The triple bottom pattern claimed an accuracy rate of more than 70%. It happens at the end of the downtrend and signs a bullish reversal.
The triple bottom pattern is a reversal pattern made up of three nearly parallel low points. It usually shows up at the end of a downward trend.
One notable feature of this pattern is its three lows, each of which looks like the letter "V". It is often considered a reliable technical pattern by traders.
According to Thomas Bulkowski's "Encyclopedia of Chart Patterns," this pattern has proven to be accurate about 74% of the time in bullish stock markets.
How to Identify Triple Bottom Pattern?
The triple bottom pattern tells you that the price may have reached a bottom, and there is potential for a trend reversal from bearish to bullish. Here's how to spot a triple bottom pattern:
- Start by looking for a downtrend as the first sign before the triple bottom forms. Look for a series of lower highs and lower lows on the chart. The price declined due to sellers dominating the market.
- Check if you have three low points that are almost in a straight line. These low points should appear relatively equal and each low form a pattern that resembles the letter "V". It tells that sellers attempt to push the price lower 3x but they fail to do so each time, indicating weaker selling pressure and stronger buying interest.
- Draw a line connecting the two highest points between those three lows; this is called the neckline. The neckline acts as a crucial resistance that the price needs to break for the pattern to be valid.
- Confirm the triple bottom pattern when the price breaks above this neckline. It's a signal that buyers are gaining strength and that the previous downtrend may be coming to an end.
How to Trade Triple Bottom Pattern?
There are two ways to trade the triple bottom pattern. These methods are the breakout method and the pullback method.
In the breakout method, you enter a buy position right after the price breaks above the triple bottom pattern's neckline. For the stop loss, you can either use the previous low or select the closest low on a smaller time frame.
As for the profit target, we estimate it based on the distance between the pattern's high and low.
With the pullback method, you don't jump into a trade right after a breakout. Instead, you enter when the price retraces to the support level that was previously acting as resistance.
For the stop loss, you can position it at the previous low. The take profit could be determined by the triple bottom pattern's range.
To help you grasp this better, we'll give you two examples of trading with the triple bottom pattern. One using the breakout method, and the other with the pullback method.
#1 GBP/USD - Breakout Strategy
In the H1 GBP/USD chart below, you can spot a triple bottom pattern forming in the price. To enter a buy position, we wait for confirmation from the price when it successfully breaks through the resistance or the neckline line.
Once the price breaks above the neckline, it confirms the triple bottom pattern. It's likely that the overall trend has shifted upwards.
We enter a buy position at the price of 1.22364, with a stop loss set at 1.22091 (27.3 pips). Our take profit level is set at 1.22833 (46.9 pips).
The price keeps going up until it hits the take profit level at 1.22833 (+46.9 pips). So, our buy setup for GBP/USD works out well.
#2 USD/JPY - Pullback Strategy
In the USD/JPY H1 chart below, you can see that the price has formed three low points. We draw a horizontal line, like a resistance line, to mark the neckline. Then, we wait for the price to go up to confirm.
The price keeps going up and successfully breaks through the resistance level or neckline. This means the triple bottom pattern is now confirmed.
Since the pattern is confirmed, we enter a buy position when the price falls back to the neckline. We buy at a price of 122.464 with a stop loss at 122.121 (34.3 pips). The take profit level is set at 123.134 (67.0 pips).
Once we enter the buy position, the price continues to rise until it reaches the take profit level at 123.134 (+67.0 pips), indicating a successful trade.
Pros and Cons Trading the Triple Bottom Pattern
Trading the triple bottom pattern, like any trading strategy, comes with its own set of pros and cons. Here's an overview:
- Clear Signal: The triple bottom pattern is easy to spot, making it simpler for traders to figure out when to enter and exit a trade.
- Risk Control: This pattern often lets traders set clear stop-loss levels, which helps them handle their risks better.
- Profit Potential: If the pattern works out as expected, it can lead to big price changes, offering a chance for good profits.
- Confirmation: It's often more trustworthy when other indicators or analyses support the pattern, making traders more confident.
- Quite rare. This pattern doesn't occur frequently in the financial markets.
- False Signals: Like any technical pattern, triple bottoms are not foolproof. Sometimes, what appears to be a triple bottom may turn out to be a false signal, leading to losses if traders act prematurely.
- Market Conditions: The success of the triple bottom pattern depends on the overall market conditions. In choppy or unpredictable markets, it may not perform as well.
- Time-Consuming: Waiting for the pattern to fully form can be time-consuming, and traders may miss other trading opportunities while waiting for confirmation.
From my perspective, this pattern lives up to the theory. The triple bottom is clear, highly effective, and offers high accuracy in charts. I also have found it relatively easy to identify and apply this pattern, and the results have been positive. The beginner can use and apply this pattern with ease too.
However, it's worth noting that this pattern doesn't show up in the market very often. It's unique because it demands three identical lows, which makes it less common compared to the double bottom which requires only two. Nonetheless, its rarity is one of its strengths.
It's important to note that sometimes it might give false signals, leading to losses if acted upon too quickly. Its success also depends on how the overall market is doing, so it doesn't work well all the time.
Adding the Triple Bottom Pattern to your trading strategy can be a helpful move, but remember to use it along with other tools and keep an eye on managing risks. Just like anything else, practice and learning are important for success in the world of finance. Before using it with real money, try it out in a demo account first.