The double bottom
Two lows at a similar level with an interim high between them. When the price rises above it, the decline counts as over. Before that, the price could just as well fall a third time.
The double bottom looks like a W. The price falls to the same floor twice and bounces both times. Many see it as sellers losing strength.
What it's about
After a decline the price reaches a low, recovers, falls again to roughly the same level and turns again. The interim high is what matters. Only when the price rises above it is the W complete.
How to recognise it
- There was a clear decline beforehand.
- Two lows at a similar level.
- A clear interim high.
- Only a close above the interim high completes the pattern.
How the price target is estimated
The distance from the bottom to the interim high is added to the interim high. Bottoms at €30, interim high at €34: the target is around €38.
Where it misleads you
Buying at the second low already means counting on a pattern that isn't there yet. If the price keeps falling, the double bottom simply becomes a new low. Even after the breakout, the price often comes back to the old level once more.
An example trade with made up numbers
Timo has €10,000 in his account and risks at most €150 per trade. A stock rises above its interim high at €34. Timo buys at €34.20 and sets his stop loss at €32.70. With that distance, he buys 100 shares for €3,420. Costs: €1 each to buy and sell, plus about 2 cents of spread per share on each order.
If it works: The price reaches the target at €38 and Timo sells. Timo is €380 ahead. After €2 in fees and €4 in spread, €374 is left.
If it goes wrong: The breakout fails and the stop fills at €32.60. That's a €160 loss, €166 with costs.
Timo only bought after the breakout. He missed part of the recovery, but he bet less often on a pattern that never completed.
Double bottoms are among the best known reversal patterns. In practice the two lows are rarely exactly equal. Many accept a few percent difference, some look for the second low to be slightly higher.
As with the double top, the result of any study depends heavily on how exactly the pattern is defined. That makes hit rate claims hard to compare.
Summary
- A double bottom is only complete with the breakout above the interim high.
- The target is the bottom to interim high distance, added on top.
- After the breakout the price often tests the old level.
Did you get it?
Bottoms at €30, interim high at €34. Where is the estimated target?
Around €38.
When is a double bottom complete?
When the price closes above the interim high.
Why is buying at the second low risky?
Because the price can keep falling and the pattern never forms.
Sources and further reading
- StockCharts ChartSchool, Double Bottom Reversal. View source ↗
- Thomas N. Bulkowski: Encyclopedia of Chart Patterns, 3rd edition 2021.
Related
- Double topChart pattern
- Inverse head and shouldersChart pattern
- What chart patterns can doLesson