What is Double Bottom chart Pattern?
A Double Bottom chart pattern is a bullish trend reversal chart pattern. The pattern is in the form of English alphabet ‘W‘, with one swing top and two swing bottoms, hence the name double bottom. In technical analysis, the double bottom chart pattern is a highly effective price reversal pattern and is very commonly used.
The double bottom pattern can be identified on bar charts, line charts, and candlestick charts. It indicates that the price is no longer falling, and the price is heading higher. The trend changes from downtrend to uptrend. It is very reliable with 50-60% probability of a successful trade
Formation of Double Bottom Chart Pattern
Observe the following chart of the index Nifty 50 to understand the double bottom pattern formation. The formation of the pattern starts when the price of a stock, index or commodity hits a particular low price level, rebounds from that level with some buying interest coming back into the stock. The lowest price point will be the first bottom.
Following the price recovery the stock trades at a higher level. However, the selling returns at the high point making a swing top and then attempts to hit the low price previously made. If the stock price gets arrested again at this level and rebounds, then the double bottom is formed.
The twice-touched low is considered a support level.
Simply put, price begins in a downtrend, stops (Bottom1), and then reverses the trend. However, the reversal to the upside is short-term. Price heads back to the previously made low, stop again (Bottom2) and if the price reverses from this point, double bottom is formed.
Here most traders having short positions book profit, and buying for long trade begins. The support trend line of this pattern is an almost horizontal line connecting the two swing bottoms of the pattern (blue line at the bottom on the above image).
As with many chart patterns, a double bottom pattern is best suited for analyzing the medium to longer-term view of an asset. Generally, longer the duration between the two lows in the pattern, greater the probability that the chart pattern will be successful. At least a two weeks to three-month duration between the two lows is considered appropriate. Therefore, better to use daily or weekly price charts when analyzing markets for this particular pattern.
Although the pattern may appear on intraday price charts, it is very difficult to ascertain the validity of the double bottom pattern.
Opposite of the double bottom is a Double Top chart pattern.