What is a Double Bottom?

In technical analysis of stocks, a double bottom chart pattern could signal a prime buying opportunity–if you’re careful.

The technical analysis of stocks can yield lots of helpful information. Basic technical analysis includes those factors we look at regularly, such as moving averages, trading volume, and momentum. However, when you really dig in, you can start analyzing things like double top or double bottom patterns, earnings gaps, and much more. 

A double bottom describes the fall in the price of a stock or index, followed by a rebound, then another drop to a level that’s roughly similar to the initial drop, and finally, another rebound. Consequently, the double bottom chart pattern resembles the letter “W.”

You can find double bottom patterns within charts that are intra-day, daily, weekly, monthly, yearly, and longer-term. The two lows should be distinct. According to technical analysts or “chartists,” the second bottom can be rounded while the first should be precise and sharp. The pattern is complete when prices rise above the highest high in the formation. The highest high is termed the confirmation point.

What does this movement mean for investors? The second low suggests that there’s enough support for the stock that it’s unlikely to sink any lower. It’s already “bottomed” twice, and is poised to move upward.

This comes with a very large caveat, though. It’s easy to get anxious and jump in or out of a stock too soon (or too late). Managing risk at this point is crucial. It’s amazingly easy to misread the chart and lose a lot of money quickly. 

That said, investors who don’t mind some risk and feel comfortable managing that risk could take some quick profits. 

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons.