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.
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.
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.