Double Bottom

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What is it?

This is same as Double Top, it halts a downtrend, and starts an uptrend in a scrip.

  • Also called as "W" pattern, because it resembles a "W".
  • If double Bottoms are Bullish, triple bottoms are even more so.
  • Volume is higher on the first bottom, and lesser in the second bottom, and starts picking up on breakout from second bottom.
  • There has to be significant distance between one bottom and the other to qualify as Double Bottom.
  • Now take the peak between two troughs … breaking that level is confirmation of a change in trend on the upside.

So, summarizing let us say if we are looking at daily charts of a stock. We have a trough put in let us say in March, and then another one in that area only in say month of July. The downtrend to the first trough came up with good volumes, and then a pullback on low volumes. The fall to the second trough came up with relatively lesser volumes and then the advance coming in relatively stronger. It might be double Bottom, but you cannot tell till the peak between the troughs is taken out. Then we call it Double bottom. Also called W-BOTTOM.

How does knowing this help us in trading?

We have a great downtrend on good volumes and a pullback on lesser volumes … no problems so far. Now the second trough formation starts to form but with much lesser volume as compared to the first one, and then a breakout on high volumes. This gives us an indication to exit our shorts. But without confirmation, we are officially in nothing more than sideways trend with possible rise upwards. Now the peak gets broken and usually the stock retraces back , we are officially in uptrend now. The time to go long has arrived. Long a half at retractment and other half over the high of bar that closed above the peak.

Target

The distance between the trough and the peak between them … add that to the high of bar that broke the peak. Thats the target.

Remember

Every time, price hits the same area does not make it double bottom. It could be a sideways consolidation before a new trough is formed..or some other pattern in formation. Wait for the resistance to be taken out before calling it Double Bottom..

Example

doublebotutx.png

References

StockCharts


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