Double Bottom Complete Guide

What is Double Bottom?

The Double Bottom is a powerful bullish reversal chart pattern, often described as resembling the letter 'W'. It forms after a sustained downtrend, signaling a potential shift from bearish to bullish sentiment. The pattern consists of two distinct lows, or 'bottoms,' that occur at approximately the same price level, separated by an intermediate peak, often referred to as the 'neckline' or 'reaction high.' Formation begins with a downtrend leading to the first bottom, typically accompanied by high volume as sellers exhaust themselves. A subsequent bounce occurs, driven by short-covering and opportunistic buying, forming the intermediate peak. The price then declines again, retesting the previous low to form the second bottom. Crucially, this second decline often occurs on lower volume, indicating that selling pressure is diminishing and support is holding firm. The pattern is confirmed when the price breaks decisively above the neckline, ideally on significantly increased volume, signaling that buyers have taken control. According to Thomas Bulkowski's extensive research in 'Encyclopedia of Chart Patterns,' the Double Bottom is a reliable reversal pattern. He notes an average rise of approximately 39% in bull markets and 34% in bear markets after a confirmed breakout. Its failure rate, where the price fails to reach its target, is relatively low, around 10% in bull markets and 15% in bear markets. The pattern's strength lies in the repeated testing and holding of a critical support level, which, once broken to the upside, suggests a strong foundation for a new uptrend.

Identification Rules

1. A clear prior downtrend must be present before the pattern begins to form.
2. Two distinct price lows occur at approximately the same horizontal price level, separated by an intermediate peak (the neckline).
3. The intermediate peak (neckline) must be a significant reaction high between the two bottoms.
4. The pattern is confirmed when the price breaks decisively above the neckline, ideally accompanied by a surge in trading volume.

References

• Thomas N. Bulkowski (2005). Encyclopedia of Chart Patterns.
• Steve Nison (2001). Japanese Candlestick Charting Techniques.

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