The idea
A double bottom is a W: price falls to a low, bounces, falls back to about the same low and turns up again. The peak between the two lows is the neckline. A close above the neckline completes the pattern.
The classic target is the pattern's height, from the lows to the neckline, added to the neckline. The double top is the same M shape upside down, completed by a close below the neckline.
Watch it play out
Step by step
The rules
Setup
- Two lows within about half a percent of each other, separated by a clear peak.
Entry
- Buy on a close above the neckline (the peak between the lows).
Stop-loss
- Halfway between the neckline and the lows, or under the second low for more room.
Target
- The pattern's height added to the neckline.
Filters that help
- Prefer patterns after a long decline.
- A second low on lower volume than the first is a common confirmation.
Why it can work
The second low shows sellers failing to push price lower than before. When price then clears the neckline, the buyers who stepped in at the lows have taken control of the range above them.
The neckline matters because it is where the first bounce stalled. Clearing it means buyers have taken out the sellers who stopped that bounce, and stops above the neckline from traders betting on lower prices add to the move.
Worked example
A stock bottoms at $58.00 twice, with a peak at $61.60 between. It closes at $61.95 above the neckline: buy, with the stop halfway down at $59.80.
The pattern is $3.60 tall, so the target is $65.20. Risking $100, the $2.15 stop allows 46 shares.
When it works, when it fails
Works best
At the end of long moves, on higher timeframes, with a decisive break of the neckline.
Struggles
When the 'second low' becomes a lower low, and when price breaks the neckline only to fall back under it. Many double bottoms are just pauses in a downtrend.
Common mistakes
- Buying the second low before the neckline breaks.
- Calling lows several percent apart a double bottom.
- Ignoring the overall trend.
Variations
- Double top
- The mirror image after a rise: two highs at about the same price, sold short on a close below the low between them, targeting the pattern's height lower.
- Triple bottom
- Three tests of the same low before the break: rarer, often considered stronger.
What the evidence says
Evidence: Tested, mixedPublic tests disagree, or the edge has faded over time.
A well-known study applied pattern recognition to US stocks from 1962 to 1996 and found that several classic patterns, double bottoms and head-and-shoulders among them, carried some information about later returns.
Information is not the same as a profitable rule after costs, and other tests are less favourable. Hence mixed: there is some evidence the patterns mean something, not that trading them pays on its own.
Questions
- Does volume matter in a double bottom?
- A second low on lighter volume than the first, and a break of the neckline on heavier volume, are the classic confirmations. They help, but neither is required.
- How long does a double bottom take to form?
- On daily charts usually several weeks, with the two lows separated by a meaningful rally. Two lows a few candles apart on a short chart are a weaker version of the idea.
- How do I confirm a double bottom?
- With a close above the neckline, the peak between the two lows. Before that, it is only a possible double bottom.
- How far apart can the two lows be?
- Close enough to call the same level: within about half a percent on most markets. Wider gaps make it a different pattern.
- What is the target of a double bottom?
- The height from the lows to the neckline, added to the neckline. It is a guide, not a promise.