A double bottom pattern is a technical analysis charting pattern that describes a trend change and momentum reversal from prior leading price action.
It explains the decline of a stock or index, its recovery, a subsequent decline to the same or comparable level as the initial decline, and a final rebound. The double bottom resembles the letter "W." The low that was touched twice is a support level.
The majority of technical analysts feel that a 10% to 20% decline should precede the initial bottom. Within 3 to 4% points of the previous low, the second bottom should develop, and volume on the subsequent rally should increase.
As with the majority of chart patterns, a double bottom pattern is best suited for intermediate- to long-term market analysis. In general, the larger the period between the pattern's two lows, the greater the likelihood that the chart pattern would be effective.
In order for the double bottom pattern to have a higher possibility of success, the period of the double bottom's lows should be at least three months. Therefore, it is preferable to utilize daily or weekly price data charts while evaluating markets for this specific pattern.
Although the pattern may appear on intraday price charts, it is extremely difficult to determine the double bottom pattern's veracity when intraday data price charts are used.
The double bottom pattern always follows a big or minor downtrend in a particular security and indicates a potential reversal and rise. Therefore, the pattern must be validated by market fundamentals for the security itself, the sector to which the security belongs, and the market as a whole.
The fundamentals must reflect the features of a forthcoming market reversal. Moreover, volume must be closely checked throughout pattern development.
A volume spike often happens throughout the pattern's two upward price movements. These volume spikes are a strong indication of upward price pressure and further proof of the existence of a double bottom pattern.
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Once the closing price is in the second rebound and is approaching the high of the first rebound of the pattern, a long position should be taken at the price level of the high of the first rebound, with a stop loss at the second low in the pattern, if market conditions are ripe for a reversal as indicated by an increase in volume and fundamentals.
A profit objective should be set at double the amount of the stop-loss order above the entry price.
Challenges of Double-Bottoms
Double bottom formations are particularly effective when correctly spotted. However, when incorrectly perceived, they can be highly harmful. Therefore, one must exercise considerable caution and patience before draw.