Triple Bottom Pattern: Definition, Formation, and Trading Strategies

What Is the Triple Bottom Pattern?

The triple bottom pattern is a bullish reversal pattern found in technical analysis. It signifies a reversal from a downtrend (bearish) to an uptrend (bullish), indicating that the price of an asset has found a solid support level.

A support level is a price point where an asset tends to find enough buying interest to prevent it from falling further, acting as a floor in the market.

Triple Bottom Pattern Formation and Significance 

The triple bottom pattern has a distinctive shape that can be divided into several key components: three lows with highs in between, a support level, and a breakout point.

Three Lows

First, the triple bottom pattern forms with three distinct lows, which are roughly at the same price level. 

• First Low: The first low marks the initial point of strong support. When the price reaches this low and bounces back, it suggests that buyers are beginning to enter the market, but the bearish trend is still dominant.

• Second Low: The second low reaffirms the support level. When the price fails to break below the first low and rises again, it indicates that the support is holding firm. This second low strengthens the confidence that the bearish momentum is weakening.

• Third Low: The third low confirms the support level as a significant barrier against further price declines. By this point, it becomes evident that the selling pressure is diminishing, and buyers are increasingly stepping in at this level.

Moreover, there are highs between these lows. Between each low, the price rises, forming two intermediate highs. These highs create a resistance level. The resistance level is crucial as it marks the point where the price needs to break through for the pattern to be confirmed.

Support Level and Breakout Point

The following component is the support level. The price level where the three lows occur is a strong support line. 

This line shows that buyers are consistently stepping in at this price point to prevent further declines, reinforcing the idea of weakening bearish momentum.

Lastly is the breakout point. The pattern is confirmed when the price breaks above the resistance level formed by the intermediate highs. 

This breakout indicates a shift in market sentiment from bearish to bullish, signaling that the downtrend is over and an uptrend is likely to begin.

Triple Bottom vs Double Bottom

The primary difference between the Triple Bottom Pattern and the Double Bottom Pattern is the number of lows. While both patterns indicate a bullish reversal, the Double Bottom forms with two lows, whereas the Triple Bottom forms with three. 

This additional low in the Triple Bottom Pattern often suggests a stronger and more reliable support level, providing a more robust bullish signal. 

The presence of three lows indicates a persistent defense against price declines, which can be a more convincing sign of a trend reversal compared to the Double Bottom.

Triple Bottom vs Triple Top

The triple bottom and the triple top patterns have opposite implications. 

The triple bottom pattern indicates a potential upward reversal, signaling the end of a downtrend and the beginning of an uptrend. 

It is characterized by three lows at roughly the same level, showing strong support. 

On the other hand, the triple-top pattern suggests a bearish reversal, indicating the end of an uptrend and the beginning of a downtrend. The Triple Top is formed by three highs at approximately the same level, demonstrating strong resistance. 

This pattern shows that the price repeatedly fails to break above this resistance, indicating that the buying pressure is weakening and sellers are gaining control.

Triple Bottom Pattern Examples

Examples can be very helpful in understanding the triple bottom pattern. For instance, imagine a stock that has been in a downtrend, forming three distinct lows at $50 over several months. 

Each time the price hits $50, it rebounds, indicating strong support. Eventually, the price breaks above the resistance level at $60, confirming the pattern and signaling a bullish reversal.

In the forex market, a triple bottom pattern might appear on a currency pair chart. For example, the EUR/USD pair may show three lows at 1.1000, with the price finally breaking above the 1.1200 resistance level, signaling a potential upward trend.

Below is an example of the triple bottom pattern on a chart.

How to Trade Triple Bottom Pattern

You can include the triple bottom pattern, like other trading patterns, in your trading strategies. In brief, below are the steps to follow when trading the triple bottom pattern:

1. Identify the Pattern: Look for three distinct lows at roughly the same level on a price chart. Ensure that the lows are spaced out over time to confirm the pattern's validity.

2. Confirm the Breakout: The pattern is confirmed when the price breaks above the resistance level formed by the highs between the lows. This breakout point is where you typically enter a long position.

3. Set a Stop Loss: Place a stop loss below the lowest low of the pattern to manage risk effectively. This step is crucial to protect against potential false breakouts.

4. Take Profits: Set a target profit level based on the height of the pattern. Measure the distance from the lowest low to the resistance level and project it upwards from the breakout point.

When to Place a Stop Loss for Triple Bottom Pattern

Place a stop loss in triple-bottom pattern trading to manage risk. Ideally, the stop loss should be set slightly below the pattern's lowest low. 

This placement ensures that if the price unexpectedly drops below this level, you can minimize your losses. 

For instance, if the lowest low is $50, setting a stop loss at $48 can help safeguard your position.

How to Set Profit Targets for the Triple Bottom Pattern

To set a profit level when trading the triple bottom pattern, start by measuring the height of the pattern.

Height of the pattern = highest point of the intermediate highs (resistance level) - lowest low (support level)

For instance, if the support level is $50 and the resistance level is $60, the pattern's height is $10. 

Once you have this measurement, project this distance upwards from the breakout point. If the price breaks out above the resistance level at $60, add the height of $10 to the breakout price, setting your profit target at $70. 

This method provides a structured and reliable way to estimate potential gains, ensuring you have a clear exit strategy based on the pattern's formation.

Common Mistakes in Triple Bottom Pattern Trading Strategy

Make sure you avoid the below common mistakes when trading the triple bottom pattern:

• Misidentifying the Pattern: Ensure that the pattern consists of three distinct lows at roughly the same level. Misidentification can lead to incorrect trading decisions.

• Ignoring Market Context: Always consider the broader market trend and other technical indicators. Relying solely on the triple bottom pattern without context can result in poor trading outcomes.

• Entering Prematurely: Wait for a confirmed breakout above the resistance level before entering a trade. Premature entries can lead to losses if the breakout fails.

Conclusion

The triple bottom pattern is a valuable chart pattern in technical analysis. It indicates a potential bullish reversal. By understanding its formation, differences from other patterns, and effective trading strategies, you can make more informed trading decisions.