Double Bottom- Full ExplanationA Double Bottom is considered a bullish signal, indicating a possible reversal of the current downtrend to a new uptrend. Sometimes called an "W" formation because of the pattern it creates on the chart, the Double Bottom is one of the most frequently seen and common of the patterns.
The Double Bottom is a reversal pattern of an downtrend trend in a financial instrument's price. The Double Bottom marks an downtrend in the process of becoming a uptrend.
A Double Bottom consists of two well-defined, sharp bottoms at approximately the same price level. The two bottoms are distinct and sharp . The pattern is complete when prices rise above the highest high in the formation. The highest high is called the "confirmation point".
The bullish momentum may be evidenced through a higher bottom on an oscillator like RSI . Though not required, the market may break below the first low, even if briefly. A slight and temporary break below the first bottom is preferred as it may excite the bears only to reverse and trend higher. The neckline is formed between the price low of the valley between the two bottoms. A break above this neckline will confirm the double bottom pattern. The bullish confirmation is specified by a break in the key price resistance level (neckline) situated at the high point between the ‘bottoms’.
Important Characteristics
Following are important characteristics for a Double Top .
Downtrend Preceding Double Top
The Double Bottom is a reversal formation. It begins with prices in an downtrend. The trend downwards should be fairly long and healthy.
Time between Bottoms
Generally, the longer the time between the two bottoms, the more important the pattern is as a good reversal signal.
Volume
Volume tends to be heaviest during the first bottom and lighter on the second. It is common to see volume pick up again at the time of breakout.
Pullback after Breakout
A pullback after the breakout is usual for a Double Bottom. The higher the volume on the breakout, the higher the likelihood is for a pullback.
Two Peaks at Different Levels
Sometimes the two comprising a Double Bottom are not at exactly the same price level. This does not necessarily render the pattern invalid.
Trading with Double Top:
There are certain rules when trading with Double Bottom chart patterns.
Firstly one should see the market phase whether it is up or down. As the double bottom is formed at the end of a downtrend , the prior trend should be an downtrend.
Traders should spot if two rounding bottoms are forming and also note the size of the bottoms.
Traders should only enter the long position when the price break out from the resistance level or the neckline.
Example:
From the below example of the 15 Min chart of BANKNIFTY we can see how bullish reversal takes places after the formation of the double bottom
Stop Loss & Target :
In the case of a Double Bottom chart pattern, the stop loss should be placed at the second bottom of the pattern and can be trailed at the pullback low as price moves higher but this will be a bit aggressive.
The price target should be equal to the distance between the neckline and the bottoms.
The False Break: How to trade the Double Bottom Pattern and profit from “trapped” traders
Now…
When you trade the Double Bottom, you must pay attention to the time and space between the lows — the larger the “gap”, the better.
Why?
Because when the lows are far apart, it gets the attention of more traders who could push the price higher.
And with this concept, you can use it to profit from “trapped” traders.
Here’s how…
The first and second lows should have time and space between them
Let the price break below the first low
Wait for a rejection of lower prices and then go long
The idea is simple.
As the price breaks below the first low, bearish traders will short the markets and have their stops above the lows.
But if the price quickly reverses higher, the short traders are “trapped”.
And you can take advantage of it by going long, anticipating if the price moves higher, it’ll trigger their stops and push the market in your favor.
Hope you all learnt from this post. Share with the community if you liked it.
Regards
Omahto
Doublebottompattern
Man Infra - Breakout & Volatality contraction My analysis is based on the Monthly chart. The monthly chart is considered ideal for long term investors and gives a directional perspective of the stock price.
The stock is forming a double bottom pattern. Typically, a double bottom is formed after a single rounding bottom pattern is formed and is often an early sign of a potential reversal. According to Investopedia "Rounding bottom patterns will typically occur at the end of an extended bearish trend. The double bottom formation constructed from two consecutive rounding bottoms can also infer that investors are following the security to capitalize on its last push lower toward a support level. A double bottom will typically indicate a bullish reversal which provides an opportunity for investors to obtain profits from a bullish rally. After a double bottom, common trading strategies include long positions that will profit from a rising security price."
