When using technical analysis, the double bottom pattern indicates a long term or intermediate reversal in the overall trend. It is defined by a price drop in a stock or index, preceded by a rebound, then another drop to roughly the same level as the first drop, followed by a more significant rebound. The double bottom pattern resembles the look of a W, where the low is considered the support level.
To further understand this bullish pattern, let us divide it into its constituents.
The prerequisite for a double bottom pattern is a significant downward trend that has been continuing for an extended period – many months. The first bottom or trough of the trend should be the lowest point of the current downward trend. The first trough is followed by 10 to 20% advance and, occasionally, a drawn-out peak.
The second trough follows the advance and finds support from the first low. This formation can take weeks and months to form. The two troughs can be considered a double bottom if the difference between them is within a 3% range.
Volume is the most critical factor for the double bottom pattern. Traders should be sure that there is an acceleration in buying pressure and volume during the advance of the second trough. If volume is not lower on the second leg of this pattern, traders should take notice as the stock or index is at risk of falling below the current resistant level. When the volume increases on the second leg of the pattern, buyers end up rushing in and pushing the stock higher through the confirmation point.
The double bottom reversal is complete when the trend breaks the resistance from the highest point between the two bottoms. Now, the resistance becomes the support. This support is sometimes tested with the first correction.
To set a target, a trader should consider the distance from the resistance breakout to the low points of the bottoms and add those values to the resistance break. With the double bottom pattern, it’s a good idea to trade on patterns that have at least four weeks between the lows.
Why is the Double Bottom Pattern Important?
When identified correctly, the double bottom pattern signals that an investor has an opportunity to enter the market with a bullish trade as there is now critical support on the downside, preventing the stock from dipping past the resistance level and is now setting up for an upward move. As soon as the double bottom pattern is identified, a trader may initiate a nicely timed bullish investment to make some quick profits. However, if they are incorrect about the movement and the stock breaches the lower support level, they can quickly get out for a small loss.
Attributes
- Pattern type: Reversal
- Indication: Bullish
- Breakout confirmation: The confirmation for this pattern is a close above the upper trendline drawn horizontally across the intervening high between the lows with above-average volume.
- Measuring: Take the distance between the two lows and a high and add it to the breakout level.
- Volume: The volume tends to decline during the formation and increase on the breakout.
Conclusion
the double bottom pattern is highly effective when correctly identified. However, traders should keep a close eye on volume to ensure it is increasing throughout the pattern. Therefore, it’s key to ensure that all elements of the pattern are identified correctly before jumping in and executing a trade. To learn more about stock chart patterns and how to take advantage of technical analysis to the fullest, be sure to check out our entire library of predictable chart patterns. These include comprehensive descriptions and images so that you can recognize important chart patterns scenarios and become a better trader.
