DOUBLE BOTTOM : REVERSAL PATTERN
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1. The Shape of The Double Bottom –
A double bottom occurs when prices form two distinct bottoms on a chart. A double bottom is only complete, however, when prices climb above the highest high point between the two bottoms. The double bottom is a reversal pattern of a downward trend in a stock’s price. Sometimes called a “W” formation because of the pattern it creates on the chart, the double bottoms are also one of the most frequently seen and common of the patterns along with double tops Because they seem to be so easy to identify, the double bottoms should be approached with caution by the investor.
2. Formation of The Double Bottom –
Leading to the formation, prices trend downward over the short to intermediate term (3 to 6 months) and usually do not fall below the left Bottom. There should be at least a 10% upside between the two bottom, measured from low to high. Two distinct Bottoms with a price variation between peaks of 4% or less. This is not crucial except that the two Bottoms should appear near the same price level and not be part of the same consolidation pattern.
3. Duration of The Double Bottom –
The Double Bottom has a minimum duration of 3 weeks and it rarely exceeds 3 or 4 months long. Anything less than 3 weeks of duration likely to be a pennant formation, not a Double Bottom.
4. The volume inside The Double Bottom –
Usually higher on the left bottom than the right.
5. Pre-mature or False Breakout –
Because volume is usually low at the time of breakout, it takes very little activity to bring about an erratic and false movement in price, talking the price below the neckline and bounces back again.
6. Breakout –
The confirmation point is the highest high between the two Bottoms, neckline, Prices closing above the neckline confirm a double Bottom and the breakout.
HOW TO TRADE THE DOUBLE BOTTOMS
Trading Rules.
1. Entry –
Buy the stock day after Prices closing above the highest high point between two bottoms. If you miss it, wait for the throwback then buy when price resumes the breakout direction after the throwback completes. When you missed and, If you Don’t Get a throwback around the neckline then Don’t Chase The Stock for buying.
2. Price Target –
Compute the formation height by subtracting the lowest low from the highest high in the formation. Add the difference to the highest high between the two bottoms. The result is the expected minimum price target.
3. Taking Profit –
For short-term traders, sell the stock when the price reaches near to the minimum price target computed as above. For intermediate and long-term traders, hold the stock as per your risk & capital management applied before entering into a trade.
4. Stoploss –
Usually, price closing below the second bottom is a stop-loss. But very often, The gap between the second bottom and neckline price is very high. So it will be an unfavourable risk-reward ratio. Ever felt you are getting enough trading calls right, but aren’t still making significant profits? An unfavourable risk-reward ratio could be the answer.
You may be adept at reading chart patterns but if you trade with an unfavourable risk reward ratio, you are headed for big losses on your trading portfolio.
A double bottom occurs when prices form two distinct bottoms on a chart. A double bottom is only complete, however, when prices climb above the highest high point between the two bottoms. The double bottom is a reversal pattern of a downward trend in a stock’s price. Sometimes called a “W” formation because of the pattern it creates on the chart, the double bottoms are also one of the most frequently seen and common of the patterns along with double tops Because they seem to be so easy to identify, the double bottoms should be approached with caution by the investor.
2. Formation of The Double Bottom –
Leading to the formation, prices trend downward over the short to intermediate term (3 to 6 months) and usually do not fall below the left Bottom. There should be at least a 10% upside between the two bottom, measured from low to high. Two distinct Bottoms with a price variation between peaks of 4% or less. This is not crucial except that the two Bottoms should appear near the same price level and not be part of the same consolidation pattern.
3. Duration of The Double Bottom –
The Double Bottom has a minimum duration of 3 weeks and it rarely exceeds 3 or 4 months long. Anything less than 3 weeks of duration likely to be a pennant formation, not a Double Bottom.
4. The volume inside The Double Bottom –
Usually higher on the left bottom than the right.
5. Pre-mature or False Breakout –
Because volume is usually low at the time of breakout, it takes very little activity to bring about an erratic and false movement in price, talking the price below the neckline and bounces back again.
6. Breakout –
The confirmation point is the highest high between the two Bottoms, neckline, Prices closing above the neckline confirm a double Bottom and the breakout.
HOW TO TRADE THE DOUBLE BOTTOMS
Trading Rules.
1. Entry –
Buy the stock day after Prices closing above the highest high point between two bottoms. If you miss it, wait for the throwback then buy when price resumes the breakout direction after the throwback completes. When you missed and, If you Don’t Get a throwback around the neckline then Don’t Chase The Stock for buying.
2. Price Target –
Compute the formation height by subtracting the lowest low from the highest high in the formation. Add the difference to the highest high between the two bottoms. The result is the expected minimum price target.
3. Taking Profit –
For short-term traders, sell the stock when the price reaches near to the minimum price target computed as above. For intermediate and long-term traders, hold the stock as per your risk & capital management applied before entering into a trade.
4. Stoploss –
Usually, price closing below the second bottom is a stop-loss. But very often, The gap between the second bottom and neckline price is very high. So it will be an unfavourable risk-reward ratio. Ever felt you are getting enough trading calls right, but aren’t still making significant profits? An unfavourable risk-reward ratio could be the answer.
You may be adept at reading chart patterns but if you trade with an unfavourable risk reward ratio, you are headed for big losses on your trading portfolio.
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