Direct answer
A “worked example” of a Double Bottom is a step-by-step numeric scenario that shows how the pattern is recognized and how its commonly discussed measurements are derived. It is not proof of future price direction; it is a way to practice identifying the structure using fixed, stated assumptions.
In a Double Bottom, you look for two downward swings (two troughs) that reach comparable low areas, followed by a recovery that breaks above the peak that forms in the middle between the two troughs. After that, people often talk about a “measured move,” which is a simple distance calculation based on the earlier range—again, with no guarantee of outcomes.
Mechanism or definition
Double Bottom (chart pattern): a visual structure in which price forms:
- First trough (Low A),
- Middle peak (Peak B) after Low A,
- Second trough (Low C) at a similar level to Low A,
- Breakout when price rises above Peak B.
Worked-example terms (all defined for the scenario below):
- Similar lows: you choose a tolerance rule (for example, “within 2% of each other”) to decide whether Low A and Low C are “close enough.”
- Breakout level: typically the middle peak (Peak B). Here we assume the breakout occurs when the closing price is above Peak B.
- Measured move (if used): a distance estimate equal to (Peak B − the low level), applied upward from the breakout area.
Important: different charting communities use slightly different tolerances and breakout rules. That is why a worked example must state assumptions.
Evidence or example (numeric, with explicit assumptions)
Assume the following simplified sequence of closing prices over time (you can replicate it on a chart by plotting the points):
Assumptions (state up front):
- We define “similar lows” as being within 2% of each other.
- We define “breakout” as a close above Peak B.
- We use the first trough level as the reference low for the measured-move distance.
- No real-time data, spreads, fees, or slippage are included; this is only a geometric exercise.
Scenario values:
- First trough (Low A): 100.00
- Middle peak (Peak B): 112.00
- Second trough (Low C): 101.50
Step 1: Check the “similar lows” rule
- Tolerance check: difference = 101.50 − 100.00 = 1.50
- Percent difference = 1.50 / 100.00 = 1.5%
- Since 1.5% ≤ 2%, Low C qualifies as “similar” to Low A.
Step 2: Confirm the structure exists
- Price drops to Low A, rises to Peak B, then drops again to Low C, and later rises.
Now assume a later close:
- Breakout close (Close D): 113.00
Step 3: Check breakout rule
- Peak B = 112.00
- Close D = 113.00, so Close D is above Peak B → breakout condition satisfied.
Step 4: Compute a basic measured move (optional, not a promise)
- Distance from reference low to middle peak = Peak B − Low A = 112.00 − 100.00 = 12.00
- Measured target level = breakout reference (Peak B) + 12.00 = 112.00 + 12.00 = 124.00
How you interpret the number:
- The value 124.00 is only an arithmetic level derived from the earlier range.
- It does not mean price must reach it.
Limitations and risks
- False breakouts: after a close above the middle peak, price can quickly return below Peak B. This can happen even if the visual troughs look aligned.
- Tolerance mismatch: if your “similar lows” rule is too strict (or too loose), you may reject a valid structure or accept a weak one.
- Asymmetry and noise: a double bottom can appear different depending on chart timeframe and the exact point you consider “the” low or the “the” middle peak.
- Cost and execution effects: real trading involves transaction costs and execution quality. A purely geometric example ignores these, so real-world outcomes can differ.
- Jurisdiction and instrument differences: how markets behave can vary across venues, regimes, and instrument liquidity. Past chart geometry does not establish future behavior.
A material failure mode for identification itself is “overfitting”: forcing two lows into a double bottom even when the middle peak and breakout logic do not hold under stated rules.