The double bottom is a reversal pattern that indicates a long or intermediate change in the overall trend. 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 important 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. The double bottom reversal is complete when the trend breaks the resistance from the highest point between the 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. To learn more about the double bottom pattern click here.