The Double Bottom Pattern Explained
The double bottom pattern is a technical analysis pattern that signals a bearish trend is ending and a bullish one is emerging.
In this article, we will explain what the double bottom pattern is, how to trade it, and what to watch out for when using this pattern.
What is the Double Bottom Pattern?
A double bottom pattern is a bullish reversal pattern that occurs at the bottom of a downtrend and signals that the sellers, who were in control of the price action so far, are losing momentum. The pattern looks like a “W” because it has two lows that are about the same level and a shift from a falling to a rising trend. A Double bottom pattern can potentially turn into a triple bottom if three lows are made.
The double bottom pattern always follows a downtrend and signals the start of an uptrend once it gets confirmed. The pattern is confirmed when the price breaks above the neckline or the top of the “W.”
The double bottom pattern consists of four main components:
First bottom: This is the first low point of the price action after a downtrend. It marks the end of the selling pressure and the start of a short-term relief rally.
Rebound: This is the upward movement of the price action after the first bottom. It shows that some buyers are entering the market and pushing the price higher. However, this rebound is usually not strong enough to break above the previous resistance level or create a higher high.
Second bottom: This is the second low point of the price action after the rebound. It retests the first bottom level and confirms that it is a strong support level. It also shows that the sellers are running out of steam and that the buyers are gaining confidence.
Breakout: This is the decisive move of the price action above the neckline or resistance level that connects the highs of the rebound. It signals that the double bottom pattern is complete and that a new uptrend has started.
Double Bottom Pattern Example
One example of a double bottom pattern can be seen on AMD’s daily chart above. The pattern started on 10/30/2018 when AMD made its first bottom at 16.18. The next bottom occurred on 12/26/2018 around 16.03. On 1/30/2019, it broke above the neckline/resistance, which confirmed the pattern and gave an entry opportunity.
How to Trade the Double Bottom Pattern
To trade the double bottom pattern, you need to follow these steps:
Spot one: Look for a downtrend followed by two lows that are roughly equal in price. The second low should not be significantly lower than the first one. Otherwise, it may indicate a failed double bottom.
Wait for entry: Wait for the price action to break above the neckline or resistance level with strong volume and momentum. This confirms that the double bottom pattern is valid and that a new uptrend has begun. You can enter a long position at this point or wait for a pullback to retest the neckline as support.
Set stop loss: Place your stop loss below the second bottom or below the lowest point of the pattern. This protects you from false breakouts or further downside movements.
Set take profit: Calculate your take profit target by measuring the height of the pattern (the distance between the neckline and the lowest point) and adding it to the breakout point. This gives you an estimate of how far the price can go after breaking out of the double bottom pattern.
Failed Double Bottom Pattern
A failed double bottom pattern occurs when the price action fails to break above the neckline or falls back below it after breaking out. This indicates that there is not enough buying pressure to sustain an uptrend and that there may be more selling pressure ahead.
A failed double bottom pattern can also occur when there is too much time between two bottoms or when they are too close together. This suggests that there is no clear change in sentiment or momentum between buyers and sellers.
Double Bottom Pattern | Bottom Line
The double bottom pattern is a powerful technical analysis tool that can help you identify and trade potential reversals in the market. It shows that the sellers are losing control and that the buyers are taking over. However, you should always use other indicators and tools to confirm the validity and strength of the pattern before entering a trade.
If you want to learn more about the stock market and network with like-minded traders and investors, join the HaiKhuu Trading community today. You will get access to exclusive content, live trading sessions, market insights, and much more. Don’t miss this opportunity to take your trading skills to the next level. Join now!
FAQ
Is the double bottom pattern bullish?
Yes, a double bottom pattern is a bullish reversal pattern that indicates a possible change from a downtrend to an uptrend. It shows that the sellers are losing strength and that the buyers are taking over.
What does a double bottom pattern indicate?
A double bottom pattern indicates that the price action has reached a strong support level twice and bounced back. It suggests that there is not enough selling pressure to push the price lower and that there is more buying pressure to push the price higher.
How reliable is a double bottom pattern?
A double bottom pattern is one of the most reliable reversal patterns in technical analysis. However, it is not a guarantee of success, and it should be confirmed by other indicators and factors.
When to buy a stock with a double bottom pattern?
The best time to buy a stock with a double bottom pattern is when the price breaks above the neckline or resistance level with strong volume and momentum. This signals that the pattern is complete and that a new uptrend has started. Alternatively, you can wait for a pullback to retest the neckline as support and enter a long position there.
