Written by and copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved.
The double bottom setup says that throwbacks which do not plunge below the confirmation price suggest better
performance after the breakout.
Double Bottom Setup Overview
The idea double bottom setup
I found this setup when doing research on stop placement. I noticed that price
after the double bottom breakout climbed higher if the throwback did not plunge
very far below the confirmation price. Statistical research into this behavior
confirmed the findings.
Double Bottom Setup Details
The above chart shows the ideal setup. A double bottom appears at points 1 and 2.
Price breaks out and confirms the double bottom as a valid chart pattern when price
closes above the red line. Then, the throwback occurs
and returns the stock to the
breakout price within a month of the breakout. In this example, price touches the
red confirmation line and then lifts off, making
a nice move up after that.
Although the rise in many cases after a double bottom is not as clean as it
appears in the above figure, research suggests that when price does not drift below
the red confirmation line, it predicts (but does not
guarantee) a better
performing double bottom.
Contrast the ideal trading setup with this one. A double
bottom appears at
points 1 and 2. Price confirms the chart pattern when it closes above the
red confirmation line.
In this situation, notice that the throwback at A
drifts below the red confirmation line, suggesting
a weaker trading setup. Price climbs to a post-throwback high at
B before continuing the decline to
C. This is the type of double bottom setup you will want
Double Bottom Setup Trading Tips
To trade double bottoms, consider the following suggestions.
- If you have not bought the stock, then wait for a throwback to occur and search
for situations like that shown in the first figure -- price touches or stays above
the red confirmation line during a throwback. The
trade may still fail, but the chances improve that you have found a profitable
- If you want to trade the double bottom, then place a buy stop a penny above the
confirmation line as the double bottom
forms (after price makes the second bottom but before rising to the red
confirmation line). When price rises and hits
the buy stop, that is the entry signal. You get in at the breakout price. If price
does not throwback, then you are all set. Ride price higher.
- If price begins to throwback, then consider taking a profit, especially if you
are a swing trader. The rise averages 6% to 8% in about 3 days, so it is a quick
rise and a quick profit providing you have excellent timing.
- Watch how far price drifts down during the throwback process. If price slides
below the confirmation price (the highest peak between the two double bottoms),
then the chances diminish that the trade will be wildly profitable. Price will
lower, not immediately, but sometime after the throwback recovers. The rise will
likely be bumpy, so do your best to get out at the appropriate time. If the stock
returns to the confirmation price for the second time (the first was during the
throwback) without showing signs of turning, then consider selling.
- Identify the type of Adam and Eve combination of double bottom and check the
associated page for additional trading tips:
Double Bottom Setup Methodology
I looked at the statistics from the four combinations of double bottoms
separately and the following table shows the results.
|Double Bottom Type||Drift for First Failure||Drift for Best Average Rise||Best Average Rise||Benchmark Average Rise||Qualifying Samples|
|Adam & Adam||-1.03%||0%||39%||35%||20/281|
|Adam & Eve||-2.76%||0%||49%||37%||22/389|
|Eve & Adam||-5.45%||-3%||40%||35%||49/227|
|Eve & Eve||-4.23%||-2%||42%||40%||72/486|
Let's take the Adam & Adam row as an example. I asked the question,
how far below the confirmation price did the stock move before the chart pattern
failed? By 'failed', I mean that price failed to rise more than 5%
after the breakout before tumbling either below the bottom of the pattern or more
For the Adam & Adam double bottom, price dropped 1.03% below the
confirmation price during the throwback and that led to the first failure.
How far down, on average, must price drop below the confirmation price and still
lead to the most powerful rally? For the Adam & Adam double bottom, a throwback
that does not drop below the confirmation price led to a rally that saw price rise
on average 39%. The average rise for all Adam & Adam double bottoms is 35%
(the next column). The last column shows that 20 samples out of 281 samples were
involved in the 39% rise.
The table shows that price can drift below the confirmation price
(Eve & Adam and Eve & Eve double bottoms) by 3% and 2%, respectively, for
the best average rise. This suggests the following trading rule:
Only buy into double bottoms when the throwback plunge is
shallow. By shallow, I mean price does not drop much (say, 0% to 2% or
so) below the confirmation line.
Double Bottom Setup Example
The figure to the right shows another example of the ideal double bottom trading
Price during the throwback does not drift below the confirmation price.
Point Buy 1 shows where you would enter if you placed a buy stop a penny above
red confirmation line. That would get you in during
the breakout. If you are lucky, price would not throwback and you would be set.
For swing traders, buy at Buy 1 and sell when price rounds over at the top of the
throwback. I show that as
Sell 1, when price gapped lower.
A throwback followed, but in this case, it did not touch the
red confirmation line. Price formed a
pipe bottom on the daily scale (the upper left shows a
zoom of this). The twin price spikes
suggest a move higher and that is the entry signal. You can buy in at any time
you are convinced that price is resuming the up move (resumption of the up move
occurs 86% of the time).
I show the entry as Buy 2. Price continues moving up.
-- Thomas Bulkowski
Copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved. My dog is named Egypt because in every room he leaves a pyramid.