-

It's all about hunting pips 
by study & strategy,
not by guessing or gambling

Encyclopedia of Chart Patterns

 

This is the first of four chapters on double bottoms. Each chapter represents a

different bottom shape. An Adam & Adam double bottom reminds me of a person

on stilts: narrow legs perhaps made of single spikes that touch the ground

near the same price.

The Results Snapshot shows the important numbers. Adam & Adam double

bottoms (AADBs) sport decent break-even failure rates with mediocre average

rises. Throwbacks occur in nearly two out of three trades, so you may be

able to add to your position or initiate a new one during a throwback. Surprises

are many and most relate to volume. I discuss all of them in the Statistics section.


The double bottom pattern is one of the easier patterns to identify, but I have

expanded the identification characteristics table (Table 13.1) for this pattern and

made the recommendations more specific.


Downward price trend. Look for price to be tending downward into the

pattern. A study documented in my book, Trading Classic Chart Patterns (Wiley

2002), suggests that performance improves for patterns with trends leading to

the pattern less than 6 months long. Most of the time (58%), a short-term (0 to

3 months) downtrend precedes the pattern.

Bottom shape. The shape of each bottom should appear similar. That

means both should look narrow, not one wide and one narrow, perhaps with a

long, downward price spike or tail. To gauge the width, look at the top of the bottom.


I know that sounds confusing, but the top end of the spike will be wider

than the base. (Eve bottoms will appear more rounded and wider than will their

Adam counterparts.)

Identification Guidelines 215

Table 13.1

Identification Characteristics

Characteristic Discussion


Downward price Price trends downward leading to the double bottom and should

trend not drift below the left bottom.


Bottom shape Narrow, V-shaped bottoms, sometimes composed of long, oneday

spikes.


Rise between At least 10% from the lowest valley to the highest peak between

bottoms the two bottoms. Taller patterns perform better.


Bottom low Bottom to bottom price variation is small. Best performance is

prices between 2% and 5% variation.


Bottom Bottoms should be at least a few weeks apart. Best performance is

separation 3–6 weeks apart. Wider than 8 weeks and performance deteriorates.

Price rise after Price must close above the confirmation point without first falling

right bottom below the right bottom low.


Bottom volume Usually higher on the left bottom than the right.


Confirmation The highest high between the two bottoms. A close above the

price confirmation point is the breakout and confirms the pattern as a

valid double bottom.