AND TRIPLE BOTTOMS
By Daryl Guppy
These are trend reversal signals found at the end of a trend. They do not
occur in the middle of a downtrend. Use this simple test. Open a chart and
show 123 months of price activity. The double, or triple bottom on the right
of the chart should be lower than any previous price activity shown on the
left of the chart. These bottom patterns form as new 12 month lows.
Here we concentrate on the ‘double bottom’. The classic double bottom
has quite precise construction rules, and these deliver a very high
probability of successfully selecting the future direction of price. Other
double bottom rules are less rigid, and have a lower level of probability.
Which rules you decide to use will determine how reliable the double bottom
is as an indicator.
single bottom in a falling trend is the pivot point at which the trend
reverses direction. In trend terms this is the pivot point low . This
absolute low price is a useful reference point and many traders try to buy
as close as possible to this to make good money as the trend develops. Many
strong trends do develop from single point bottoms but many single point
bottoms precede weak trends.
Sometimes prices rise and then fall back again to re-test the low. This is
the beginning of a potential double bottom. When the pullback in prices is
exactly equal to the earlier single point low, or is within a few cents, we
label it a double bottom. This is a powerful signal when the two bottoms are
separated by several weeks. It is still a powerful signal when separated by
just a few days, but the reliability is reduced.
The rules for a classic double bottom are quite definite and are
designed to eliminate look-alike patterns of no significance that occur in
trending securities. Some traders modify these, accepting a pattern where
prices are almost the same, or within 3%. This stretches the classic rules
and reduces the reliability of this pattern.
Significant double bottoms occur in securities with strong trends. The first
bottom is a significant and clear low.
Triple bottoms are constructed in the same way as double bottom
patterns. The triple bottom includes another failed rally with a price
retreat to the same levels, followed by another up trend. Although many
traders feel these triple patterns are more reliable, they sometimes signal
the start of a channel trading opportunity. Cautious traders wait for the
trend break from these triple patterns to be fully confirmed before taking
View our Privacy and Internet Security Policy
guppytraders.com Pty Ltd, ACN 089 941 560