Double Bottom
Candlefocus EditorThe double bottom is one of the classic technical analysis formations and is used to identify a major change in trend. Visually this formation looks like the letter “W” and is formed when a security hits a low twice in rapid succession creating two bottoms. The twice touched low is considered a support level, and when the security breaks through this level a new uptrend may be forming.
The double bottom pattern is considered a major reversal pattern and it always follows a major or minor downtrend in a security. In other words, when a double bottom is created it signals the reversal of a prior down move and the potential start of a new uptrend.
Double bottom patterns can be seen across many different timeframes, ranging from daily lows to hourly lows. A daily double bottom indicates a major reversal that may signal a longer-term shift in trend, while an hourly double bottom may be a brief pause within an overall downtrend.
Given it's ability to signal a major change in trend direction for a particular asset, investors and traders monitor for the double bottom pattern to attempt to identify when a new buying opportunity may be available. This allows traders to benefit from the potential large price swings that can come about in the wake of a double bottom formation. In general, the greater the prior down move of the security the greater the subsequent up move that may be seen when the double bottom pattern is identified.
Technical analysts will watch for double bottom patterns when a security starts to approach its twice-touched support level. When this support level is broken through, it is deemed a breakout and the security will be monitored to see if a new uptrend becomes established. The success of a new uptrend also depends on other factors such as fundamental strength of the security, news events and other technical indicators, so investors will often use the double bottom in conjunction with other analysis tools.
Overall, the double bottom is a major and classic technical analysis formation that investors, traders and analysts use to identify potential buying opportunities. By monitoring for double bottom patterns investors can be provided with an early indication of a potential change in trend for a particular asset, and potentially benefit from a large price movement if the double bottom formation does indeed result in a major trend reversal.