often creates a favorable risk-to-reward ratio.

Practical Trading Example

Let's walk through a hypothetical trade:

1. Identify the Pattern:

   • Stock XYZ has been in a downtrend. It hits a low of $100 (on high volume) and bounces to $110.

   • It then declines again but only reaches $100.50 before stalling, and this second decline occurs on much lower volume. The "W" shape is now visible.

2. Entry & Risk Management:

   • Entry Signal: The price rallies and breaks above the $110 neckline, closing at $111 on a 50% increase in volume. You enter a long position at $111.

   • Stop-Loss: You place your stop-loss order at $99.50, just below the $100 low. Your total risk per share is $11.50 ($111 - $99.50).

3. Profit Target:

   • Measuring the Pattern: The height of the pattern is $10 ($110 neckline - $100 low).

   • Setting the Target: You project this $10 upward from the breakout point at $110. Your price target is $120.

   • Your potential profit per share is $9 ($120 - $111).

4. Reward-to-Risk Analysis:

   • Potential Reward: $9.00

   • Potential Risk: $11.50

   • This is a sub-1:1 reward-to-risk ratio on this initial calculation. This highlights a crucial point: sometimes the initial R:R isn't perfect. A trader might wait for a pullback to the neckline (now support) to enter, or use a partial profit-taking strategy (e.g., take half off at the target and let the rest run).

Crucial Limitations and Tips for Use

• No Pattern is Foolproof: False breakouts can occur. The price may break the neckline and then reverse back down, invalidating the pattern (this is known as a "bull trap").

• Volume is Key: The pattern's reliability is heavily dependent on volume.

  • First Bottom: High volume (capitulation).

  • Second Bottom: Lower volume (lack of selling interest).

  • Breakout: Surging volume (conviction from buyers). A low-volume breakout is suspect.

• Time Between Bottoms: The pattern needs time to develop. The two lows should be at least several weeks apart. Bottoms that are too close together may just be normal volatility, not a major reversal.

• Depth of the Trough: The second low can be slightly higher or lower than the first, but they should be roughly equal.

Summary: Why the Double Bottom is Useful

In essence, the Double Bottom is useful because it provides a complete, high-probability reversal blueprint:

• Narrative: It explains the shift from bearish capitulation to bullish control.

• Signal: A clear breakout level (neckline) for entry.

• Target: A measurable profit objective.

• Risk Management: A logical stop-loss level.

It allows traders to identify potential major trend changes with a clear plan for entry, exit, and risk management, making it a cornerstone pattern for both swing and position traders.

A double bottom is a charting pattern used in technical analysis. It describes the drop of a stock or index, a rebound, another drop to the same or similar level as the original drop, and finally another rebound. The double bottom looks like the letter "W". The twice-touched low is considered a support level. Source: https://www.investopedia.com/terms/d/doublebottom.asp

This indicator will detect and highlight the double bottom pattern automatically on the chart and alert you.

Features and inputs:

• Range(input): check if the first bottom was the lowest Low in given Range of bars. You can use large value if you want to detect long term trend, or small value for short term trend pattern.

• Choose the alert sound file you want to use from a drop-down menu.

• Switch ON/OFF of alert.

It works on all timeframes and any symbol. It will draw a line right after the pattern is formed.

Double bottom is a candlestick chart pattern, that's why it works the same on all timeframes, as long as the volatility is good.
On a low volatility chart, doesn't matter what timeframe it is, could form unstable or less accurate patterns.
So it's actually not about the timeframe, it's about the volume or volatility.

You can also load more than one with different inputs to get more results on the chart.

There is a plot (a cyan dot) which is used to check if a double bottom chart pattern has been formed.

You can use this plot in Market Analyzer and Strategy.

How to use it from Strategy Builder.

1. select the Double bottom indicator and the input you want to use.
2. follow the arrows as shown in pic below to setup the condition.
3. click OK.

After you click OK, you should see the condition list as pic below.