A double bottom pattern is a type of chart pattern used in technical analysis to show that the price action leading up to that point has changed its direction and speed.
It shows how a stock or index goes down, then goes back up, then goes back down to the same level or a slightly lower level, and then goes back up again.
The shape of the double bottom looks like the letter "W." A support level is the lowest point that has been hit twice.
What does a "double bottom" mean?
Most technical analysts say that the initial bottom should go up by 10 to 20%. The second bottom should happen within 3 to 4% points of the previous low, and the size of the next rally should grow.
Like many other chart patterns, a double bottom pattern is best used to look at the mid- to long-term trends of a market.
In general, the distance between a chart pattern's two lows makes it more likely that the pattern will work.
People think that the lows in a double bottom pattern should be at least three months long for the pattern to have a better chance of working.
So, the best way to look for this specific pattern in the markets is to use daily or weekly price data charts.
Even if the pattern is visible on intraday price charts, it can be hard to tell if the double bottom pattern is real or not.
A double bottom pattern always comes after a big or small downtrend in an investment. This shows that the trend is over and that a possible uptrend is about to start.
So, the pattern should be supported by market fundamentals for the security in question, as well as for its sector, the market as a whole, and other relevant factors.
The fundamentals should show the signs of a market change that is about to happen. Also, as the pattern starts to take shape, it's important to keep a close eye on the volume.
Most of the time, the pattern's two price moves up are accompanied by a rise in volume. These increases in volume show that the double bottom pattern worked and are a clear sign of price pressure going up.
Once the closing price is in the second rebound and is getting close to the high of the first rebound of the pattern, a long position should be taken at the price level of the high of the first rebound, with a stop loss at the second low in the pattern. This should be done when there is a clear increase in volume and fundamentals that show the market is ready for a reversal.
Set a profit goal to be double the amount of the stop loss above the entry price.
What's the difference between a double bottom and a double top?
When you turn a double bottom pattern upside down, you get a double top pattern. A double top pattern is made up of two round tops that are next to each other. The first rounding top looks like an upside-down U.
Rounding tops often show up after a long bullish rise, which is a good sign of a bearish turn. Double tops will lead to the same kinds of conclusions.
In the case of a double top, the second round top will usually peak at a lower level than the first, which shows resistance and tiredness.
Even though double tops are rare, they often mean that investors are trying to cash in on the last of a bullish trend's gains.
Most of the time, a bearish reversal happens after a double top. Traders can make money by selling the stock during a downward trend.
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