Stock trading has evolved in the Western markets, but in India, a large number of people still consider it to be gambling. The popular perception is that stock trading is a game of chance. The reality is vastly different though. Stock trading can be a rewarding activity if one makes proper use of technical charts and takes adequate risk mitigation measures. Stock movements form different patterns on the technical charts which are a signal for the future action to be taken. One of the most reliable pattern is the triple bottom pattern. Let us try to understand the triple bottom chart pattern.
What Is the Triple Bottom Chart Pattern?
A Triple Bottom is a bullish reversal pattern seen on price charts, signalling a potential shift from a downtrend to an uptrend. It typically forms after a prolonged decline in prices and consists of three distinct lows or bottoms occurring at nearly the same level, creating a strong support zone. Between these lows, two minor price recoveries or pullbacks emerge, giving the pattern a shape similar to the letter “W.”
This pattern reflects a transition in market sentiment from bearish to bullish. For traders and investors, recognising the Triple Bottom is essential as it suggests the likelihood of an upward price movement. Confirming this pattern often involves a breakout above the resistance level formed during the pullbacks.
How is triple bottom chart formed?
As the name suggests, a triple bottom chart has three lows and it signals a reversal of the prevailing downtrend. A triple bottom stock pattern can be formed on a line, bar or a candlestick chart. It is a bullish reversal pattern and is formed after a considerable downward price trend.
The first bottom is formed when the price of the security declines but bounces back from a specific level. The sellers are in control of the market, but are unable to take the price below the support level. The bulls take over at the support level and take the price starts rising but faces resistance at a level. The bulls are not able to take the price over the breakout point.
At the price touches the resistance, the bears take control and drive down the price towards the support level but are again unable to take it below the support level. The second bottom is formed. The bulls take over from there and drive the price higher. After a point, however, the bears become dominant and drive down the price to the support level. The bears fail for the third time to drive the price below the support level, forming the third bottom. On the chart, a triple bottom pattern looks like a classical zigzag pattern.
Points to note
One the third bottom is formed and the price starts rising, it is likely to break the resistance and rise further, signalling a reversal of the trend. However, in certain cases, the price may dip slightly after the price of the security starts rising from the third bottom. The price may dip, but the chart will not form a fourth bottom and start rising before touching the support price. Before planning to trade a triple bottom chart pattern, one should keep a few points in mind.
The triple bottom is a bullish reversal pattern and hence there should be an existing downtrend for the pattern to be effective. Without an existing downtrend, the triple bottom stock pattern doesn’t make any sense.
The space between the three bottoms and the support price are important components of the triple bottom chart. All the three lows should be equally spaced. The price of the three lows should be similar. Ideally, the price of the three bottoms should be equal. In reality, however, the prices should at least be at a level that the trendline is horizontal.
The third important consideration is the volume of the trades. Since it is a reversal pattern, the volume should decline with each low. The volume during the first bottom will be the highest and will decline gradually, signalling the weakening of the bears.
How to trade?
The triple bottom chart pattern is a reliable pattern but it is not advisable to take action without additional conformation signals. Traders should look at indicators like relative strength index and if the stock has an oversold index, one should enter the trade. If the stock has an oversold relative strength index before the triple bottom is formed and the price crosses the breakout levels, one could take long positions.
Example of a Triple Bottom Pattern
Consider the stock of XYZ Ltd. in the Indian stock market, which underwent a prolonged downtrend due to unfavourable market conditions. A Triple Bottom pattern emerged over a few months, as outlined below:
- First low: The stock price dropped to ₹100 per share due to significant selling pressure, reflecting concerns about the company’s performance. Investors began offloading their shares.
- Minor pullback: Following the initial low, the stock showed a slight recovery, rising to ₹110 per share. However, it failed to breach the resistance level, indicating persistent bearish sentiment.
- Second low: The stock declined again to ₹100, where it encountered strong support. Buyers recognised the price as an attractive entry point, halting further declines.
- Minor pullback: Another minor rebound occurred, with the stock price hovering around ₹110, but resistance remained intact, preventing a breakout.
- Third low: For the third time, the stock price tested ₹100, confirming the strength of the support level. This consistent support suggested a potential reversal from the downtrend.
- Breakout: The price eventually broke above the ₹110 resistance level, validating the Triple Bottom pattern and signalling a shift towards a bullish trend.
Investors identifying this pattern in XYZ Ltd. could have taken it as a buying signal, entering at ₹110 with expectations of further price appreciation.
NOTE:This example is illustrative and not financial advice. Conduct detailed research before making investment decisions.
How to Trade Triple Bottom Candlestick Pattern?
- Identify the triple bottom: Look for three distinct lows forming at approximately the same level, which creates a strong support area. This indicates the possibility of a trend reversal.
- Check for progressively higher lows: Ensure that each subsequent low is either equal to or slightly higher than the previous one. This signals growing bullish momentum.
- Wait for a breakout: Confirm the pattern when the price breaks above the resistance level formed by the pullbacks between the lows. This breakout provides a clear entry point for bullish trades.
- Set a stop-loss: Place a stop-loss just below the lowest point of the pattern to protect against potential losses if the reversal fails.
- Determine your target price: Measure the distance between the support and resistance levels. Add this value to the breakout point to calculate your potential target price for exiting the trade.
Advantages and Disadvantages of the Triple Bottom Pattern
| Advantages | Disadvantages |
| The pattern is easily recognisable due to its distinct structure. | It does not guarantee 100% accuracy, similar to other technical analysis tools. |
| It helps traders establish support levels, risk-reward ratios, and benchmarks. | Prices may still fall further and breach the support level in certain scenarios. |
| It is applicable across various timeframes, from short-term to long-term charts. | The pattern requires considerable time and patience to form and confirm. |
| Clear stop-loss levels can be set using this pattern, reducing potential risks. | Delays in confirmation may result in missed trading opportunities. |
Conclusion
While patterns give valuable information about future price movements, one shouldn’t completely rely on chart patterns. A host of other factors have an effect on price movements. For instance, the double bottom pattern fails sometimes and becomes a triple bottom chart before the price breaks out over the resistance level. Similarly, the triple bottom pattern can fail on some instances and traders should take additional information such as volumes, price and spacing before taking positions.
FAQs
Is triple bottom bearish or bullish?
The triple bottom is a bullish reversal pattern, signalling a potential shift from a downtrend to an uptrend.
What happens after the Triple Bottom Pattern is formed?
After formation, the price typically breaks above the resistance level, confirming a trend reversal and indicating upward momentum.
Is the Triple Bottom Pattern better than the Double Bottom Pattern?
The triple bottom is considered more reliable than the double bottom, as the third low strengthens support, confirming bullish sentiment.
What is the success rate of the triple bottom pattern?
The success rate of the triple bottom pattern depends on market conditions, but it is generally viewed as a reliable bullish signal in technical analysis.
