Chart Pattern Recognition Series - Double Bottom Reversal Pattern
The double bottom is probably the most popular technical pattern of all time and thus worthy of your attention to help better understand its opportunities and correctly judge buying points. One of the most attractive attributes of the double bottom patter is its 35% average rise after confirmation. So lets start with the identification guidelines of the pattern.
- A downward stock motion leading into the pattern
- Two distinct V-shaped (or price spikes) bottoms
- At least 10% rise BETWEEN bottoms
- Bottom prices that do not vary more than 3% apart
- Valley should be approximately 5-weeks apart (for best performance)
- Volume usually higher on the left valley formation
Confirmation of the double bottom is confirmed once the price closes above the peak between the two valleys. This means there are TWO good buying opportunities here. My favorite is that of the second valley bottom with a tight stop just below that the low of the first valley. This maximizes opportunity and limits your downside risk. A seemingly simple objective for any trade but one that too many traders fail to do on a regular basis. The other opportunity is a upon the confirmation of the close above the peak between the two valleys. However, with a 65% pattern throwback rate, taking a position at this point in time serves both opportunity and risk to the investor.