Double bottom patterns are a bullish pattern. It consists of two valleys or support levels. After the first support level is formed, price goes up either quickly or gradually. After that, price moves back down to the first support level and it holds that first support level, thus creating the double bottom. Look for price to hold support areas and rise to confirm bullish continuation.
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What Are Double Bottom Patterns?
A double bottom pattern consists of several candlesticks that form two valleys or support levels that are either equal or near equal height. Typically when the 2nd peak forms, it cannot break above the first peak and causes a double top failure. They are common patterns that can be found on any chart.
Double bottoms are a strong bullish reversal pattern. It gets its name from the shape it forms. Sometimes double bottoms are referred to as W patterns. Look closely tonotice it has two troughs and a peak.
Double bottom patterns describe the drop of a stock, followed by a rebound, then another drop to the same support level. This gives it the W look.
Thus, the twice touched low is now seen as a key level of support. They can be found on any chart time frame, as with most chart patterns, these work the best over a longer view of time.
Many potential double bottoms can form and then breakdown along the way. Unless key resistance is broken, the reversal cannot be confirmed. Sometimes this is a moving average, an angular resistance or technical indicator.
As with any reversal pattern there has to be a strong trend in place to reverse. In this case, the double bottom is a bullish reversal pattern, therefore it must be in a downtrend.
Technicals
The first trough forms at the lowest point of the current trend. That is why having a strong trend in place is important for this pattern and that it is happening at the bottom of the trend; hence the name and the lows.
The first low should not be too much lower than previous lows. This way it does not raise a red flag among traders.
After the first low forms, a correction takes place. This is the bulls coming in increasing buying pressure and volume to drive price up; even though the bears are still in control at this point.
Sometimes the high of the peak can be round or drawn out a bit instead of that sharp move up. The round high is hesitation to go back down.
This hesitation tells that demand for the stock is increasing. Traders are becoming more interested in it; however it is still not strong enough for the breakout though.
The Second Trough
The second trough of the double bottom is formed when price declines after the reaction high. This usually occurs with low volume and goes back to the support level created by the previous low.
Next, the bears come back in not ready to give up control of the trend yet. They test support to see if it will hold.
Notably, exact troughs on double bottom patterns are ideal; if it is not exact it needs to be close. It is important to remember that not every trend will be picture perfect.
The essence of the pattern is more important than the text book look. Patterns on real world charts do not shape up perfectly.
How to Trade Double Bottom Patterns
- Watch for the fall of 1st valley
- Next, watch for price to move up either quickly or slowly
- Then, watch for price action to fall again to the previous valley area
- Watch if price can break down below previous support level
- Traders take a long once price breaks above the neckline of the two valleys
- Place stop at bottom of the 2nd valley
- Some traders take a long position once 2nd valley holds support near 1st peak
- Place stop below the 2nd valley
Volume and Resistance Break
Volume is more important on double bottom patterns than on double top patterns. There needs to be clear evidence of volume and buying pressure increasing. Sometimes gap up patterns form indicating a change in trend is about to happen.
As price moves back up, it is heading to test resistance. Resistance is formed by the highest levels of the troughs. In order for the double bottom pattern to be complete and begin the reversal, price needs to break resistance and hold.
Support and resistance are such an important part of trading; these are levels that traders pay special attention to. Once resistance is broken and holds, it becomes new support levels.
Price may then head back down to test this new support level to confirm the validity of it. This can offer a second chance to close a short position or go long.
The Bottom Line
Double bottom patterns usually take longer to form than its counterpart. Patience can be a virtue when trading this pattern. As with any pattern confirmation of the breakout is paramount. The pattern is not complete until the previous reaction high is taken out. As always be sure to wait for confirmation and use the tools available to make the best trade available. Do not get discouraged if the stock does not go according to plan; those things happen. Best is to see where/how the plan failed and look for the next possible set up.
