The triple bottom pattern a bullish reversal pattern used to predict the bottoming of stock that has been in a downtrend. The pattern can be found on bar charts, line charts and candlestick patterns with a distinct bounce off a support level three times.
Looking at the pattern, it is correct to deduce that the third bounce signifies demand for the stock at this level and since it was able to hold it three times it increases the chances that prices will turn around and head higher.
This typically means there is a large buyer at those prices which is what is holding up the stock.
Triple Bottom Components
a. Three troughs
Also referred to as the three lows, they are equally spaced and help to mark vital points on the pattern. It is important to understand that the lows don’t have to be equal but they need to be in the same range.
Volume usually declines when the pattern develops. There are times when it will increase especially close to the lows. Once the third low is achieved, volume will experience an expansion at the resistance breakout.
c. Price target
As a trader, the distance measured from the lows to the resistance breakout can be added to the resistance break. If the pattern has a longer development, it will result in the ultimate breakout.
d. Resistance break
This is the highest point on the pattern.
e. Broken resistance
Broken resistance = potential support.
Understanding the Triple Bottom
As said earlier, the Triple Bottom is composed of three lows. When the first low is formed, the price of the security will reach peak and begin to move towards the previous support level. When this happens, buyers will enter the trade finally pushing the price of the security much higher. As a result, the second bottom and second peak will be created.
As time goes by, the final bounce will create the third bottom meaning traders will be ready to enter the long position. This happens only when the price of the security forms the third bottom usually above the previous resistance.
Trading with Triple Bottom
When the downtrend hits the third low, it will result in an uptrend followed by more pressure on the traders to sell the security. As a result, the price will return to the previous low. Due to this, buyers will begin to move back into the asset resulting in the price experiencing an uptrend.
If the situation above is repeated for a third time and the price falls to a new low, then the pattern can be said to be complete once it attains a higher position than the resistance level.
If the trader has confirmed the Triple Bottom pattern, he or she is supposed to set the trade trigger at the resistance line. The trader can measure the potential breakout target which presents the opportunity of opening the long position.
At this stage, traders have the chance of purchasing the underlying security thus benefiting from the downtrend. As the pattern ends, it will experience a price high which will result in more selling pressure among the traders.
Selling the security at this point will allow short term traders to profit.
Triple Bottom is a reliable technical analysis tool that not only indicates the reversal of the downtrend but also indicates the potential for a new trend direction. It helps to signal a shift in supply and demand of an asset and when timed properly creates a great risk/reward trade.