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Double Bottom

双åŗ• Double Bottom

Summary

Double bottom is one of the common bottom patterns in candlestick charts, its shape is like “W”.

Identify

  1. Formation
    The double bottom consists of two consecutive falling prices and two relatively similar lows, reflecting the change from a bear market to a bull market, and its shape is similar to “W”.A double bottom usually occurs at the end of a market downtrend. After the first bottom, the price will start to rebound. Draw a horizontal line on the peak level formed in the first bottom to form a neckline; The price fell again, but the volume contracted slightly compared to the first peak. After the price fall nearly to the previous bottom, it rebounds upward for the second time and breaks through the horizontal line (neckline or resistance). The price movement is like a ā€œWā€, forming a double bottom.
  2. Volume
    During the formation of the double bottom, the volume of the first bottom is higher, and the volume of the second bottom is slightly lower. The volume of transactions showed a diminishing phenomenon, which shows that in the process of the second fall of the price, the selling momentum is weakening, imply that the downtrend is going to end. After the completion of formation, the rising price tends to fall but the momentum is weak, the neckline becomes strong support.
  3. Precautions
    1. Theoretically, the two bottoms’ price levels should be basically the same, but in the actual market, they may not. Generally speaking, the second bottom price level may be slightly higher than the first bottom, which means that during the uptrend retracement, there are sellers trying to further expand the price to fall, but due to the volume is small, the sellers failed and the price turned back up. On the other hand, the second bottom may also be lower than the first bottom, this is mainly due to the downtrend is stronger, so that the buyers are afraid to hold their positions, resulting in buyers’ entry at a lower price level.
    2. When the first bottom is formed, the magnitude of its rebound is about 10%.
    3. When a double bottom pattern is formed, the KD line and RSI often show divergence signals.
    4. During the formation of the double bottoms, trading volume is always high. The volume of these two bottoms will also be sharp and prominent, showing two peaks in the volume indicator. However, the volume at the second bottom shrank significantly compared to the first one, reflecting the weakening of the downward momentum. If the volume at the second bottom increases instead, the double bottom pattern may fail.
    5. The double bottom pattern usually can be determined when two bottoms are formed, and the second bottom trading volume enlarges and effectively breakout the neckline. After that, the price retraces briefly, but the neckline will become its support.
  4. Application
    1. Buying LevelThe buy entry level is at the point where the price breakout the neckline, in this situation the volume needs to be higher at this time. Traders who buy at this point will take a greater risk, this is because of the double bottom breakout fails, the buyer will face a loss at this price. A more conservative way is to wait for the price to breaks the neckline and retrace to the support (neckline), traders can buy if there is a higher volume, the winning rate will be higher.
    2. Take Profit Level
      The take profit target point is the same as the distance from the bottom point to the neckline.