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Triple Bottoms Made Easy

Introduction

The triple bottom pattern serves as a bullish reversal pattern that indicates a shift from a downtrend to an uptrend. It is formed when the price of security hits a low point three times, with each low being roughly equal to the previous one, and then breaks above a resistance level that connects the highs of the intervening rallies. The triple bottom pattern looks like the letter “W” on a price chart. Here is more insight into this pattern.

How does the Triple Bottom pattern work?

The Triple Bottom pattern is a visual representation of the psychology and behavior of the market participants. It shows how the sellers lose dominance, and the buyers gain strength over time. Here is how this pattern works.

  • The first low of the pattern marks the end of a downtrend, where the sellers are in control, and the buyers are in retreat. 
  • The price then bounces back and forms a rally, where the buyers try to push the price higher, and the sellers try to defend their positions. 
  • The price reaches a resistance level, where the selling pressure is stronger than the buying pressure, and falls back to form the second low, similar to the first one. This shows that the sellers are still confident, and the buyers are still cautious.
  • The price then rallies again and faces the same resistance level, where the sellers are waiting to sell again. However, this time, the price did not fall as much as before and formed the third low, slightly higher than the previous two. This shows that the sellers are losing momentum, and the buyers are gaining courage.
  • The price then breaks above the resistance level with a powerful surge of volume, signalling that the buyers have overcome the sellers and the trend has reversed. The price continues to rise and forms a new uptrend, where the buyers are in charge, and the sellers are in a panic.

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Features and criteria of Triple Bottom pattern

  • The duration of the pattern should be at least two months, as it takes time for the price to consolidate and reverse. The longer the period, the more reliable the pattern.
  • The price volatility should be moderate. That is because it reflects the balance and the tension between the buyers and the sellers. The volatility should not be too high or too low, as it may indicate a false or weak pattern.
  • The shape of the pattern should be symmetrical and well-defined, with three distinct and equal lows and a clear and horizontal resistance level. The shape should not be distorted or irregular, as it may show a lack of conviction or a continuation of the trend.
  • The price volume must decline during the formation of the pattern, as it shows the diminishing interest and activity of the market participants. The volume should increase during the pattern's breakout, as it shows the market participants' confirmation.
  • The confirmation of the pattern should be a decisive and sustained breakout above the resistance level, with a significant increase in volume and price. The confirmation should not be a tentative or a temporary breakout, as it may indicate a false or a failed pattern.
  • The Triple Bottom pattern can be found in different markets and time frames, such as stocks, commodities, currencies, indices, and daily, weekly, or monthly charts. However, some markets and time frames may be more suitable and profitable for the triple bottom pattern than others, depending on the market's characteristics and conditions.

Limitations of Triple Bottom pattern

  • The Triple Bottom pattern is rare. Its forming requires a specific combination of price movements, volume levels, and periods.
  • It is not a foolproof indicator of a trend reversal. It may generate misleading signals that can lead to losses or missed opportunities. For example, the price may break above the resistance level but then fall back below it, forming a false breakout or a whipsaw.
  • The Triple Bottom pattern is not a risk-free or a high-reward indicator of a trend reversal. For example, the price may move too far or too fast after the breakout, leaving little room for profit or entry.
  • The Triple Bottom pattern is not a definite trend reversal indicator. It requires a subjective and flexible interpretation of the price movements, volume levels, and periods to identify.

Conclusion

The Triple Bottom pattern is also a valuable indicator of a trend reversal and a potential opportunity to avoid or exit a losing trade. It can help you prevent or close short positions against the trend or wait for long positions that align with the trend.

However, this pattern has limitations and challenges, such as the rarity, ambiguity, false signals, and the risk-reward ratio. 

 

Related Articles: What Is Candlestick Wick Analysis | What Is On Neck Candlestick Pattern | Difference Between Margin Trading And Short Selling | What Does a Paper Umbrella Candlestick Indicate

 

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