Double bottom

When looking at a stock chart, the double bottom is a pattern that looks like a "W". It may not be a perfect "W" but you should be able to identify its four legs if it's actually there.

The first leg of the "W" is a downtrend that leads to a first momentum low. When the price reverses to a reaction high, it forms the second leg. The third leg corresponds to the pullback to a second momentum low (close to the first in price). When the price moves up from that second low and passes the high of the second leg, the double bottom pattern is complete.

The idea is to buy the stock right after the price reverses at the second low (on strong volume). A word of caution: if the stock doesn't act as expected and goes down past the second low, it is not a bad idea to sell immediately. As with any sort of trading based on technical analysis, it is extremely important to know in advance when to get out of a trade (stop-loss is a must) ... but you probably already know that full well.

You may enter the trade later when the stock goes up past the confirmation line (the previous high) but expect not as juicy returns (as usual, you're trading greater reward for smaller risk by waiting for confirmation).

It is not unusual to see retracements or pullbacks after the stock shoots past the confirmation line as traders take in profits.

The double bottom is a powerful pattern because of the expected strength of the fourth leg uptrend. Why? Mostly because the second test of the low makes the support line (at the lows) a very strong one.