Example of a double bottom from a technical point of view

In technical analysis, when the price of a stock goes down, it goes back up, and then it drops back to where it was before it went down. The design looks like the letter W.

Technical analysis says that this pattern is good for the stock. Technical analysts think that the stock has hit its bottom and will go up in the future.

What is a pattern with two bottoms?

The opposite of a double-top pattern is a double-bottom pattern. Both of the opposite conclusions can be drawn from this pattern.

A single rounding bottom is followed by a double rounding bottom, which can be the first sign of a possible change in direction. Most of the time, rounding bottom patterns show up at the end of a long downward trend.

When there are two rounded bottoms in a row, it could mean that investors are watching the asset to make money off of its last drop toward a support level.

Most of the time, a double bottom means the market is about to go up, so investors can make money from a bullish rally. Long positions that make money when the price of a security goes up are a common way to trade after a double bottom.

A Case with a Double Bottom

The above daily trading chart shows a double bottom if Advanced Micro Devices is in a general downtrend (AMD). After a sudden, sharp drop, many people want to buy at the first low point.

Based on candlestick analysis, this makes a long, light candlestick and a bullish engulfing line. Both of these are signs of a bullish reversal. The difference between the first low and the next high is almost 10%.

Since most bounces from the first low are between 10% and 20%, investors should be looking for another move down right now.

The pattern gets stronger when the second low is within 3% to 4% of the first low. Now that the double bottom is in place, traders could expect a pullback up or a new uptrend since solid support has been reached and tested twice.

When the price falls below the double-bottom lows, the pattern is broken, which means the price is likely to go down. When the price closes for the day above the intermediate high, it shows a big change and maybe the start of a new uptrend.

When found the right way, double-bottom formations are very useful. But if they are misunderstood, they can do a lot of damage. Because of this, people must be very careful and patient before jumping to conclusions.

The most important example is when there is a second bottom around the previous low, and then a few days or weeks later, there is confirmation of a bullish trend. The daily and weekly charts are the best places to see these patterns.

Identify A Double- Bottom Pattern

How to find the double bottom pattern on a chart, step by step:

Find the two different bottoms that are the same in height and width.

How far apart the bottoms are should depend on how long it will be between them.

Confirm the price level of resistance at the neckline.

Other technical indicators, such as moving averages and oscillators, can be used to back up bullish signs from a double bottom.

Try not to go against strong trends when you trade.

Why a double bottom is important

A double bottom is a good sign because it means the stock has reached its lowest point, and after the second bottom, the stock price usually keeps going up.

How do you trade when there is a double bottom?

As we've already said, a double-bottom reversal is a bullish move in stock prices. It teaches us two things. If we look at Diagram 1, we can see that a drop in stock prices leads to the initial low, and then a rise in prices leads to the neckline.

The next thing to happen is the second low, and then a bullish movement happens. For a double bottom to form, the second bullish move that comes after the first bullish move needs to be bigger than the first.

When there is a double bottom, traders usually buy at the second low, expecting the price to go up.

Double bottoms are one of the most important chart patterns for figuring out long-term trends because they show that a key low has been reached for the near future.

After the second low, the pattern usually predicts a 10% to 20% bounce back, but if the fundamentals have changed in the securities' favor, there could be more upside.

For example, a new rise could be caused by a strong prediction of future earnings. To see double bottoms, you need charts that cover a long period of time. The lows should be spaced out by 3% to 4%.

The 10% highs of the first bounce back set the minimum goal for possible growth. If the new low is within 3% to 4% of the previous low, the pattern is considered to be over after a pullback and the second test of downward support.

After a double-bottom pattern is formed, investors should expect the price to go up. If the high that marks the middle of the pattern is broken after the second bottom, this means there is more upside potential and maybe the start of a new uptrend.