The shapes that often appeared when a falling price was losing strength are the top patterns turned upside down: two lows at about the same height (a double bottom) or three (a triple bottom), and three lows with the middle one deepest (an inverse head and shoulders). In the same order as lesson 2, real charts show the neckline break and the pullback, and wrong examples where price passed the neckline and still went the other way; this time they are read as a signal for when to buy.
The neckline: the line that decides a bottom
A bottom pattern is not judged by the shape of its lows alone, either. The key is the neckline through the top of the peak between the lows. This time the neckline is the same as a resistance line from lesson 1, the level that capped the rebounds between the lows. When price closes above the neckline, it is read as having passed the line that held it back, and the shape as complete. Until then it is only "a shape that might be a bottom".
This lesson is Lesson 2, "Top patterns" turned upside down. A double top becomes a double bottom, a triple top a triple bottom, and head and shoulders an inverse head and shoulders; reading the neckline works the same way, only in the other direction.
Double bottom
A falling price stops once, rebounds, comes back down, and stops again at about the same height as the first low. The two lows draw a "W". Being held up twice at the same height is the same story as a support line from lesson 1: many people want to buy at that level.
The horizontal line through the top of the peak between the two lows is the neckline. Two lows alone are not yet a double bottom. The shape is read as complete only when price closes above the neckline, and after that it often rose further.
Drag the chart sideways with a finger or the mouse to move it, and pinch with two fingers to zoom in. With a keyboard, click the chart, then use ←/→ to move and +/− to zoom.
Charts by TradingView Lightweight Charts™
A chart of 100 candles. The up arrows (↑) are two lows at almost the same height (around candles 60 and 70), and the purple horizontal line is the neckline through the top of the peak between them. Candle 80 (↑) closes above the neckline, and a few candles later the price comes back near the neckline and then rises again. Keyboard: ←/→ to move, +/− to zoom, 0 to see the whole chart.
100 daily candles of one stock. At the end of a big fall it hit a low around candle 60, rebounded to the height of the neckline, came back down, and stopped around candle 70 at almost the same height as the first low. It approached just below the neckline a few times, then closed above it at candle 80. A few candles later it dipped below the neckline during the day, but it closed above the neckline and rose again.
Triple bottom
Price stops three times at the same height. Held up once more than in a double bottom, that level carries more weight. There are now two peaks between the lows, and when they are at about the same height, the neckline is drawn flat.
It is read the same way as a double bottom. Even with a third low showing, as long as price is below the neckline it cannot be told apart from a trading range (lesson 5). Only when price closes above the neckline is it read as a bottom.
Charts by TradingView Lightweight Charts™
A chart of 100 candles. The up arrows (↑) are three lows at almost the same height (around candles 41 and 56, and once more after that), and the purple horizontal line is a flat neckline. Candle 80 (↑) closes above the neckline on heavy volume, the next candle comes back just below the neckline, and then the price rises again. The lower panel shows volume. Keyboard: ←/→ to move, +/− to zoom, 0 to see the whole chart.
This stock stopped three times at the same height. In between, it once rose to the height of the neckline on heavy volume and was pushed back. At candle 80 it closed above the neckline on heavy volume, and on the very next candle it came back just below the neckline, but from the candle after that it started rising again. The neckline is a band (lesson 1), so a pullback this size is read as a wobble inside the band.
Inverse head and shoulders
Three lows, with the middle one the deepest. It is head and shoulders stood on its head, hence the name inverse head and shoulders. Price falls at the left shoulder, falls deeper at the head, then stops at the right shoulder before reaching the depth of the head. Failing to make a lower low is read as a sign that the fall has lost strength.
The neckline joins the tops of the two peaks between the shoulders and the head. It does not have to be horizontal and may slope a little. When price closes above the neckline after the right shoulder, the shape is read as complete, and after this shape at the end of a long fall, price often rose.
Charts by TradingView Lightweight Charts™
A chart of 100 candles. The up arrows (↑) are the left shoulder (around candle 55), the deepest point, the head (around candle 64), and the right shoulder, and the purple line is a neckline that slopes slightly down to the right. Candle 80 (↑) closes just above the neckline, the next candle comes back just below it, and then the price rises a long way. The lower panel shows volume. Keyboard: ←/→ to move, +/− to zoom, 0 to see the whole chart.
This shape came at the end of a long fall. The head is the deepest and the two shoulders are at almost the same height. Candle 80 closed barely above the neckline on heavy volume, and the next candle came back just below it. But after that, volume stayed higher than usual as the price moved away above the neckline, and when it was pushed back once near the end, it still stopped well above the neckline.
The pullback to the neckline after the break
After breaking up through the neckline, price sometimes comes back down near the neckline a little later. This is the pullback. It is the same story as "Role reversal" in lesson 1: the neckline that capped price now becomes support holding it up from below, and price often rose again from above it.
If the pullback stops above the neckline, it is taken as a second confirmation that the break was real. If you missed the breakout candle, this pullback can be another chance to buy. On the other hand, if the pullback falls and closes below the neckline, that is a sign the break may have been wrong (see the wrong examples below).
