As with the triple top counterpart, the triple bottom pattern is widely used in the technical analysis to anticipate situations where a trend is likely getting exhausted and the price is about to start a new trend.
So, it is also a reversal chart pattern, but since it occurs at the bottom of a downward move, it often leads to a bullish reversal move.
The point is that at a time during a downtrend, the bears get exhausted and can’t push the price below a certain low level, despite their best efforts.
This creates an opportunity for the bulls to take control and move the price up, marking a change in trend.
Although you may see the triple bottom pattern more often in the lower timeframe — owing to the time it takes for it form — it has a stronger bullish effect when it is occurring on a higher timeframe or in line with the price structure on a higher timeframe.
In this post, we will discuss the following:
- What the triple bottom pattern is
- Why it is formed
- How to know when it is likely to work or fail
- The strategies for trading it
- What you must avoid when trying to trade the pattern
What is the triple bottom pattern?
The triple bottom pattern is one of the bullish reversal chart patterns in technical analysis.
It is characterized by three consecutive swing lows that occur nearly at the same price level followed by a breakout of the resistance level.
The resistance level is often regarded as the neckline, which is a line connecting the two swing highs intervening the swing lows.
One of the main criteria for a triple bottom pattern is that there must be a downtrend prior to the formation of the pattern.
The pattern simply shows that the price was being held up at a certain low level that it could not break after three attempts.
Instead, the price turned upwards, breaking above the resistance level to start a new uptrend.
As one of the patterns that takes the longest time to develop, the triple bottom pattern takes an average of around three to six months to fully form on the daily timeframe.
Of course, the duration is far lesser in the intraday timeframes, but the higher the timeframe, the stronger the significance of the price move after a breakout.
The pattern is an extension of the double bottom pattern by making a third attempt at the support zone.
Visually, it looks like the inverse head and shoulder pattern — with three swing lows — but the middle swing low is around the same level as the other two.
Why the triple bottom pattern forms
The triple bottom pattern occurs as a part of the accumulation phase of the market cycle, but more specifically, it visually represents the battle between demand and supply — buyers and sellers. So, we will discuss the significance of the pattern under the following:
- Accumulation phase of the market cycle
- A battle between demand and supply
Accumulation phase of the market cycle
The triple bottom pattern typically occurs in the accumulation stage of the price cycle, which occurs after a downtrend and before an uptrend.
This stage represents a period when the institutional traders gradually build their long positions in the market in anticipation of an uptrend.
It is also the period when some of those big boys, who shorted at higher levels are buying them back to offset their previous position and look to go long.
So, the majority of the institutional traders are in buying mood but doing it gradually to avoid tipping off the retail traders.
At the same time, the retail traders are still in the euphoria of the preceding downtrend and think it would continue forever. So, they keep selling at every opportunity they can get.
Whenever there is a swing up, they sell immediately en mass, driving the price towards the support level were the big boys are waiting with a lot of buy limit orders.
Sometimes, the smart money helps them to push the price a little below the support level so that more sellers would jump in and provide the big boys with the much-needed liquidity.
When the big boys have accumulated enough long positions, they push the price up above the resistance level where the retail sellers have their stop loss orders, which are actually buy orders.
What you get is a rapid upward price movement, driven in part by the huge number of stop loss orders and new buy orders from traders that are waiting for the breakout of the resistance level.
The result is the likely emergence of a new uptrend. Note that the pattern can still fail after the breakout, with the price turning downwards to continue the previous downtrend.
Demand supply battle
So far, you have seen that the pattern represents a period of accumulation in the market, but it also shows the battle between demand and supply, with the buyers representing the demand and the sellers representing the supply.
From our discussion so far, you could see that, in this situation, the retail traders mainly constitute the sellers while the institutional traders constitute majorly the buyers.
While the buyers are defending the support zone, the sellers are defending the resistance level (neckline).
The sellers managed to push the price down to the support zone on three occasions, but on each of those occasions, the buyers were able to absorb all the supply and push the price up to the resistance zone.
With time, the sellers, which are mostly made up of poorly-capitalized retail traders, get exhausted and can’t withstand the aggression from the more capitalized institutional buyers, who have been waiting to complete their orders before pushing the price over the opposition’s line.
So, the break of the resistance level, which is considered the completion of the triple bottom pattern, shows that demand has overcome supply and is dominating the market, at least for the foreseeable future.
Hence, the best course of action for a trader is to be on the side of the demand and ride the emerging uptrend.
How to know when the triple bottom pattern is likely to fail
Like every price action chart pattern, the triple bottom pattern can fail. However, there are ways to check whether the chart pattern is doomed from the beginning, and one of them is to check if the pattern is against the trend in the higher timeframe.
