A double bottom is a chart pattern formed by two consecutive price lows that are approximately equal in depth, followed by a reversal to the upside.

The two lows are often referred to as the “twin bottoms.” The formation is complete when the price breaks above the neckline, which is a horizontal line connecting the two lows.

A double bottom is typically considered a bullish reversal pattern, unlike the double top. It suggests that the downward pressure on the market has weakened, and there is increasing buying interest. When the price breaks above the neckline, it signals a potential upward trend.

How is the Double Bottom Formed?

The pattern typically begins within a downtrend. The price is declining, and there is a sense of bearish sentiment in the market.

As the downtrend continues, the price may experience a temporary rebound. This rebound creates the first low of the double bottom.

After the rebound, the price resumes its downward movement and forms a second low. This second low should be approximately equal in depth to the first low.

A horizontal line is drawn between the two low points. This line is called the neckline. The pattern is complete when the price breaks above the neckline. This breakout signals a potential reversal of the downtrend.

It is important to note that:

• The two lows of the double bottom should be approximately equal in depth.
• The neckline is a crucial element of the pattern, as it determines the breakout point.
• A high-volume breakout above the neckline can strengthen the bullish signal.
• Usually, the longer the time between the two low points in a double bottom pattern, the more likely it is to be correct. For this reason, it’s better to use daily or weekly price charts when looking for this pattern.

Trading Double Bottoms

Traders often employ various strategies when encountering a double bottom. Some common approaches include:

1. Buy on Breakout: Once the price breaks above the neckline, traders may consider buying with the expectation of an upward move.
2. Trailing Stop Orders: To protect profits, traders can use trailing stop orders that adjust the stop price as the price moves in their favor.
3. False Breakout Trading: In some cases, the price may briefly break above the neckline but then reverse direction. Traders may look for signs of a false breakout and enter a trade in the opposite direction.

Conclusion

Double bottoms are one of the most important chart patterns for seeing long-term changes in trends. They show that the price has reached a very low point for a while.

The pattern usually means the price will go up by 10% to 20% after the second low. But it could go up even more if the company’s future looks better.

By understanding its characteristics and implications, traders can make informed decisions and potentially capitalize on potential price movements.

See more chart pattern in our glossary.