What is a triple bottom chart pattern and how to trade it?
What is a triple bottom pattern?
A triple bottom is a bullish chart pattern that signals a trend reversal, i.e., the end of a downtrend. Its structure is similar to the double bottom, but it consists of three bottoms instead of two, which means it will appear less frequently on the charts. Despite that, it is a chart pattern that is relatively easy to spot due to its simple structure.
Is a triple bottom bullish or bearish?
A triple bottom is always a bullish pattern - the bearish variant is called a triple top. The three lows (bottoms) represent three failed attempts by sellers to breach a key support level, indicating that they are losing control and buyers are taking over. Triple bottom patterns are only reliable when markets are trending, i.e., the traded instrument should be in an existing downside trend.
How to identify a triple bottom
The triple bottom pattern consists of three bottoms - i.e., three lows that are at approximately the same price level. The lows do not need to be at the exact same level but should be within a reasonable distance of each other.
The formation of these three lows signals that the support level that has been formed is strong, and sellers are losing control.
Between the three bottoms, there will be two intermediate highs. This is where buyers tried to gain the upper hand but failed as resistance proved to be too strong. The line that is connecting the resistance level is called the neckline.
The triple bottom pattern is confirmed after the third bottom has formed followed by a breakout above the neckline.
The double bottom and triple bottom share several characteristics, but the fact that the price failed to break below the key support level three times instead of twice hints at an even higher probability of a trend reversal.
Triple bottom vs triple top
The key difference between a triple top and a triple bottom is that a triple top occurs during an uptrend and is always a bearish chart pattern. A triple bottom on the other hand, can be spotted during a downtrend and is solely a bullish chart pattern.
While a triple top consists of three peaks (highs), a triple bottom consists of three bottoms (lows). However, both patterns have a neckline, meaning a support or resistance line connecting the valleys.
For a triple top or triple bottom to be confirmed, the price of the instrument has to break above/below the neckline.
Traders utilize the pattern on different timeframes and various asset classes.
How to trade a triple bottom chart pattern
To trade a triple bottom pattern, you must first be able to identify it. Since it is a reversal pattern, we are looking for an existing downtrend and three separate lows that are located at approximately the same price level. Between those three lows are two intermediate highs which form the neckline.
The neckline is the resistance level that connects the intermediate highs. This is an important component of the pattern, as the breakout above this level confirms the pattern and is used as entry-level.
After a breakout above the neckline has occurred, you will be looking to enter a long position, either by buying the instrument at the market price or by already having a pre-existing limit order ready.
Waiting for the neckline to be broken is crucial, as only then is the pattern confirmed.
The use of a stop-loss order can protect you against excessive losses and is an important tool. Traders will generally place the stop-loss order below the third low (bottom). If the distance is significant, you may reduce your position size.
Where do you place the take-profit order? The most popular way is to measure the distance between the lows and the neckline. For example, if the distance is 200 pips, the take-profit order would be placed 200 pips above the neckline.
Advantages of a triple bottom
Some of the key advantages of trading a triple bottom pattern are:
- The ease of identifying the chart pattern due to its simple structure (three bottoms and a neckline).
- Having a clear entry point, by looking for a breakout above the neckline. The distance between the bottom and the neckline also helps traders to easily determine the take-profit level.
- It is always a bullish pattern.
- It can be traded across various timeframes.
- It can be combined with technical indicators for additional confirmation, such as the Relative Strength Index (RSI) or MACD.
Disadvantages of a triple bottom
There are also some disadvantages of trading triple bottoms that traders have to be aware of:
- As with every chart pattern, a false signal can occur. The price could break out above the neckline but quickly collapse again as resistance proved too strong.
- Most traders use the distance between the most recent bottom (third bottom) and the neckline to place their take-profit order and their stop-loss just beneath the most recent bottom (low). This can potentially lead to a less favorable risk-to-reward ratio.
- The three lows may not be perfectly aligned, making it harder to identify the pattern.
- The chart pattern should be used when markets are trending, as there is a high chance of a false breakout when markets are consolidating.
Conclusion
The triple bottom is a bullish chart pattern that indicates the existing downtrend is ending. It shows that the price has failed to break below a key support level three times, signaling that buyers are gaining the upper hand.
The triple bottom is easy to spot as it consists of three distinct bottoms (low) located at approximately the same level, separated by two intermediate highs. Once the price has broken the neckline, the pattern is confirmed, and traders will be looking to enter a long position.
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This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation and needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability with regard to the accuracy and completeness of the content in this publication. Readers should seek their own advice.
FAQ
What is a triple bottom pattern?
A triple bottom is a bullish reversal pattern that indicates that the existing downtrend is ending and buyers are regaining control.
How do you identify a triple top?
- Three lows located at approximately the same price level.
- Two intermediate highs located between the three lows.
- A "neckline" - connecting the two highs
When is a triple bottom confirmed?
Once the price has broken above the neckline, the chart pattern has been confirmed.
How reliable are triple bottoms?
As with every chart pattern, the risk of false breakouts exists, which is why using stop-loss orders is crucial.
What does a triple bottom indicate?
It indicates that sellers have been trying to breach a key support line, but failed three times, signaling that momentum is waning and buyers are gaining control.
Can I trade a triple bottom when markets are moving sideways?
Ideally, a triple bottom pattern should be traded when markets are trending (i.e., an existing downtrend is visible).
How long does it take for a triple bottom pattern to form?
This depends on the timeframe traded, but since it requires three peaks to form, it can take longer than other patterns (for example, double bottom).
Can triple bottom patterns be combined with technical indicators?
Yes, you can use technical indicators to help you in the decision-making.
