A double bottom pattern is a type of chart pattern in technical analysis that shows a change in trend and a change in momentum from the leading price action before it.
It talks about a stock or index going down, coming back up, going down again to the same or a similar level as the first drop, and then coming back up again.
The double bottom makes a "W" shape. The low that has been hit twice is a support level.
What Can You Learn From a Double Bottom?
Most technical analysts think that there should be a drop of 10 to 20% before the first bottom.
The second bottom should happen within 3–4% points of the previous low, and the next move up should have more buyers.
Like many other chart patterns, a double bottom pattern is best used to look at the market in the middle to long term.
In general, the chances that a chart pattern will work are higher the longer it has been since the two lowest points in the pattern.
The lows of a double bottom pattern should last at least three months for the pattern to have a better chance of working.
Because of this, it is best to look at daily or weekly price charts when analyzing the markets for this pattern.
Even though the pattern can show up on intraday price charts, it is very hard to tell if the double bottom pattern is true when intraday price charts are used.
The double bottom pattern always comes after a major or minor downtrend in a security. It shows that the trend is changing and could start going up.
So, the pattern should be confirmed by the fundamentals of the market for the security itself, the sector the security is in, and the market as a whole.
The fundamentals should show the signs of a change in market conditions that is about to happen. Also, the volume should be closely watched while the pattern is being made.
Usually, a big jump in volume happens when the price goes up twice in the pattern. These jumps in volume are a strong sign of price pressure going up, and they also show that a double bottom pattern has worked.
Once the closing price is in the second rebound and is getting close to 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. A profit goal should be set at twice the amount of the stop loss above the entry price.
When found correctly, double bottom formations are very useful. But if they are taken the wrong way, they can cause a lot of harm. Before coming to any conclusions, one must be very careful and patient.