In all three charts above, price came back near the neckline soon after the break and then rose again. Sometimes it dipped below the neckline during the day or closed one candle just below it; read the neckline as a band too. But a pullback does not always come. In the three top charts of lesson 2, price never once got back above the neckline after the break.
Wrong examples: it passed the neckline and still collapsed
A close above the neckline does not always lead to a rise. In the two charts below, both the shape and the break looked like the textbook, yet after the break the price came back below the neckline and fell instead.
Double bottom: it held for ten or so candles, then collapsed
Charts by TradingView Lightweight Charts™
A chart of 100 candles. The up arrows (↑) are two lows at the same height (around candles 34 and 70), and the purple horizontal line is the neckline. Candle 80 (↑) closes above the neckline on heavy volume, and the price rises above it for a while. Then it breaks back down below the neckline, and near the end it falls to around the height of the two lows. The lower panel shows volume. Keyboard: ←/→ to move, +/− to zoom, 0 to see the whole chart.
This stock moved in a narrow range for a long time, stopped twice at the same height, and climbed above the neckline at candle 80 on volume. It then held above the neckline for ten or so candles, so by the textbook the double bottom was complete. But when the price came back down to the neckline, it did not stop there; it broke down below the neckline, and near the end it fell to around the height where the two lows had been.
- It did not come after a fall. A bottom pattern is the shape of a fall losing strength, but this chart was a long stretch of crawling sideways. The two lows were also far apart, closer to a wobble inside a trading range (lesson 5) than to one bottom shape.
- The pullback did not stop at the neckline. If the returning price is held up above the neckline, that confirms the break, but in this chart it held near the neckline for one candle and then broke straight down.
- Be more careful when a bottom breaks. Once back below the neckline, the price fell near the end to around the height where the two lows had been. Holding on in the belief that the bottom will hold makes the loss bigger, so set your exit in advance, such as "sell if it closes back below the neckline".
Inverse head and shoulders: pushed back after leaping over
Charts by TradingView Lightweight Charts™
A chart of 100 candles. The up arrows (↑) are the left shoulder (around candle 56), the deepest point, the head (around candle 70), and the right shoulder, and the purple line is a neckline that slopes slightly down to the right. Candle 80 (↑), right after the right shoulder, closes well above the neckline on heavy volume. After that the price slips little by little below the neckline and never clearly gets back above it to the end. The lower panel shows volume. Keyboard: ←/→ to move, +/− to zoom, 0 to see the whole chart.
The shape was all there. The head was the deepest, the two shoulders were at almost the same height, and at candle 80 the price leapt over the neckline in one go on heavy volume. But the higher point reached during the next candle was the top, and after that it slipped little by little for nearly ten candles and dropped below the neckline. After falling further for a time it came back near the neckline, but it ended without clearly getting above it.
- It jumped too far from the neckline. The breakout candle closed far above the neckline and the next candle went even higher during the day. After a long jump in one go like this, the pullback is sometimes deep as well. It mirrors the wrong example (double top) in lesson 2.
- The pullback did not stop at the neckline. The price that slipped back was not held up above the neckline and closed below it. The neckline it broke through failed to turn into support.
- Even a big rise in volume does not prevent a wrong call. The breakout candle in this chart had far more volume than usual, but it did not predict the price that followed. Even when confirmation signs stack up, set your exit separately.
Using bottom patterns in the game
When a match starts, the first 60 candles are already on the chart. If two or more lows at about the same height show up near the end of those candles, draw a neckline through the top of the peak between them. Bottom patterns are used to decide when to buy. In a game without short selling, buy-side signals are the ones you can use right away.
| What you see | A common response |
|---|---|
| A second (or third) low stops at about the same height | If price is still below the neckline, the shape is not complete. Wait to see whether it climbs above the neckline. If you want to get in early, decide to sell if it closes below the lows. |
| The right shoulder stops before falling as deep as the head | Read it as a sign that the fall has lost strength. Watch whether price closes above the neckline. |
| Price closes above the neckline | Treat it as a place to buy. Decide in advance to sell if it closes back below the neckline. |
| After the break, price comes back near the neckline and stops (pullback) | If you missed the break, this pullback is another chance to buy. Decide to sell if it closes below the neckline. |
| After the break, price falls back and closes below the neckline | This is a sign the break may have been wrong. If you are holding, treat it as a place to sell: as in the wrong examples above, the price sometimes fell back near the bottom. |
Watch out for
- Do not rush on lows alone. Until price closes above the neckline, it may be a brief stop in the middle of a fall rather than a bottom. Even in a fall, two lows at about the same height are common.
- Check that the shape comes after a fall. Bottom patterns mean something at the end of a fall. Lows in a long sideways crawl are closer to the lower line of a trading range (lesson 5).
- Do not chase a candle that leapt up. Buying after a candle that jumped far above the neckline in one go makes losses easy to grow when the pullback is deep. Waiting to see whether the pullback stops above the neckline is another way.
- Trade count: a match allows up to 10 trades (a buy counts as one and a sell counts as one). Buying and selling every time something looks like a bottom uses them up fast, so act only at clear points such as a neckline break.
Tops and bottoms were shapes where the trend changes. The next lesson covers the shapes that often appeared when a trend paused and then continued: flags and pennants, and wedges, whose direction needs careful reading.