The Double Bottom in Forex Trading

The double bottom is an important reversal pattern that evolves after a lengthy downtrend. The drawn out fall of the share price retracts to new lows on solid volume. The stock bottoms and a new rally are created. Over the following weeks stock volume fades, a retest of the recent low (bottom) is apparent. At this instance the traders purchase in speedily and the opportunists promote the price higher again.

The conflict between double tops and double bottoms
Double tops are primarily concerned with stock distribution while the double bottom is identified with accumulation of stock. The recent extended decline is defined by fast-growing short selling and central information present in the market. Investors who assess the benefit of the stock are typically in the trade for a long term investment purchase stock. They are of the opinion that a good bargain can be picked up by nervous traders or traders who are highly leveraged and risk margin calls. This creates a defined support level for the stock and forms the first bottom (B 1). The latest buying would often have the bears or the short sellers having to cover their positions. At this time a limited amount of speculative buying is noticeable.

Over the following trading sessions it becomes apparent the volume is weak and the buyers have left the stock for other opportunities, this bounce in the stock price is called the “reaction high”.

At this moment in time the opportunistic traders sense an opening to short sell the stock. The bullish speculators take their short term profits and the selling has some strong volume behind it. The previous bottom 1 is approaching, on occasion the recent bottom is breached but with very low volume. The sentiment around the stock is very poor, with no apparent reason to retain the stock the short selling begins and greed is the factor for easy money, the amateur awaits his new found profit. The speculators who purchased stock at the late bottom show concern that a further sells off is apparent and start to close out their positions. But the anticipated sell off doesn't eventuate, this creates a second bottom (B 2). With the stock price stabilizing long term investors add to their positions, the short sellers have to cover their positions causing the share pries to rise on the added volume. Concern in the stock price rises quickly and a latest wave of traders enters the market and a latest rally eventuates. What happens next is that a latest level of sustain is established a sureness returns to the stock and a new rally comes into play.