Double bottom is a popular trend reversal chart pattern which indicates the end of an existing downtrend and the start of an intermediate/long-term uptrend. As the name suggests, double bottom pattern is identified when the price forms two troughs of (almost) same lows.
The requirements of double bottom chart pattern include,
- The pattern should form at the bottom of an extended downtrend.
- There should be two price troughs of almost the same depth which should be separated by a clear price peak. The highest point of this peak is the reaction high or confirmation point.
- There should be enough time interval between two bottoms. The ideal interval is 4 months; but can range from 4 weeks to many months. The longer the pattern takes to form, the higher its significance.
- The volume should decline as the pattern forms, but the bottoms are noticeable with increase in volume.
- The trend reversal is confirmed when the price crosses above the reaction high after forming the second bottom. Volume expands on confirmation and gaps are common.
Double bottom chart pattern is a clear indication of the weakening of an existing downtrend. Price begin to fall from overbought levels at the first bottom but the existing market sentiment or some other news drives the price to drop to second bottom. But prices don’t fall much from first bottom level and tend to rise from there after successfully testing this support level. Traders should go long only after confirmation of trend reversal.
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