A triple bottom is a powerful bullish chart pattern utilized in technical analysis, signified by three roughly equal lows followed by a breakout above the resistance level.
Key Takeaways
- A triple bottom visually indicates that buyers (bulls) are gaining control over sellers (bears).
- This pattern manifests as three approximately equal lows rebounding off support, followed by the price surpassing resistance.
- The emergence of a triple bottom is often seen as an opportunity to enter a bullish position.
Decoding the Triple Bottom
The triple bottom usually unfolds after an extended downtrend dominated by bears. While the first low may be typical price movement, the second low signifies increasing bullish momentum, ushering in a potential reversal. The third low underscores robust support, with bears often capitulating as the price breaks through key resistance levels.
Essential Criteria for a Triple Bottom:
- Existing Downtrend: There must be a preceding downtrend before the pattern forms.
- Three Equal Lows: The lows should be roughly equal in price and reasonably spaced apart, establishing a horizontal trendline.
- Volume Dynamics: Volume should taper off during the lows, signaling dwindling bearish momentum, while a rise in bullish volume should accompany the breaking of resistance.
Trading the Triple Bottom: A Step-by-Step Approach
The target price for a triple bottom reversal is calculated by adding the distance between the lows and the breakout point to the breakout level. For instance, if the low is $10.00 and the breakout occurs at $12.00, the target price would be $14.00 ($12 + ($12 - $10)). Stop-loss points are typically placed just below the breakout point and/or the triple bottom lows to manage risk effectively.
Similar Patterns and Confirmation
The triple bottom resembles the double bottom pattern and may appear like ascending or descending triangles. Traders should confirm a triple bottom using other technical indicators or patterns, such as an oversold relative strength index (RSI) before a double bottom forms or a breakout to ensure it’s a triple bottom over a descending triangle or another bearish pattern.
A Triple Bottom in Action
Image by YourGraphics © 2023
In this example, XYZ Corporation’s stock formed a triple bottom and surged past trendline resistance. The distance between the third bottom and breakout point is $1.75, implying a target price of around $15.50. To safeguard against downside risk, the stop-loss can be set at approximately $13.50.
Triple Bottom vs. Triple Top
A triple top, contrary to a triple bottom, is a bearish reversal pattern characterized by three approximately equal highs brushing against resistance before dipping below it. Both patterns signify the market’s tug-of-war between bears and bulls, where the prevailing side dictates the trend. If neither side dominates, these patterns may simply signify an extended trading range.
Potential Drawbacks
Like all chart patterns, trading the triple bottom involves some uncertainty and is often identified retrospectively. Additionally, while providing a viable strategy, the target and stop loss positions may limit the risk-to-reward ratio. To enhance profit potential, some traders may set their stop loss within the pattern and adjust it upwards during the breakout, though this increases the likelihood of being stopped out in the range.
FAQs About Triple Bottoms
Is a Triple Bottom Bullish or Bearish?
A triple bottom signifies a bullish reversal pattern that hints at a breakout to higher prices.
What Follows a Triple Bottom Formation?
Once the triple bottom pattern is identified, traders can anticipate an upward trend, with prices breaking resistance levels.
Is a Triple Top a Good Indicator?
In contrast to a triple bottom, a triple top indicates a bearish reversal pattern, suggesting a downward price movement.
Related Terms: double bottom, triple top, resistance, support, downtrend, volume, reversal, technical indicators
