Double Bottom chart patterns are probably one of the easiest to recognize patterns, however most people call any time the price touches near a low twice a double bottom and that’s not exactly what the Double Bottom is.
The price has to touch the same low twice (usually within 3%) with a significant retracement in between. If the price isn’t exactly the same make sure the price isn’t say 4% lower than the first bottom, lean to the high side for trend reversals. Staggering lower prices may be a confirmation of a trend continuation. Also, the two bottoms can not be too close together in time or else it’s just normal volatility. Unfortunately the exact numbers for retracement and time frame vary from stock equities, commodities, options and within each sector. So working out these details for your trade option of choice can give you an edge.
The best test for the double bottom pattern is a price breakout on increased volume after the second bottom higher than the in between retracement. Huh? I think I just confused myself, it must be picture time!
There I think that should help clear that up. The line is the point of the retracement. If the price moves above this line AFTER the second bottom with a “significant” time frame between the two bottoms you have a very high chance of a price reversal. I’d say in the 80% range.
It’s good to remember what the chart pattern actually represents – people making trades. As a price gets lower some generally people think it’s worth less that’s what makes the price go down. At some point a group of people will now think the stock is a deal and buy in. Some of those people will sell on the retracement or “take profits” and the sellers who wish they had sold earlier will use that as an opportunity to sell again. When the price reverses again at the same point it indicates to the market there is a reason why the entity being traded is worth buying at the point and a trend reversal can begin.
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