If the higher timeframe is in a downtrend and a triple bottom pattern occurs only in a lower timeframe, it may not be able to bring the desired trend reversal. It is even worse if the pattern occurs right into a higher timeframe resistance level.
The two charts below are those of GBPUSD. In the H4 chart, you can see a triple bottom pattern, but when you step up to the D1 chart, you will notice that the pattern in the H4 timeframe formed just below a resistance level in the D1 timeframe.
How to know when the triple bottom pattern is likely to work
To know when a triple bottom pattern is likely to work, check whether the higher timeframe’s market structure is in support of a bullish move.
For example, is the higher timeframe in an uptrend? The best scenario for this price action chart pattern is for the higher timeframe to be in an uptrend and the price to pull back to a support level.
Of course, in the lower timeframe, the pullback would be seen as a full-blown downtrend.
A triple bottom pattern around a support level can be an indication that the pullback has ended, and the price is about to resume the uptrend in the higher timeframe.
The two charts below are that of Momenta Pharmaceuticals Inc. (MNTA). You can see a triple bottom pattern on the D1 timeframe, and when you step up to the W1 timeframe, you will notice that the price was already ascending and made a pullback to a support level where the triple bottom pattern formed.
Strategies for trading the triple bottom
There are many strategies you can use in trading the triple bottom pattern, but you must have a good understanding of the pattern and know your trading personality — the kind of risks you are willing to take.
As you have learned, the pattern has three swing lows that occurred around the same price level and two intervening swing highs which mark the resistance level (neckline).
So, there are three places where you can enter a buy order with the pattern, but you may also add a fourth one (the first pullback) if you are a risk taker. Here are the four of them:
- At the third swing low
- At the neckline breakout
- The first pullback
- The retest of the neckline
Buying the third swing low
Classically, the triple bottom pattern is considered complete only after the price has broken the resistance zone or the neckline.
However, some traders may enter earlier at the third swing low. It may seem like a risky approach, but it does work sometimes because the two preceding swing lows around the same level shows that the area is a strong support zone.
Moreover, it offers a better reward/risk ratio as the stop loss would be just below the lowest level of the support zone — thus, it won’t be as large as the size of the pattern, which is often the case when you trade the pattern the classical way.
While being a strong support level implies that the price is likely to reverse again at that level on the third attempt, you will need to see that the swing low is already exhausted and the price turning upward before you look to go long.
In other words, when the price makes that third attempt at that level, you must have a positive bullish signal before entering a buy order.
One way to know whether the swing low has exhausted its momentum is to look for a bullish reversal price bar, such as an inside bar, a bullish engulfing bar, a bullish pin bar, or the morning star pattern.
Another pattern that can tell you when there is a likely upward reversal at that level is the spring pattern, which is a false breakout below the support level.
This is often seen as a sign that the big boys (institutional traders) tried to lure in sellers so that they can have enough orders to fill their buy positions.
To put it all together, here is how to trade the third swing low:
- Clearly mark the support zone with horizontal lines after the price has formed a double bottom and it’s making a third move to that level.
- Watch the price reaction when it hits that support zone again and look for signs of slowing downward momentum and bullish reversals signals.
- If you see a bullish reversal candlestick pattern or a false breakdown at the support zone, go long on the next candlestick open.
- Place your stop loss below the lowest point of the swing low, so the trade has enough room to work but gets you out in time if the price breaks the support zone.
- You can have two profit targets: one below the neckline and another at the classical target of the triple bottom pattern, which you estimate by adding the size of the pattern to the breakout level. An alternative is to use only the classical profit target but move your stop loss to breakeven once the price reaches the neckline.
In the MNTA stock chart, you can see that an inside bar candlestick pattern formed at the third swing low.
That would have been a good early trade entry. Notice the position of the stop loss and the profit targets TP1 and TP2.
Trading the neckline breakout
The classical way to trade the triple bottom pattern is to enter a long position after the price has broken above the neckline (resistance), which can either be a horizontal or inclined line connecting the two swing highs.
One of the factors that contribute to a successful breakout is the buildup before the breakout.
When there is a price buildup around the resistance level before the price breaks it, there is a good chance that the price will advance better. But that is not enough. You can use other trading tools to confirm the breakout.
If the market you are trading has a central exchange that keeps a record of the volume of transaction per trading session — for example, the stock market, commodity market, or futures — one of the best confirmatory tools you can use is the volume.
Often, you notice a general decline in volume when the triple bottom pattern is forming, but there is a sudden increase in volume when the price breaks above the resistance level, which shows an increase in buying interest. A breakout that occurs with a declining volume is more likely to fail.
Another useful tool for trading breakouts generally is the MACD indicator, which helps you to gauge the price momentum.
