Double Bottom pattern with Candlestick analysis

 

 

 

A Double bottom is a widely studied pattern in western technical analysis. It is sometimes referred to as a ‘W’ formation, because it looks like a ‘W’ once completed.

The way the pattern is formed is as follows:
The stock is descending because of some news. It might be weeks before the investor perception towards the stock starts changing. The stock rallies at that point, but soon finds resistance in the form of a downtrend line or a moving average. The bears knock the stock down again. As the stock approaches the point from where it rallied before, the bulls get enthusiastic. All those people who wished they had bought the stock before it rallied briefly are happy to get this second chance. They jump in with vigor. The bears take notice of the fact that the bulls came in a second time at that level and they realize its not going to be easy to drive the stock down any more. They cover their shorts and move on. This leads to rapid price appreciation. The pattern is said to be completed when the stock rallies above the mid-point of the W, the point at which it had failed before.

Candlesticks can give the trader an edge over the competition. As the stock starts approaching the support point again after its initial failed rally, a trader can start noticing what signals are being formed. If a lot of Doji, Spinning Tops or any reversal patterns are noticed near the support area, it will give the trader the confidence to jump in the trade, with the knowledge that the stop loss point is very close to his point of entry. This will give the trader at least a couple of days of head start over the competition.

The following chart shows ACI forming a 'W' pattern. A candlestick trader could have started entering the position as soon as the Hammer Harami was becoming obvious. The normal confirmation requirement for the signals could be waived with the knowledge that the candlestick signal is part of a well known pattern formation. Also helping the confidence, would be the fact that, should things not work as anticipated, the stop-loss point was very close indeed.