Professional traders often use these 2 ways to spot the bullish reversal of an asset
Trend trading is one of the best ways to make money. If traders learn to spot a new trend early on, it will create a buying opportunity with a good risk / reward (RR) ratio.
While there are many patterns that can signal a turnaround, one of the easiest patterns to spot is the raised floor. This can help traders change their strategies if the trend reverses from bearish to bullish.
Let’s take a look at the Double Bottom pattern and identify some of the best ways to trade it.
What is a raised floor?
A double bottom pattern forms on a downtrend and consists of two lows formed near a similar horizontal level with a small peak in between. When the price breaks out and closes above the little top after forming the second bottom, the setup is complete. This is a reversal pattern that will result in a trend reversal in the medium to long term. Because the pattern resembles the shape of the letter ‘W’, some also call it the W bottom.
The picture above shows the structure of a raised floor. The asset is in a downtrend but at a certain price the bulls believe the asset is undervalued and start buying. This helps create the first floor where demand exceeds supply and a rally begins.
However, most bears still do not believe that a bottom has been reached and start short positions again after a pullback. The price went back down, but as it neared the first low the bulls started accumulating again, stopping the decline and initiating another rally. A second low point within 3% of the first low point is generally considered valid. This is not a fixed number and traders should act at their own discretion when trading.
When the price rises above the resistance line, it signals a trend reversal from bearish to bullish. The minimum goal the pattern can achieve is to take the distance from the resistance line to the bottom that connects the breakout level and is pointing up.
Let’s look at a few examples to better understand this concept.
Daily XTZ / USDT Chart | Source: TradingView
Tezos (XTZ) price was in a downtrend before hitting its first low at $ 1.78 on November 4, 2020. the bears see their chance again and are selling well.
Although the pair broke the $ 1.78 support and fell to $ 1.57 on December 23, 2020, the bears were unable to hold the lower levels. The pair quickly recovered and began to rebound the next day, making a second low.
The bears aggressively defended the resistance line trying to trap the aggressive bulls who bought in the January 24, 2021 outbreak.
The length from the resistance line to the bottom is $ 1.18. Adding that to the breakout at $ 2.96, the pattern’s minimum target would be $ 4.14. In this case, however, the pair beat the target, rising to $ 5.64 on February 14.
The raised floor is also shown in the weekly timeframe
Along with the daily chart, the double bottom also works well on the weekly chart. When a reversal setup forms on the weekly chart, it results in a long-term trend change and a new uptrend, which usually lasts longer.
Weekly ETH / USDT Chart | Source: TradingView
Ether (ETH) has been in a sharp downtrend since peaking at $ 1,440 in January 2018. Demand exceeded supply when the price hit $ 81.70 in December 2018, which resulted in the formation of the soil. The price then rebounded to $ 366.80 in June 2019, where the bears stepped in again.
The decline then made a second low at $ 86 in March 2020. The gap between the two lows is very long, but there is no set pattern in trading. Since both levels are close together and the price movement forms a clear W, traders can view this as a double bottom.
The bulls pushed price above the cutout in July 2020, but that move did not spark a new uptrend as the bears made another attempt to trap the bulls. The price fell below the breakout levels but the bears were unable to hold the lower levels. This shows that sentiment has changed from selling when it rises to buying when it falls.
This confirmed the reversal and the ETH / USDT pair started a strong uptrend. Although the pattern’s minimum target is only $ 651.90, the pair climbed above $ 4,300 during the rally.
This shows that the double bottom is an important reversal pattern that sometimes leads to a strong uptrend.
Some floors can be misleading
Often times, traders will notice a false bottom and buy before the price breaks above the resistance line. This can sometimes lead to losses as the pattern may never complete.
BTC / USDT daily chart | Source: TradingView
Bitcoin (BTC) has been in a downtrend since peaking at $ 19,798.68 in December 2017. Buyers stopped the decline on February 6, 2018 at $ 6,000. The relief rally reached $ 11,786 on February 20, 2018. This level attracted the bears and the price fell again to $ 6,430 on April 1, 2018.
This move looks like a double bottom, but the bulls have been unable to push the price above the $ 11,786 resistance. This means that the raised floor is not ready.
Although the USD 6,000 level was held for a long time, the trend has not changed from bearish to bullish. Eventually, the BTC / USDT pair fell below the support and continued its downtrend on November 14, 2018.
The raised floor is an important reversal pattern that signals a trend reversal, but there are a few important points to be aware of.
The first floor should be formed after a downtrend as there would be no reversal without the downtrend. Traders should wait for the pattern to complete by waiting for the price to cross the resistance line before buying as price has often created a false bottom but failed to complete it and the downtrend resumed.
When a long-term trend changes direction, the price often moves past the target of the pattern. Therefore, traders can use the target as a guide, but should not rush to close a position on that basis alone.
According to Cointelegraph