What is a double bottom pattern?
A double bottom is a pattern and a technical analysis that shows a trend change and trend reversal from the leading price action that happened beforehand. It explains further an asset decline, a decline of the same or the similar level like the original drop, and another rebound. If you look at the chart, you will see that a double bottom looks like a letter W since it touched the low twice. We can consider this twice-touched low as a support level.
Describing the double bottom pattern’s W
If we look at the double bottom pattern’s details more, the first bottom’s drop should be more advanced than the second. It should play around the figures between 10% and 20%. On the other hand, the second bottom should be around 4% compared to the previous low. The succeeding advance’s volume should increase.
People use this chart pattern to analyze intermediate and long-term market views. If the chart pattern’s low duration is longer, the probability of success is more. And since we are talking about the low’s duration, the least duration that we can consider appropriate is three months for the double chart pattern to be successful. Since we know these facts, it may be safe to say that it is good to use daily or weekly date price charts to analyze markets.
A double bottom pattern indeed appears on intraday price charts. However, it may still be hard to verify the pattern’s validity when using intraday price charts.
When can we see double bottom patterns?
We can often see a double bottom pattern after a major or even a minor security downtrend. We can consider this pattern as a trend reversal or a potential uptrend signal. Due to these facts, the market fundamentals will need to validate the following: the double bottom pattern itself, its security sector, and the market. These characteristics are the ones that the fundamentals should reflect on the upcoming market condition reversal. As the pattern forms, the volume should be monitored because there is a significant tendency for a massive volume to arise. An enormous volume is a powerful upward price pressure indication and the pattern’s further success confirmation.
What actions should a trader take?
Let us imagine. A closing price on the second rebound is about to reach the first rebound of the pattern. There is a noticeable volume expansion with fundamentals that are conducive to a reversal which indicates market conditions. Here is what a trader needs to do: take a long position at the first rebound high’s price level. This long position should be together with a stop loss at the pattern’s second low. The trader should take the profit target twice at a stop loss amount more than the entry price.
As a summary
Indeed, a double bottom formation can be of great help if appropriately identified. However, as great as it helps when done correctly, the harm can also be great if it was identified poorly. We should always be careful and wary of the way we identify double bottoms pattern.