Double Bottom

The double bottom pattern is a technical analysis chart pattern that appears during a downtrend and indicates a possible trend reversal. It is formed by two consecutive lows that are approximately equal and separated by a peak in between, creating a "W" shape. The purpose of identifying it is to detect buying opportunities for traders.

The double bottom pattern suggests that the stock or security is reaching a point of support and is likely to move upward. It is considered a reliable pattern as it indicates a shift in momentum from the selling side to the buying side, providing traders an opportunity to take a long position in the stock or security. 

• A double bottom pattern is a bullish reversal pattern that indicates a reversal in a downtrend. It is characterized by two troughs and a peak in between.
• The pattern can signal a potential entry point for traders to profit from the expected upward trend.
• The pattern is identified on a chart by a prior downtrend, two distinct troughs, a peak, and a resistance point that turns into a support level. Once the price breaks out from the peak level, it continues rising.

Double bottom in stocks is a candlestick pattern that occurs at the end of a downtrend, indicating a potential reversal in market direction. This pattern presents an opportunity for buyers to enter the market with a long double-bottom pattern. Although it primarily appears on candlestick charts, it can also be seen on bars and line charts.

In order to identify the double bottom pattern, there are several key features to look out for.

• Firstly, the troughs or double bottoms should be easily distinguishable.
• Secondly, the first bottom must be at the lowest point of the downtrend. The distance between the two bottoms should be relatively long and not too short. The first trough or bottom should result in a price drop of 10 to 20 percent, and the second bottom should not fall within a price drop range of 3 to 4 percent.
• The duration between the two bottoms should be between one to three months.
• Volume should indicate a shift in momentum towards buying, and there should be a prior reverse trend before the occurrence of the double bottom.
• Lastly, the pattern typically forms after several months of significant downward price momentum.

Here are the key components of a double-bottom chart:

• Downtrend: The double bottom pattern usually occurs after a sustained downtrend in the asset's price, indicating that the bears are losing momentum and the bulls are beginning to take control.
• First Low: The first low is when the bears are exhausted, and the bulls start to push the price upward. This forms the first bottom of the pattern.
• Interim High: The price then rises to a new high, which marks a temporary resistance level where the bears may attempt to push the price down again.
• Second Low: The price returns to the first low level, forming a second bottom. This bottom is usually slightly higher than the first and forms the second part of the "W" shape.
• Breakout: The double bottom pattern is confirmed when the price breaks above the interim high, signaling that the bulls have taken control of the market.
• Volume: An important factor to consider when analyzing a double-bottom chart pattern. Generally, the volume should be higher during the second low and breakout, indicating greater buying pressure and conviction among traders.

The double bottom chart pattern is considered a bullish reversal pattern, indicating a potential trend reversal from a bearish to a bullish trend. Traders often use this pattern to identify buying opportunities in the market.

In the chart taken from TradingView, the technical details of Tata Steel show a double bottom pattern. The points of the double bottom are marked with the letters A and C. In the point marked with A, which can be called the first low, and after a continuous fall in prices for some trading sessions, the exhausted bears are not able to push down the prices any longer, leading to bulls taking over with an uptrend. This reaches point B, which is the interim high. Then, there is a second low at point C, which may be a bit higher than the first bottom. However, the prices considerably rise from this point and cross the level of interim high to give a breakout that shows a clear uptrend.

Both the bottoms also display a considerable volume that can be identified from the bar charts below, which the trader should pay attention to while making trade decisions. This is because the volume is a clear indication of a change in trend. If stocks are traded in huge quantities, then it is a confirmation of their demand in the market, which gives a boost to their price and company performance in the future.

Source

Let us look at some double-bottom examples to clarify this concept.

Example # 1

Let's say the price of a stock has been in a downtrend for some time, with investors selling off their shares due to negative news or poor financial performance. However, after a while, the stock's price begins to form a pattern of two distinct troughs with a peak in between.

If the price breaks out above the peak level, it could signal that the downtrend is over and a new uptrend is beginning. This would be a double-bottom pattern, and traders may see it as a bullish signal to buy the stock in the hope of profiting from the expected price increase.

Example #2 

An example of a double bottom pattern is apparent in the price of gold, where it indicates a potential bullish reversal in the commodity's price. The pattern comprises two troughs with a peak in between, and the price of gold rebounds after forming the second trough, suggesting a possible uptrend.

Confirmation is crucial when trading using technical analysis patterns like the double bottom. According to a Reuters article, traders should wait for the price to break out above the peak level before taking a long position in the commodity. If the gold price breaks out above the peak level, it could indicate a potential rebound to a certain previous month's level, such as early November 2015, as mentioned in the article.

Both candlestick chart patterns indicate the reversal of existing price trends that take a long time. However, both are different from each other in many senses, as shown in the table below:

This has been a guide to what is Double Bottom Pattern. Here, we explain the topic in detail, including a chart, examples, and a comparison with double top. You can learn more about it from the following articles –

• Descending Triangle
• Continuation Pattern
• Point And Figure Chart