What is a Triple Bottom?
- A triple bottom is a visual pattern that shows the buyers (bulls) taking control of the price action from the sellers (bears).
- A triple bottom is generally seen as three roughly equal lows bouncing off support followed by the price action breaching resistance.
- The formation of triple bottom is seen as an opportunity to enter a bullish position.
What Does a Triple Bottom Tell You?
The triple bottom chart pattern typically follows a prolonged downtrend where bears are in control of the market. While the first bottom could simply be normal price movement, the second bottom is indicative of the bulls gaining momentum and preparing for a possible reversal. The third bottom indicates that theres strong support in place and bears may capitulate when the price breaks through resistance levels.
There are a few rules that are commonly used to qualify triple bottoms:
- There should be an existing downtrend in place before the pattern occurs.
- The three lows should be roughly equal in price and spaced out from each other. While the price doesnt have to be exactly equal, it should be reasonably close to the same price, such that a trendline is horizontal.
- The volume should drop throughout the pattern in a sign that bears are losing strength, while bullish volume should increase as the price breaks through the final resistance.
How to Trade a Triple 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. For example, if the low is $10.00 and the breakout is at $12.00, the price target would be (12 - 10 = 2 + 12 = 14) $14.00. Stop-loss points are usually placed just below the breakout point and/or below the triple bottom lows.
The triple bottom is similar to the double bottom chart pattern and may also look like ascending or descending triangles. Traders always look for confirmation of a triple bottom using other technical indicators or chart patterns. For example, traders might note that the stock has an oversold relative strength index (RSI) before a double bottom forms and/or look for a breakout to confirm that its a triple bottom rather than a descending triangle or other bearish pattern.
An Example of a Triple Bottom
The following chart shows an example of a triple bottom chart pattern.
In this example, Momenta Pharmaceuticals stock formed a triple bottom and broke out from trend line resistance. The difference between the third bottom and the breakout point was about $1.75, which translated to a take-profit point of around $15.50 on the upside. The stop-loss point could have been placed at around $13.50 to limit downside risk as well.
The Difference Between a Triple Bottom and a Triple Top
The triple top is the opposite pattern of a triple bottom. Instead of a bullish reversal, a triple top is a bearish reversal pattern where price action bumps off resistance three times, posting three roughly equal highs before plummeting down through resistance. That said, these are essentially mirror patterns of the same market phenomenon - a prolonged battle for control between the bears and bulls where one side emerges victorious. If no winner emerges, a triple bottom or top will simply become a longer term range.
Limitations of a Triple Bottom
There is always some uncertainty when trading charting patterns as you are working with probability. As with most patterns, the triple bottom is easiest to recognize once the trading opportunity has passed. Double bottoms may fail and become a triple bottom, and the triple bottom and the head and shoulders pattern can, by definition, be one and the same. However, the most often cited 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. To ramp up the profit potential, traders may choose to put their 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.