Trading the Triple Bottom Formation
As outlined earlier, the triple bottom is a bullish reversal chart pattern. Hence, we are looking for clues when the market is ready to reverse its course. The signal that we are looking for is a break of the neckline.
Looking at the chart above, a 4-hour chart, we see a strong breakout that launches the price action higher. As this breakout candle closes much higher, leaving us without an opportunity to dip into the market, we move to a 1-hour chart (below) to identify our entry.
As with every chart pattern that involves a breakout, we have two opportunities for an entry - after the breakout candle closes above the neck line or waiting for a test. In this case, the second option is not available as the price action never returned to the “crime scene”. This was expected to a certain degree, given how explosive the breakout was.
The power behind the breakout tells us that there is a high likelihood of the market extending higher. Hence, we set our entry as soon as the breakout candle closes above the neckline. The vertical blue, which measures the distance between the support and neckline, will help us determine the take profit.
You just copy-paste the line, starting from the breakout point, with the other end signalling a level, where we should consider taking profits off the table. Any move below the neckline, after the price action closed above it, invalidates the pattern. Hence, this is where our stop loss is located.
Given the power behind the breakout, we are not surprised to see that, during the next hourly trading session, our profit-taking level has been activated, making us 33 pips richer. On the other hand, we risked 17 pips, which translates into 1:2 risk-return ratio, a standard profitable setting.
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