Double Bottom Pattern
5paisa Research Team Date: 19 Sep, 2022 06:08 PM IST
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- What is the double bottom pattern?
- What does a double bottom tell you?
- Example of a double bottom pattern
- Limitation of Double Bottom
Price charts reflect traders' sentiments, and their patterns help identify upcoming events. Academics often claim that price movement on the chart is wildly random. However, the patterns locked in the charts indicate a different narrative.
For example, a double bottom or double top pattern often appears to reset for the extreme sentiments on the chart. This indicates that the sentiments are not wild or random. Moreover, traders who identify the patterns can save themselves from losses and even book profits.
The double bottom chart pattern appears after a crash or downtrend. If identified correctly, the trader can make a hefty profit. By understanding the definition of a double-bottom pattern, an investor can leverage this technique to increase their investment returns.
What is the double bottom pattern?
A double bottom pattern is a reversal trend that indicates a change in momentum from the prior price action. It depicts the sign of a 'W' on the price chart. The second low in this 'W' pattern encompasses the support level, verifying the double bottom pattern.
As presented, the price line touches two lows, forming the shape of the English alphabet 'W.' The graph shows that the first low marks a drop of 10% and the other low is almost the same. Also, the second drop breaches the support level, confirming the pattern.
The double bottom refers to the index's decline, followed by a rebound, an equally significant drop, and another rebound. A massive or moderate downturn in a particular index brings along a pattern, marking the trend's conclusion and the start of a potential uptrend.
What does a double bottom tell you?
The double bottom chart pattern registers a correction in the ongoing downtrend. Therefore, the pattern often appears on the chart during a plunge. Many analysts have suggested that the easiest way to recognise a double bottom is to check the two lows. The first low will always mark a 10-20% fall, and the other low will remain within the previous low's 3-4% range. Another important aspect of identifying the pattern is the volume. The index's volume will rise once the uptrend is confirmed.
Furthermore, the likelihood of a successful price movement increases with the distance between the two lows. Therefore, it is ideal for long-term trading and even for intermediate trading. It helps traders identify the index’s future and calculate the risk accordingly.
Analysts recommend a minimum 3-month chart to identify a double bottom. Long-term traders even prefer 6-month or yearly charts to identify the pattern better. However, the pattern also appears in an intraday chart, but the success rate might diminish or reflect no improvement.
A complete momentum reversal or the start of a potential uptrend are the two interpretations of the double bottom chart pattern. Consequently, the pattern may indicate fundamental support for the specific security or the market or segment to which it belongs. While monitoring the chart, keep a close check on the volume of the index. The improvement is often marked when there is a high probability of an uptrend in the index.
Example of a double bottom pattern
The chart displays a double bottom after a moderate downtrend. It started with minor support for the current plunge, which leads to a potential uptrend on the chart. The two bottoms of the pattern set the stop level. Once the trader reaches this level, they can choose a risk-to-reward ratio of 1:2. Either they can target the limit level, or find the crucial level and use price action. Additionally, technical indicators such as moving averages and oscillators also help verify the double bottom pattern.
The confirmation candle plays a vital role. If it closes above the neckline, the trader needs to wait. The said candle often forms due to the bullish pressure. With the help of the method mentioned earlier, there will be less risk and more potential for profitable trades. However, this also lessens the likelihood of risk-reward.
It is important to note that trading against a strong downtrend requires caution, even if a double bottom appears on the chart. Therefore, one should take calculated risks per their appetite to avoid future losses.
Limitation of Double Bottom
In the case of misinterpretation, the trader might suffer losses as it is a reversal pattern for long-term traders. Thus, before landing on results and confirmation of the pattern, it is highly recommended to relook patiently.
The chart patterns have helped traders identify the future of the stock. Among all of them, the double bottom pattern appears more frequently. However, identifying it correctly and trading basis the identification can involve risks. Therefore, trading based on the double bottom accompanies high risks.
Q1. Is the double bottom pattern bullish?
Ans. Yes, it is a bullish pattern. The double bottom is a reversal pattern that appears during a downtrend to establish a potential uptrend.
Q2. How reliable is the double bottom pattern?
Ans. The double bottom chart pattern is crucial to identify correctly. However, if it is verified, the trade could bring in better profits.
Q3. How do you do a double bottom pattern?
Ans. The chart's double bottom pattern looks like a 'W.' The first low represents a 10–20% decline, and the second is almost identical, but sometimes only a 3-4% decline from the first low
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