Also, note that the distance between the two bottoms is quite long. Following the second bottom, the price grows steadily and without corrections. The chart shows the formation of the first bottom, which is the support level.

The daily trading chart above shows a double bottom in the case of an overall downtrend in Advanced Micro Devices (AMD). A long position should be taken on a daily close above the price level of the high of the first rebound, with a stop loss at the second low in the pattern. The minimum measured move objective for the pattern is the distance from the two lows to to the intermediate high in the middle of the pattern. A more aggressive interpretation of the pattern suggests a target at two times the distance between the lows and the intermediate high.

Trading the Double Bottom Pattern

Typically, the double bottom will take a familiar letter “W” pattern. This pattern is common on time frames as large as yearly and monthly charts and on smaller time frames like hourly, 5-minute, and even tick charts. We are going to discuss the method for trading this pattern and then look at a real-time example unfolding in gold. The double bottom chart pattern is certainly most effective when it appears at the end of a downtrend.

The pattern forms at the trend high and signals a bearish reversal. This information has been prepared by IG, a trading name of IG US LLC. This how to trade double bottom pattern material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument.

The Best Double Bottom Pattern Scanners

We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances. We recommend that you seek independent advice and ensure you fully understand the risks involved before trading. This is a sign that the selling pressure is about finished, and that a reversal is about to occur. EW, Looks like a nearly perfect double bottom on both the daily and weekly charts.

Double bottoms are best identified visually, using relatively long-term charts (daily and weekly). The lows do not have to be identical, but preferably between 3% to 4% of each other. The upside potential has as its minimum measured target level the highs of the first rebound (about 10%). A pullback and second test of the downside support completes the pattern if the low is within 3% to 4% of the prior low. Once the double bottom pattern is formed, traders should keep an eye out for upside moves.

What does a double top indicate?

The advance off of the first trough should be 3-5% in FX and 10-20% in stocks. The second trough should form a low within 0.5% in FX and 3% in stocks of the previous low and volume on the ensuing advance should increase. Volume indicators such as Chaikin Money Flow, OBV and Accumulation/Distribution can be used to look for signs of buying pressure. Just as with the double top, it is paramount to wait for the resistance breakout. The formation is not complete until the previous reaction high is taken out.

Get ready to receive three amazing chart pattern videos that are over 30 minutes long straight into your inbox. Chris Douthit, MBA, CSPO, is a former professional trader for Goldman Sachs and the founder of OptionStrategiesInsider.com. His work, market predictions, and options strategies approach has been featured on NASDAQ, Seeking Alpha, Marketplace, and Hackernoon. First, as you have seen above, they are relatively easy to identify.

What Does a Double Bottom Tell You?

The Double Bottom is not bearish; it is considered a bullish signal in a bull market. It signals with an 88 percent accuracy that the current downward trend may be coming to an end and could reverse into an upward trend soon. It can be helpful to use trend lines or other technical indicators such as moving averages or RSI to identify the double bottom pattern.

• Many potential Double Bottom Reversals can form during a downtrend, but until key resistance is broken, a reversal cannot be confirmed.
• Hence, the risk is always that the market will continue moving in the same direction.
• Following the second bottom, the price grows steadily and without corrections.
• Therefore, double bottom patterns are common patterns that reflect the psychology of traders.
• This can create a great opportunity for traders to capitalize on the potential gains while limiting losses by placing a stop-loss order above the lower high.
• The double bottom looks like the letter “W.” The twice-touched low is now considered a significant support level.

If you rely on technical analysis then knowing how to pinpoint double bottom patterns matters for choosing when to buy or sell a particular security. Generally, the first bottom should reflect a dip of at least 10%, though you may see price drops of 20% or even 30%. When analyzing which securities to add to your portfolio, there are two approaches you can take, fundamental analysis and technical analysis. The former focuses on the financial health of companies while the latter looks more closely at current market trends. If you’re using a technical approach, one of the key methods to use is the double bottom pattern. This W-shaped pattern is used to track downward movements in a security’s price.