A triple-bottom reversal is generally viewed as a bullish chart formation that can help identify buying opportunities. Typically, the triple bottom can detect a reversal of a bearish trend, highlighting opportunities to go long on an upwards price breakout.
As the name suggests, three troughs are created at around the same price level.
Classically coming in the aftermath of a pronounced downtrend, the second trough tends to show that buyers are beginning to gain control, as an area of price support becomes more established.
Once the price fails to breakthrough the same trough level on a third occasion, and subsequently bounces up, there is even firmer evidence in place of strong price support at this level.
A sharp upward price movement may subsequently take place once the price breaks through the upper resistance level of the formation.
A horizontal line can be drawn through the points of the three troughs, representing the area of price support. Similarly, another line can be drawn across the top of the formation, using the highest price points created by the price bounces within the triple-bottom pattern.
A breakout above the upper level should be accompanied by higher volume. Traders tend to implement buy orders just above the upper horizontal line of the triple-bottom pattern to take advantage of a sharp rally in the price.
Trading the triple bottom
As an example, suppose we are tracking the price of crude oil. In line with a recent bearish trend, we see the price of Brent crude fall to $53 per barrel. We subsequently see the price bounce relatively sharply over the next couple of weeks, peaking at $61. However, the price then falls quite sharply to hit $53 per barrel once again.
Following this, we see a recovery up to $59 and some zigzagging on lower volume but the price subsequently falls back to $53, creating the third trough at the same level in our pattern. Brent then rises sharply, in a near vertical jump on higher trading volume.
We have initiated a buy order at $62, just above the $61 price level denoted by the upper line of the chart pattern. We exit the trade two days later, extremely pleased with the result, when the price has met our profit target and is trading at $69.
The usual way to calculate a profit target for a triple bottom is to add the height of the pattern to the breakout price level.
In this case, the height of the pattern is: $61 − $53 = $8
Our profit target is therefore: $61 + $8 = $69
As always, it’s important to implement a stop-loss order for the trade to guard against losing money on a false breakout.
We could choose to be conservative by putting on a stop loss just slightly below the breakout level, perhaps at $60. Alternatively, we could choose another point in the pattern, where we saw some consolidation, say at $59.
If we wanted to give ourselves more leeway, we could even set the stop-loss order at $53, which has been firmly established by the triple-bottom pattern as an area of formidable support.