Following up on my previous discussion, today I’m going to share the basics of the Triple Bottom Stock Pattern.
Just like its top counterpart, the triple Bottom Stock pattern is also a rare occurrence and may 3-6 months to develop.
Nevertheless, it is one of the most reliable buying signals in the technical analysis of stocks.
We’re going to study how this pattern is formed, what it signifies and how traders can take advantage of it.
What is Triple Bottom Stock Pattern
The Triple Bottom Stock Pattern is a chart pattern used in technical analysis that’s identified by three equal lows followed by a breakout above the resistance level.
This means implications there have been three failed attempts at making new lows in the same area, followed by a price move up through resistance.
The first bottom does not signify anything out of the ordinary.
However, the second and third bottoms show a change in direction where buyers may push the price action higher.
This is how a Triple Bottom Stock Pattern looks like:
Remember when I said that Triple Bottom Stock Patterns consist of three equal lows followed by a breakout above the resistance level? So what is a breakout?
A breakout refers to when the price of a stock moves above a resistance area, or moves below a support area.
Breakouts signify that there’s potential for the price to start trending in the direction of where the breakout happened.
Here’s a quick video of how to detect breakouts in a trading chart:
Is a Triple Bottom Bullish?
We’ve already learned previously that a Bullish reversal pattern may form after a market downtrend.
We’ve also learned that Bullish patterns signal a reversal of price movement.
By this definition, we can say that the Triple Bottom Stock Pattern is Bullish, because it tells traders to position for an upcoming upward trend.
What Happens After A Triple Bottom?
As with any reversal pattern, there should be an existing trend to reverse.
And we know that in the case of a Triple Bottom Stock Pattern, a clear downtrend should be the prior formation. So what happens next after that?
Well, as far as volume is concerned, the third low bottom should be on low volume. Meanwhile, the rally up from that bottom should show a noticeable increase.
Here’s a simplified explanation of what goes down when a Triple Bottom Stock Pattern develops:
What the Pattern Tells You
The Triple Bottom Stock Pattern typically follows a prolonged downtrend where bears are in control of the market.
As I mentioned above, the first bottom could simply be normal price movement. The second bottom is indicative of the bulls gaining momentum and anticipating a possible reversal.
The third bottom means there’s strong support in place and bears may back down and surrender.
The Difference Between a Triple Bottom and a Triple Top
In my discussion of the Triple Top Stock Pattern, we know that it is a bearish reversal pattern.
We also know that during a Triple Top, price action bumps off resistance, posting three equal highs before going down through resistance.
That said, the Triple Bottom Stock Pattern is basically a mirror of the same market phenomenon.
Both are about a long contest to gain control between the bears and bulls, wherein one side will eventually emerge triumphant.
If no one wins, a Triple Top or Bottom will simply become a longer term range.
Trading a Triple Bottom Stock Pattern
Now that I understand the concept of the Triple Bottom, it’s now time to learn how to use it.
First, let’s talk about a Double Bottom. The price target for a Double Bottom reversal is typically the distance between the lows and the breakout point added to the breakout point.
Stop-loss points (or limits) are usually placed just below the breakout point and/or below the Triple Bottom lows.
Apparently, the Triple Bottom Stock Pattern is similar to the Double Bottom is many ways. Traders always look for confirmation of a Triple Bottom using other technical indicators or chart patterns.
Here’s a 3-minute video on the basics of trading a Triple Bottom Stock Pattern:
Taking Advantage of the Pattern
If you’re a trader and you see a stock has two bottoms, you know an uptrend is coming until the stock reaches the upper support level again.
This is where the pressure is on traders to sell the stock. A a result, the price will return to the previous low where it’ll hit resistance resulting in the Triple Bottom.
Moving towards the third downtrend, buyers and sellers come together. However, the lower price increases demand, and the buyers pushed the stock higher, resulting to the final uptrend.
To take advantage, traders will have to watch closely as the price moves higher. Still, the Triple Bottom pattern can’t be confirmed until the price action trades over the upper support level.
Upon confirmation, the price target can be measured by subtracting the distance between the lows and the upper support level added to the breakout point.
Remember, as a trader, you’re working with probability. That means there is always uncertainty when trading charting patterns. Just like most patterns, the Triple Bottom is easiest to recognize once the trading opportunity has passed.
Double Bottoms sometimes fail and become a triple bottom. Meanwhile, the Triple Bottom and another pattern, Head and Shoulders Pattern can, by definition, be one and the same.
But the most known limitation of a Triple Bottom is simply that it is not a great risk and reward tradeoff because of the placement of the target and stop loss.
If you want to maximize the profit potential, you may choose to put your stop loss inside the pattern and trail it up as the breakout occurs. The issue with this is the likelihood of being stopped out in the range for a small loss is higher.
What I’ve Learned
Okay, so now I’ve learned the attributes that make a pattern a Triple Bottom Stock Bottom:
- It’s a reversal pattern type
- Prior trend is a downtrend, which makes it Bullish
- All three lows should be equal or close to equal, well-spaced and mark significant turning points
- The confirmation for this pattern is a close above the upper trendline with above-average volume.
- Take the distance between the first high and the low of the head and then add it to the upper resistance level on the breakout.
- The volume tends to be low, heading into the formation and increase on the breakout.
I’ve also learned that traders should consider a Triple Bottom as a neutral pattern until they can confirm a breakout.
Like the Triple Top Stock Pattern, a Triple Bottom is rare and takes typically three to six months to form.
The Triple Bottom Stock Pattern is a reliable tool for technical traders. This pattern allows them to find the reversal within the trendline, but also calculate how far that trend will go once it’s there.
It basically tells us the potential for a new trend direction.
And lastly, it helps in signaling a shift in supply and demand of a stock. When timed properly, this creates a great risk-reward trade.
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