Volume expansion can also be clearly seen as the candles are coming close to ATH (All time high). The ATH was in year 2010 and the stock has broken with a strong body candle and volumes after eleven years. If the period from January 2018 to July 2021 is observed carefully, there is volume contraction- this is a good sign.
Relative Strength against CNX Infra index is outperforming since April 2021. This is another positive.
Data from Screener.in shows that promoter has been increasing shareholding since September 2018 -from 63.13% to 66.10% in June 2021. Promoter buying is again considered a positive move.
Entry strategy - now that the longer timeframe looks positive, we should move to the lower timeframe to get an entry. Here I will move to the Weekly timeframe and follow the Stan Weinstein framework. The stock has to be above the 30 Weekly MA, volume expansion must be clearly seen, range and body of weekly closing candle must be strong. Stock must be in HH HL structure. The stock fulfils the Stan Weinstein framework. If stock retraces and takes support within the 75-81 zone, that would be a good entry point to add from risk reward standpoint. Ensure volume does NOT expand when stock retraces.
If you move to the Weekly timeframe, between the candles of 19 July 2021 to 30 August 2021 you will see a high tight flag (HTF) formation. The stock had run up approx. 86% between 19 April to 19 July 2021. HTF is a very rare pattern and forms in bull cycles and according to William O'Neil, HTF begins with a stock moving 100% to 120% in a very short time, usually four to eight weeks. It then corrects sideways no more than 10% to 25% usually in three to five weeks. It may not be HTF strictly by William O'Neil's definition, but the flag can be seen very clearly.
Risk management is key in both investment or trading. If we see the current market cycle, NIFTY50 is forming newer highs. The rise has been unprecedented. This is fuelled by supply of money in the markets. What if in the near future money supply is chocked by tapering by FED or hawkish stance by MPC of RBI? In that case we will see a retracement even if the broader economy is doing well, structurally speaking. No one knows the future and hence a safer approach is to invest using a pyramid model i.e. take an entry when stock is just above the 50 Day MA with volumes above average and scale up. This could be an equal split, for example, 34-33-33 or 50-25-25. There is no hard and fast rule. There is a possibility that stock may shoot up after the first tranche and not give another opportunity to enter at retracement, but what is market turns against us? In that case our loss will be limited to the first tranche only.
Disclaimer: I am not a registered investment advisor or analyst. This is not a recommendation to buy or sell. The purpose is to share with peer community and learn from the experts. For any investment or trading calls, please consult your authorised investment advisor.
What is Dounle Bottom Pattern?What is Double Bottom Pattern?
The double bottom pattern looks like the letter "W". It indicates an trend and momentum reversal in a particular asset. It is best for analyzing the intermediate to longer-term view of a market. Double Bottom Pattern one of the most reliable reversal pattern after Head and Shoulders Pattern.
How does Double Bottom Pattern Work?
Double Bottom Pattern works in two phases:
Phase 1:
When the major trend is downtrend and forms the first down peak, then from the support the prices bounce to a new higher resistance and unable to break that resistance.
Phase 2:
When prices are not able to break the resistance it again goes to the same level and take support form similar levels forming second down peak also double bottom . Again due to demand the prices rises up to the resistance and break that resistance. Increase in volumes during breakouts further confirms the reversal move. This marks the completion of the pattern.
Above Chart Explanation:
This is the daily chart of EGLDUSDT here we can see in a downtrend prices take support and forms a down peak one and took support form there and bounce back to the above resistance. But prices were not able to break it instead prices got rejection from resistance and the prices again go down forming second down peak. After taking support prices bounces and break resistance due to heavy demand with great volumes.
Usually traders enter on the breakouts and target the next resistance.
Conclusion:
Hence, the Double Bottom Pattern is great reversal pattern after Head and Shoulders Pattern. And it occurs quite often. Most of the traders use it on large time frames like 1D, 1W, 1M.
Please let me know in the comments what do you think about Double Bottom Chart Pattern!
Disclaimer:
This is just an educational post never trade just any pattern. And please do your research before taking any trades.
PS: We are publishing this for our Indian Audience again!
Happy Trading !
AXISBANK double bottomAXISBANK near its resistance in double bottom pattern at hourly timeframe. Be ready to go long if breakout comes.
