Double bottom pattern

The figure below shows a typical double bottom pattern:

The idea is to buy a stock after the price has broken the breakout line (that passes through the high of the “top” in the middle of the pattern). The breakout day is denoted as A in the figure.

As it happens, a trader may try to enter on the open of the next day (this was done in my backtesting) or alternatively wait until the price retraces to the breakout line. The second option offers a better win/loss ratio but there is a possibility that the trader may lose the trade if the price increases further and never retraces. Because of this issue, some traders prefer entering when the price does not really return to the breakout line but rather a bit earlier, e.g. in the middle of the candle on day A.

A stop-loss is usually put a few cents below the lowest of the bottoms (and this is what I do in both my trading and in backtesting). Nevertheless, sometimes I leave a trade earlier if some significant bearish action occurs. A typical take-profit level (denoted as b) corresponds to the breakout price plus the height of the pattern (i.e. b = a). Of course, in practice we have other possibilities like trailing the stop or considering price action, trendlines or other patterns. I did not consider this issue in my backtesting (even though I do it in real trading).

Would you like to see the backtesting results? I published them in the article:

P. Kosinski: Double bottoms revisited, Technical Analysis of Stocks & Commodities, September 2018

You can find it by visiting the website of Technical Analysis of Stocks & Commodities. Note that if you are not subscriber of this magazine, you can still receive from them a sample issue. In other words, you can get the article for free . Alternatively, take contact with me and I will send you the backtesting results.

In addition, some results were also published in these articles:

P. Kosinski: Are chart patterns still valid?, Seeking Alpha (2017): Visit the link

P. Kosinski: Trading Nonstandard Double Bottoms, Seeking Alpha (2017): Visit the link

 

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