When the price breaks above the resistance level, you want to see the MACD line already above the signal line and possibly above the zero level too.
This shows that there is an upward price momentum, so the breakout is more likely to work. If an upward breakout occurs with the MACD lying below the signal line, it shows poor upward momentum, and the breakout may likely fail.
With the triple top pattern, the classical place for your stop loss is below the support zone — being beyond a price structure offers more safety.
However, it makes the stop loss too big — even bigger than the expected profit — which is usually the size of the pattern.
This unfavorable reward/risk ratio is one of the major limitations of trading the triple bottom pattern classically.
As a result, some trader put their stop loss in the middle of the pattern or below the price buildup (if there’s one) before the breakout.
For the profit target, estimate the size of the pattern and project it upward from the breakout level.
Some traders may still use double of it. Whatever the case, manage your trade actively as the price may not reach your target or may significantly go beyond it.
In that same MNTA, if you didn’t want to trade the third swing low, you could have traded the breakout of the neckline (resistance level).
Notice that the price touched the neckline several times (buildup) before the breakout and the MACD line was already above the signal line and the zero level during the breakout.
Trading the first pullback
This is a very risky approach to trading the triple bottom pattern, but if you missed the actual breakout, rather than chase the price up and probably get stopped out on a pullback, it’s better you wait and enter on the first pullback that happens after the breakout.
Here, the pullback will appear like a bullish flag or pennant. You can enter a trade when the price starts climbing again and place your stop loss below the low of the pullback.
With the profit target still at the estimated target, you have to check if the trade is worth any reasonable profit before making it.
Moreover, the price can pull back again and get to the breakout level, so you should decide whether to wait.
In this GBPUSD W1 chart below, you can see the first pullback looking like a flag. That is one way to enter the trade after missing the breakout.
You can keep your stop loss a few pips below the low of the pullback, as you can see in the chart.
Buying the retest of the breakout level
After missing the breakout, it may be better to wait for the price to retest the breakout level and look for a buy setup around there.
However, the price does not go back to retest the breakout level in all cases, so there is a chance you may not have the opportunity to enter the trade again after missing the breakout.
After the breakout of the resistance level, that level becomes a support level, as it now lies below the price.
When the price pulls back to that level, it will likely bounce off, presenting a buying opportunity.
But you will need a bullish trigger to know when the price is about to resume the upward movement.
The most common trade triggers you can use here are bullish reversal candlestick patterns, such as the hammer (bullish pin bar), bullish engulfing pattern, inside bar, and morning star.
When you see any of those bullish candlestick patterns, go long at the opening of the next candlestick.
Place your stop loss below the low of the pullback and your profit target at the estimated target. This usually offers a favorable reward/risk ratio.
The MNTA stock chart below shows when the price later pulled back to the breakout level.
Notice that the pullback ended with a bullish pin bar, creating a perfect opportunity to enter the trade if you had missed the first breakout. Note the position of the stop loss just below the low of that price swing.
What you must avoid when trading the triple bottom pattern
Now, let’s address some avoidable mistakes that many traders make when trading this chart pattern. There are two common ones, which often lead to unnecessary losses.
Chasing the breakout
If you are trading on an intra-day timeframe, it is possible for the breakout that you have been waiting for to occur just at the moment you stepped out for lunch, and by the time you come back, the price must have extended from the breakout level.
At other times, you may be watching your screen, but the breakout price bar may be very long that it closes far away from the breakout level.
Whatever the case is, it makes no sense to chase the trade out of fear of missing out. If you enter a trade when the price has extended, it becomes difficult to put your stop loss behind a price structure without it being too large.
Moreover, there is a high chance that the price may pull back on you since the chances of pullback increases as the price extends.
It is better to wait for the price to pull back and probably retest the breakout level so that you look for a trade setup at that level.
In the chart below, if you had entered when the price was extended after missing the breakout, the pullback would have put you in the red and probably forced you out if you used a tight stop loss. Using a large stop loss wouldn’t have offered a good reward/risk ratio either.
Buying at a resistance level in the higher timeframe
When trading a triple bottom, it is better to have the price structure supporting your trade.
Entering a buy position when the price is just below a higher timeframe resistance level increases the chances of losses.
What you do is to make sure the higher timeframe price structure is favoring the triple bottom pattern.
As you can see from these charts below, buying right into the D1 resistance would have failed because the price reversed on hitting the D1 resistance.
The triple bottom pattern is a popular bullish reversal chart pattern that consists of three consecutive swing lows ending around the same price level, which has become a strong support zone.
The pattern tends to occur during the accumulation stage of the market cycle and reflects the activities of institutional traders as they quietly accumulate buying positions before a new uptrend. We’ve discussed four possible ways to trade the pattern, which you can study and adapt to your style.