A double bottom pattern is a charting pattern that indicates a change in trend and momentum from prior leading price action and is utilized in technical analysis.
It symbolizes the fall of a stock or index, the recovery that follows, the second fall to the same or a slightly lower level, and the rebound.
The double bottom has a form that resembles the letter "W." The low that has previously been reached twice is a support level.
What Does A Double Bottom Mean?
Most technical analysts believe that the initial bottom should rise by 10% to 20%. The second bottom should form within 3 to 4% points of the prior low, and the succeeding rally's volume should increase.
Like many other chart patterns, a double bottom pattern is best utilized to analyze a market's intermediate- to long-term tendencies.
In general, the separation between a chart pattern's two lows improves the likelihood that the pattern will be successful.
It is believed that in order for the double bottom pattern to have a better chance of succeeding, the lows must be at least three months long.
Therefore, when looking for this particular pattern in the markets, it is recommended to use daily or weekly data price charts.
Although the pattern may be obvious on intraday price charts, it might be difficult to tell whether the double bottom pattern is indeed present when utilizing intraday data price charts.
A double bottom pattern always follows a significant or minor downtrend in a particular investment, signaling the end of the trend and the beginning of a potential uptrend.
Because of this, the pattern should be backed by market fundamentals for the questioned security as well as for its industry, the market as a whole, and other pertinent factors.
The underlying trends should show signs of a coming market condition reversal. As the pattern develops, it's also critical to maintain a tight eye on the volume.
Usually, the pattern's two upward price moves are accompanied by a rise in volume. These volume gains are a definite indicator of rising price pressure and serve as additional evidence of a successful double bottom pattern.
Once the closing price is in the second rebound and is getting close to the high of the first rebound of the pattern, and a discernible increase in volume is currently coupled with fundamentals that indicate market conditions that are conducive to a reversal, 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 target should be established at double the stop loss amount above the entry price.
The distinctions between a double bottom and a double top
Double top patterns are the opposite of double bottom patterns. A twin top pattern is produced by two rounded tops that follow one another. A first rounding top design looks like an inverted U.
After a sustained bullish advance, rounding tops frequently develop, which makes them a reliable indicator of a bearish reversal. Double tops will lead to similar conclusions.
When there is a double top, the second rounded top usually peaks at a lower altitude than the first, denoting resistance and exhaustion.
Even though double tops are uncommon, they typically indicate that investors are attempting to profit from a bullish trend's remaining gains.
Double tops typically lead to a bearish reversal, when traders can profit by selling the stock at a discount while the market is falling.
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