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
Identification Guidelines 215
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
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.