What is Double Bottom chart Pattern?
Double Bottom is a chart pattern, formed by price action, with two swing bottoms placed side by side, almost at the same level. It is very profitable reversal chart patterns. It is very reliable with 50-60% probability. This is created in a down trend when the price hits a support level twice and reverses to continue in an up trend.
They are the pressure areas in a stock chart, which may be a major support area, or it may even be a major target area. Here most traders having short position book profit. And buying for long trade begins. The trend changes from downtrend to uptrend. The support trend line of this pattern is an almost horizontal line connecting the two swing bottoms of the pattern.
It is so named because the pattern is in the form of English alphabet 'W', with one swing top and two swing bottoms. Hence the name Double Bottom Chart Pattern.
Trend is your friend. Dance with the friend. Tune to the trend.
There are two great forces which move the price up and down. They are demand and supply. Double Bottom is the result of increase in demand over supply for the stock.
In a downtrend the price keep making lower low swing highs and lower low swing lows. As the target area or the support area is approached there is increased buying. As the demand increases the price rises up forming a swing low. This swing low forms the first swing bottom of double bottom chart pattern formation.
Because of increase in demand over supply for the stock, the price rises. When buying is exhausted, selling continues because it is a better price to sell in view of previous price fall. So there is an increase in the supply for the stock and the price falls. This price fall creates the swing top of this pattern.
Although many traders are selling and the price is falling, it is not backed by smart money. Major funds are not selling. Instead they are interested in buying at this level. This time the price does not fall much below the previous swing low. It does not make a lower swing low. Rather it just falls to the level of previous swing low which is the major support level.
Here the demand again increases and the price swings up forming the second swing bottom of this double bottom chart pattern. A trend line connecting the lowest points of these swing bottoms and extended to right forms the support line for this pattern.
Between these two swing bottoms there is a swing top. A horizontal trend line drawn at the highest point of this swing top forms the resistance line for this pattern.
Study the chart given below.
This chart shows a Double Bottom Chart Pattern which is the bullish reversal pattern in a downtrend.
Pattern trading is one of the strategies of making money in stock trading. Among the chart patterns reverse double bottom chart pattern formation gives us the opportunity to cover our short position and enter a long trade. These trades will have high rate of success.
What is invisibly going on in the market is very well expressed on the visible chart. The first bottom is lower low swing low with lower low swing highs. This is in tune with a downtrend. But unusual increase in volume at this level should rise suspicion of entry of bulls to accumulate stock. It is easy to accumulate great quantity of stock in a bearish trend.
The failure of second swing bottom to form lower low swing low at the level of the previous support, tells us that the down fall has arrested. If the support is strong enough to stop the further fall of the price, it is an indication that bulls are active behind the screen. If the price takes support, it should alert the formation of two bottoms.
Next when all the sellers are exhausted, the price rises and breakout above the resistance trend line of this pattern. Here the price crosses above the previous swing high and makes first higher high. Now an uptrend begins. By definition uptrend is marked by higher high swing highs and higher high swing lows.
The moment you see a stock making a double bottoms chart pattern cover all your short position and get ready to go long above the resistance line drawn above the high of the central swing high. A close above the resistance trend line is a buy signal to go long. Protect this long trade by placing a stop loss sell order below the support trend line of the double bottom pattern.
Once the price breaks out above the resistance line, many a time it pulls back to test the resistance turned support line. Those stocks which does not pullback after a breakout do much better than those which do pull back. Stocks which breakout with heavy volume perform better than those which breakout with low volume.
If the price pulls back and rises, move the stop loss sell order to just below the swing low formed when the price rises after pull back.
The minimum target for this long trade is equal to the range of the pattern. That is the height from the support line of the pattern to the resistance line of the pattern, applied above the resistance line from the break out point. Though this is the minimum target, many times the reward will be many times this which increases the risk to reward ratio.
The two swing bottoms need not be exactly at the same level. A difference of up to three percent, is considered as acceptable.
There are many more chart pattern formation used in pattern trading. Some of them are listed below. You may click on the name of each chart pattern listed below to learn and understand more about them.
Continuation Chart Patterns
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