Double Bottom Pattern Meaning, Definition and Creation
The Double Bottom pattern is a type of candlestick pattern. It is characterized by a W-shaped price chart. However, it can also be found in bar charts and line charts. A double bottom is formed when the price of a security falls and rises twice respectively. There are two ‘bottoms’ of the upswing pattern. A double bottom is usually formed at the end of a downtrend in the price of an asset.
A trend reversal is said to be initiated whenever a double bottom appears as it usually indicates that a potential uptrend is around the corner. The double bottom chart pattern is helpful in trying to predict the probability of a security’s intermediate to long-term price move.
A double bottom pattern is commonly studied in candlestick charts but can also be seen in bar and line charts. Candlestick patterns are important tools of technical analysis – the school of investment that believes that a trader can make profits in the stock market by studying the movement of a security’s price because history repeats itself — meaning that patterns repeat. .
Candlesticks can be of two types – red or black, indicating that the opening price of the security is higher than the closing price, and green or light, indicating that the closing price is higher than the opening price. Wick is another important characteristic of candlestick patterns. Also called shadows, these lines at the upper or lower limits of a candlestick bar show the rise and fall of a security during a trading session.
First, two distinct lows or double bottoms must be identified when looking for patterns. Furthermore, the first bottom should be the lowest point of the current trend. One should also check the gap between the two bottoms – it should not be very small. Generally it is preferred that the first move should occur on a price decline in the range of 10-20%. The next bottom should not be in the range of 3-4% of the previous bottom.
When the security’s price rises after the first bottom, it may remain around the above value for some time – indicating hesitation to move downwards again. This usually means that demand for the asset is bullish but not strong enough yet for a breakout.
The period between the first low and the next low can be anywhere between one and three months. Volume is an important parameter of the double bottom chart pattern as it indicates that there is a change in momentum towards buying. It is important to keep in mind that any such pattern must have a prior trend to reverse. For the Double Bottom chart pattern, there must be a sufficiently large downward movement of several months before the pattern is formed.
Difference between double bottom and double top
Conclusion
The double bottom chart pattern can be a very useful tool for detecting changes in market sentiment regarding a security. However, if it is not analyzed properly, the investor or trader may lose profits. One should always look at broader market and regional indicators to understand the authenticity of the double bottom pattern before trading. Although it may appear on intraday charts, it is better to use the pattern for longer time periods.
How to trade the double bottom chart pattern
- When the security’s price moves up for the second time and approaches the neckline, a trader should see a significant expansion in volume, knowing a reversal is on the cards. Furthermore, other market fundamentals should also support this signal.
- Can go long to the above price after an initial downtrend. Stop loss can be set on the second low in the double bottom pattern.
- When setting the target price for take profit, aim to double the stop loss target at the entry price.
- Sometimes, when a security’s price breaks the neckline (or resistance), it may find a new support level and give a trader another opportunity to initiate a long position or go short.
