In our previous write-up, we discussed the double-top chart pattern with a current example of Manappuram Finance. Today let’s focus on the rules of the double bottom pattern which is quite important like the double top. These patterns are one of the most commonly found patterns in the stock market. Though there are thousands of patterns and indicators under technical analysis, you need to work with a few of them. All you have to know is the accurate situation to apply them properly.
What is a Double Bottom Pattern?
As the name implies, the double bottom pattern consists of two bottoms, which look like the letter “W”. It comes after a prolonged bearish trend, highly considered as a bullish reversal chart pattern. In order to form the specific pattern downtrend reversal is necessary. After a prolonged downtrend, there is a short-term reversal to the upside, creating its first bottom. Shortly after forming the first bottom, the price rebounds a little and creates the neckline. Subsequently, in the second phase, the price moves back towards the support created by the first level and rallies to the neckline again. This formation looks like a “W” chart pattern, which refers to the double bottom.
To clarify the lesson more easily, we are going to discuss the characteristics of the double bottom pattern.
Characteristics of Double Bottom Chart Pattern
- The formation of the pattern begins after a prolonged downtrend.
- Firstly, the market pulls back up to 10% to 20% and creates a neckline.
- After the formation of the first bottom, there will be another bottom to the support level of the first one.
- Though the difference between the two bottoms can be higher in a higher time frame chart, generally, it is not more than 2% to 3%.
- When the price breaks the middle peak or valley between two bottoms, refers to the neckline breakout process.
- You have to wait until the price breaks the neckline, buy stocks at the breaking point or wait for the next support level, otherwise, if any mishap happens, you may suffer loss.
- It is not an overnight formation, you have to wait for the mid-term or long-term.
Example of a Double Top Chart Pattern
Moving forward, we are going to place an example of a current double-bottom scenario of LUPIN.
This is a weekly chart of Lupin Limited, a pharmaceutical company. The chart is taken from the Zerodha Kite. You can get an idea of this pattern better in a line chart. Let’s have a look at the above chart pattern.
After a long bearish trend, the formation of a double bottom begins. As we can see here that the price breaks the neckline near about Rs. 818 and completes the pattern. The neckline breakout indicates a high possibility of an uptrend in the next few months. After breaking the price level, the next possible resistance level will be Rs. 960 as well as Rs. 1065. If investors work with a stop loss of Rs. 750 and target Rs. 1000, just after the 2nd supporting point, it could be beneficial for them.
Reason for Double Top Chart Formation
One of the main reasons behind the pattern can be due to oversold stocks. As one of the main double-bottom pattern rules is to reverse the trend, it is advisable to buy stocks at the current market price as soon as possible and book your profit near the resistance. Hold them until the target is achieved or carry forward future contracts if necessary.
FAQ
The rules of the double-bottom chart pattern require two consecutive lows of similar height and are commonly regarded as a bullish reversal indicator in technical analysis. The pattern consists of two distinct “bottoms” comprising of low points, with the peak between these bottoms being higher than both.
Although it suggests that an uptrend may take place after its formation, there is no guarantee that this will occur. Many traders use other indicators to supplement their analysis when it comes to relying on a trade setup such as a double bottom.
Depending on how you interpret and utilize pattern recognition, the accuracy can vary from trader to trader. Generally speaking, correctly identified formations tend to lead to reliable price movements if combined with additional confirmation tools like moving averages or volume increases/decreases, etc.
It has great potential for large gains after proper identification because if confirmed by patterns seen in volumes and prices; price breakthroughs can be predicted accurately! This helps traders enter at correct positions enabling maximized profit potential from minimized risk investments!
Conclusion
In conclusion, the double-bottom pattern rules provide a useful approach for traders to detect potential reversals in downtrends. By observing price action and comparing it against historical charts, investors can identify buy signals with greater accuracy. There are several other tools that may be used alongside this strategy as part of an overall trading plan. Ultimately, the success of any trading system depends heavily on its implementation by applying strong risk management techniques and understanding proper market entry points.