ThinkMarkets > Learn to trade > > Bullish Patterns > Triple Bottom Pattern
The triple bottom is a bullish reversal pattern that occurs at the end of a downtrend. This candlestickpattern suggests an impending change in the trend direction after the sellers failed to break the support in three consecutive attempts.
In this article, we look at the structure of the triple bottom chart pattern, what the market tells us through this formation. We are also sharing tips on the simple triple bottom trading strategy that will help you make profits.
What the Pattern Tells Us
As the name suggests, the triple bottom consists of the three consecutive lows printed at the same, or near the same level. For this chart pattern to occurand be effective the price action has to trade in a clear downtrend.
The sellers push the price lower to test the horizontal support for the first time, however, they meet a strong resistance from the side of the buyers. The price action rebounds higher as the sellers take a breather before the second attempt gets going.
The outcome of the second attempt is the same, which now makes this level extremely important as the sellers, who are still in control of the price action, have now failed for the second time.
In general, the price should returnto around the same levels as during the previous rebound. Given that the downtrend is very strong, the sellers push the price action lower again to try and break the buyers’ resolve, but without much success again.
Finally, they give up and the buyers assume control of the price action, this time extending the rebound much higher and eventually erasing most, or all, of the previous losses.
If you look at the illustration above, the blue line represents the horizontal support that rejected the bears’ attempt to extend the downtrend. Up higher we have a neckline (the red line) which connects the highs of two rebounds.
The neckline is arguably the most important element of the triple bottom pattern as its break to the upside activates the pattern and then helps us determine the stop loss and take profit. Hence, three mandatory features of the triple bottom chart pattern are:
- A downtrend - the security’s price must trade lower;
- Horizontal support - A trend line connecting three roughly equally lows;
- A neckline - whose break signals the activation of the formation
Significance and Limitations
The triple bottom chart pattern is a rare, but extremely effective reversal pattern. It’s rare since the successive creation of three equal lows doesn’t happen quite often. Therefore, the double bottom is a more frequent chart pattern as it requires one low less to happen..
On the other hand, its scarcity makes it a very strong and powerful pattern. The sellers are extremely exhausted after three consecutive attempts to break lower, which makes them exposed to a rally as buyers feel much more confident after defending a strong horizontal support.
The triple bottom formation doesn’t have any apparent weaknesses. Actually, its biggest limitation is that it doesn't occur quite often, otherwise it would be the strongest reversal pattern out there.
Spotting the Triple Bottom Pattern
Due to its rarity, the triple bottom is quite easy to spot. The first thing you should look for is a downtrend,i.e. a series of lower lows and lower highs. Three consecutive failed attempts to break lower usually stick out on the chart (see the chart below).
As outlined above, the double bottom is a more frequent chart pattern. We advise you to simply mark two bottoms on a chart, and if the price action breaks above the neckline after the second bottom - you should continue by trading the double bottom.
If, on the other hand, the sellers return to try and break the support in a third attempt, you should monitor the price action closely to see if the third try will end up in a failure. In that case, a break of the neckline should activate the triple bottom chart pattern.
In the chart above, we see USD/JPY on a daily chart that is moving lower. The bears then register three attempts to break below the horizontal support around the $108.50 mark, however without much success at all. If you look more closely, you will count at least 8 touches of the $108.50 handle, while we highlighted three lowest prints on a chart.
Trading the Triple Bottom Formation
As outlined earlier, the triple bottom is a bullish reversal chart pattern. Hence, we are looking for clues when the market is ready to reverse its course. The signal that we are looking for is a break of the neckline.
Looking at the chart above, a 4-hour chart, we see a strong breakout that launches the price action higher. As this breakout candle closes much higher, leaving us without an opportunity to dip into the market, we move to a 1-hour chart (below) to identify our entry.
As with every chart pattern that involves a breakout, we have two opportunities for an entry - after the breakout candle closes above the neck line or waiting for a test. In this case, the second option is not available as the price action never returned to the “crime scene”. This was expected to a certain degree, given how explosive the breakout was.
The power behind the breakout tells us that there is a high likelihood of the market extending higher. Hence, we set our entry as soon as the breakout candle closes above the neckline. The vertical blue, which measures the distance between the support and neckline, will help us determine the take profit.
You just copy-paste the line, starting from the breakout point, with the other end signalling a level, where we should consider taking profits off the table. Any move below the neckline, after the price action closed above it, invalidates the pattern. Hence, this is where our stop loss is located.
Given the power behind the breakout, we are not surprised to see that, during the next hourly trading session, our profit-taking level has been activated, making us 33 pips richer. On the other hand, we risked 17 pips, which translates into 1:2 risk-return ratio, a standard profitable setting.
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