What is a Double Bottom Pattern In Stocks?
A double bottom pattern in stocks is a chart pattern that appears at the end of a downtrend.
The price action reverses and breaks through the support level. This breakout in price is also supported by increased volume indicating buying pressure to push through the previous resistance level.
A rally then occurs which takes prices above the previous high to create new highs.
The price structure forms two distinct lows instead of one low for this pattern to work as expected.
Unlike a single bottom pattern in stocks, the double bottom does not need to have the troughs at exactly the same level.
The main requirement for this stock chart pattern is that price retrace or bounce off of support before reversing again on increased volume.
- This reversal and breakout must be confirmed as it often does with an increase in trading volume as compared to what occurred during the previous downtrend.
- A successful double bottom setup implies there is greater downside risk than upside potential at this point which makes a rally after breaking through resistance likely.
As such, traders who use longer-term indicators may find they do better selling their long positions after first confirming the double bottom pattern in stocks has formed correctly by using moving averages or other technical tools for confirmation. These can be traded in tandem with the double bottom pattern and give a better idea of where the price may head next.
Selling into strength is usually not recommended because it is difficult to determine when the actual top has been made. Support can rely on more than resistance as this occurs once only and is, therefore, easier to figure out before any trader sells.
The validity of a double bottom may, however, be correlated with other technical indicators such as momentum oscillators or moving averages which will help traders know if there are enough reasons for buying pressure to continue past resistance levels into upside territory.
Although these patterns are useful for getting an idea of prices that could move significantly they too cannot predict future prices and should always be used together with other tools to ensure accuracy instead of relying on a single indicator alone.
How Do Double Bottoms Work in Stocks?
The general idea behind the double bottom pattern in stocks is that once prices have fallen below a previous support level with high volume, the market usually turns to weakness and may experience lower prices.
- After the lower lows form at points A – B on our chart above, the price bounces off of support at the dashed line for a second time before reversing direction and breaking through resistance (grey dashed line).
- The push above the previous high after both troughs formed should be strong enough to confirm this stock chart pattern as valid.
- The volume should also increase considerably since we are looking for upside confirmation in addition to two distinct lows forming on our chart instead of one low point of contact.
- This would indicate buying pressure which helps prices reverse to the upside from below resistance and then rise above this area before prices pull back.
Practical experience has taught traders that a double bottom pattern in stocks is not always easy to confirm because there are many false breakouts as well. The structure of this pattern may look identical to its true counterpart but it comes without increased volume or any other indicator signals that confirm this stock chart pattern.
A trader can only rely on his or her own experience which will teach them about how certain indicators react under different market conditions.
No two markets behave exactly alike which makes it important for individual traders to be able to distinguish between patterns that have a high probability of success and those that fall short of expectations.
Randomness plays an important role when trading so traders must try to minimize their downside risk as much as possible while being prepared for the possibility of a false breakout in stock charts just like they are for other trading situations.
How Do You Trade A Double Bottom?
These are just some general guidelines that should get you started if you want to use double bottom stock charts as part of your trading plan but there are many more combinations available once high-quality stocks start to move in your direction and you begin trading.
You can also find some great stock charting software online that will allow you to place indicators on the charts as well so that you can even better confirm these trends before they appear on the price action itself.
Risk management is key when it comes to trading or investing so don't over-extend yourself once price forms a double bottom pattern just because of what it might mean for any given market in the future. Be careful, do your homework and adjust your risk accordingly while looking at many different stock chart patterns until you find a trading strategy that truly works.
Be sure to confirm the Double Bottom formation with a solid break-out through resistance. A downward move below key support levels combined with increased volume often gives enough evidence of a possible reversal to the upside before any fresh highs are made in stock charts.
Look for at least two distinct troughs forming, one just above and another just below the previous high point. If there is not much space between these lows then it may still be possible to identify this pattern but consider other technical indicators like moving averages or momentum oscillators to ensure that price is likely to make a sustainable move higher from here.
Place your stop loss just above both peaks which form as part of the double bottom chart pattern. This will protect you against any false breakouts that could push stock prices below this area.
Set your take profit targets at the next resistance levels in the pattern (see image above). This will minimize any risk from a false breakout before you have time to lock profits in on the chart and may help you avoid a stop loss from being hit prematurely as well since this would be used only as a last resort.
Remember that volume is important so look for increased or high volume associated with these troughs forming on the stock chart to give more evidence of an actual reversal rather than one that falls short of expectations.
Check other indicators like momentum oscillators, moving averages or even Elliott Wave counts to ensure that price is most likely going to continue heading higher once it breaks out through resistance The patterns that you find the most often in stock charts are those that have proven their results by working over and over again.
Many charting platforms will not show all of these patterns but it is usually possible to find at least some of them for any given market.
The low volume at which many stocks trade may make it more difficult to confirm that a double bottom pattern has formed, especially if there was little or no increase in volume on the break-out through resistance.
Be prepared to protect your profit as the price moves higher even after breaking out through resistance.
This is what makes trading so much fun because your winners can pay for all of your losses from false breakout signals.
Take profits once the price starts moving away from the entry area set during the breakout. You should be looking to close out some of your winning trades before the market closes in order to secure a portion of your profits for that day.
Be prepared for the possibility that the price may not follow through as expected after forming these kinds of chart patterns. Recognize when it is time to exit a trade and move on with your other plans for trading and investing by closing out any remaining positions you still hold at this point instead of hoping they will turn around.
Sometimes stock charts are just random, especially if there was an increase in volume without much corresponding movement in price on the break out through resistance which means you should plan accordingly so you can move forward quickly if need be once you recognize that nothing more is going to happen with this chart pattern.
Be sure to look for patterns that also form near key technical levels like moving averages or Fibonacci retracement areas. Similar moves in the past can often lead to continued price momentum once the price is able to break out of a downward spiral and move back above these levels.
Do your research on this and other stock charting techniques so you know what type of formations to look for wherever they may be forming on any given market. This will help you learn how to identify them faster, which helps improve your overall trading performance.
Trading and investing in today's markets requires skill, education, and experience but there are many tools available to help investors succeed no matter what their background might be or how much free time they have each month for managing their investments.
Double Bottoms are a great way to determine which stock prices might be going up in the near future and they form regularly on all types of stocks so that anyone who is willing to learn how to recognize them can start trading right away.
You just need to do your homework about everything involved with trading first including what market conditions work best for you or your clients, what different tools are available online and offline for tracking stock prices, where to place stops for profit protection, how much risk you should take on at any given time and many other things.