Triple bottom pattern

The triple bottom pattern is an important chart pattern in technical analysis. It signals a potential reversal in a downtrend.

The pattern forms when price makes three consecutive lows at around the same support level. The three bottoms create a W shape on the chart. This shows buyers are stepping in at this area, attempting to halt the downtrend.

A successful triple bottom reversal occurs when price breaks above the resistance level formed by the highs between the three bottoms. This confirms buyers have gained control and the downtrend is reversing into an uptrend.

How to identify the triple bottom pattern?

To spot a triple bottom pattern, look for the following characteristics on a chart.

• A prior downtrend. The triple bottom is a reversal pattern, so there must be a preceding downtrend.
  

• Three distinct lows at roughly the same price level. The bottoms do not need to be exactly equal, but should be within close proximity.
  

• The lows are separated by a peak. Look for higher peaks between each bottom.
  

• Volume clues. Volume tends to be higher on the first and third bottom. The middle bottom usually sees drying volume as selling pressure fades.
  

• The lows create a W shape. Connecting the lows forms three pullbacks and a W shape on the chart.
  

How the triple bottom pattern works

The formation of the triple bottom pattern reflects a battle between buyers and sellers:

• Sellers are in control during the preceding downtrend, pushing prices lower.

• At the first bottom, buyers step in and attempt to stop the decline. Their buying pressure pushes the price back up.

• At the second bottom, sellers take back control and resume the downtrend. This tests the support zone again.

• At the third bottom, buyers overwhelm sellers and halt the decline. Their increased buying absorbs all the selling pressure.

This forms the third low and indicates buyers may be gaining strength. The uptrend starts once resistance is broken.

Trading the triple bottom pattern

There are some tips for trading a triple bottom pattern:

• Confirm the pattern is complete. Wait for a clear break above the resistance level before entering.

• Place a stop-loss below the third low. This limits risk in case the pattern fails.

• Target a minimum price move equal to the depth of the pattern. So if the lows are 10 points below resistance, target at least 10 points above the entry.

• Trail a stop to lock in profits as the new uptrend progresses. Manage risk according to your trading plan.

• Watch for weakening upside momentum as a sign the reversal may be ending.

Example of a triple bottom pattern

Here is an example to illustrate a triple bottom pattern on a stock chart.

• The stock had been in a downtrend, falling from 110 to around the 90 level.

• It formed the first bottom at 93, then bounced up to 98 where sellers took over again.

• This led to the second bottom at 91. The bounce from the second low reached 96.

• The stock then pulled back and formed the third bottom at 92. This held above the prior two lows.

• On higher volume, the stock broke out above 98 resistance. This confirmed the triple bottom reversal.

• The measured target was a move above 98 equal to the depth of the pattern (around 10 points).

Benefits of the triple bottom pattern

• Well-defined risk points. The pattern provides clear areas to place stops and targets.

• Reversal signal. It warns that a bounce is likely and gives traders a chance to get in early.

• High probability setup. The three touches indicate strong support and increase odds of a successful breakout.

• Versatile time frames. Triple bottoms form on charts of all durations, from one minute to monthly.

• Common in stocks and indexes. The pattern occurs frequently in equity markets and indexes.

Limitations of the triple bottom pattern

• Price breaks below the third low instead of reversing higher. This triggers stop-losses.

• The resistance level is not broken after forming the pattern. The setup is invalid without a breakout.

• Volume does not increase on the third bottom and breakout. This shows a lack of confirmation.

• The reversal stalls quickly after the breakout. Momentum failures indicate weak buyers.

• It forms very close to major support. This increases the chance it is a minor bounce, not a true reversal.

Conclusion

The triple bottom is a powerful chart pattern used by traders to identify potential reversals. Its three touches make it distinct and show underlying support. But like with any pattern, trade it with risk management as failures do occur. Confirm the breakout and target a minimum price move that compensates for the risk taken.