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Double Bottom

A pattern in asset prices that creates a W-shaped movement

What is a Double Bottom?

A double bottom is a type of price movement identified in technical analysis where there is a fall in price led by gain and then another drop (similar to the previous drop), and finally, a rise in price from a shape that is similar to the letter W. An accurate definition of a double pattern is achieved when the second price rise goes above the highest point, thus ending the pattern.

Usually, the first drop is usually a sharp decline, while the second drop is more of a gradual drop. The first drop is because of panic selling by investors, while in the second drop, investors who bought stocks after the first drop sell to gain profits.

 

Double Bottom

 

Summary

  • A double bottom is a pattern in asset prices that creates a W-shaped movement. It indicates that after two lows, there will be a significant increase in price.
  • A double top is an opposite movement in price compared to a double bottom. The double top pattern indicates that after the two highs, the price of the asset is going to go down significantly.
  • Investors who want to trade in a double bottom should do so at the second bottom. The only gamble here is that they are still assuming it will be a double bottom.

 

Importance of Double Bottom

A double bottom is an indicator of positive signals as the stock’s reached its low, and the second bottom will mostly be followed by a continuous increase in the stock price.

 

Double Top and How it is Traded

 

Double Top

 

A double top is a reversal of a bearish movement in the stock price. It consists of two peaks. The first peak comes after a bullish movement, after which it goes down to the neckline. It is followed by another bullish movement to reach the second peak.

It is important to note that for a double top, the bearish movement after the second peak should be more significant than the bearish movement after the first peak for the pattern to be termed as a double top.

Investors who trade during a double top usually go short during the second peak in anticipation of a huge fall in price.

 

How is Trading Done During a Double Bottom

As stated earlier, a double bottom reversal is a bullish movement in the stock prices. It contains two lows. When we look at diagram 1 above, the first low comes after a bearish movement in the stock prices followed by a bullish movement to reach the neckline.

The second low comes after and is followed by a bullish movement. It is important to note that the second bullish movement should be more significant than the first bullish movement to attain a double bottom.

Investors trading during the double bottom usually go long during the second low in anticipation of a bullish run.

 

Trading Strategies During a Double Bottom

 

1. Aggressive strategy

At point A in diagram 1, traders will use an aggressive strategy by betting for a double bottom. At the second peak, they will assume for the pattern to complete by expecting a bearish movement, thus helping their portfolio to increase in value.

 

2. Less aggressive strategy

At point B in diagram 1, the double bottom pattern has already taken place. Hence, at this point and beyond, the investor will see a smaller opportunity to earn a higher profit as compared to point A.

 

3. Conservative strategy

At this point, the investors will see much of an advantage to earn a profit, as beyond this point, it will be difficult to know in which direction the prices will go.

 

Related Readings

CFI offers the Capital Markets & Securities Analyst (CMSA)® certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Advanced Technical Analysis
  • Momentum Indicators
  • Bull vs. Bear
  • Long and Short Positions

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