What is a triple-top chart pattern?
The Triple Top pattern is a bearish reversal pattern that often forms after a prolonged uptrend. It signals a potential shift in market sentiment from bullish to bearish. The pattern consists of three distinct peaks, all roughly at the same price level, with minor pullbacks between them.
These peaks create a significant resistance level that the price repeatedly fails to surpass. This failure to break the resistance level three times indicates a lack of buying pressure and increases the likelihood of a downward price movement.
How does a triple top pattern work?
When the asset’s price forms three peaks at similar price levels, the triple top pattern occurs. The area of these peaks is known as resistance. Likewise, the pullbacks in the middle of the peaks are known as swing lows. Following the third peak, if the price dips beneath the swing lows, the pattern is viewed as complete, and traders monitor it further for a possible downward movement.
Because of the three consecutive peaks, the triple top resembles a head and shoulders pattern. However, in this scenario, the middle peak is almost identical to its neighbouring peaks rather than being taller. A triple top also shares similarities with the double top pattern, where the price hits the resistance zone twice, resulting in the creation of two high points before a subsequent drop.
Additional read: Double bottom pattern
What does the triple top chart pattern indicate?
A triple top pattern demonstrates that the price is failing to break through the area of the peaks. Simply put, even after numerous efforts, the asset is incapable of finding an adequate number of buyers in a particular price bracket.
As the prices continue to decline, it creates an urgency for all the traders who have already bought the asset, compelling them to sell. Without its ability to surpass the resistance, the potential for profits diminishes for as long as it is retained. This consistent fall in the prices below the swing lows triggers a surge in selling as the old buyers exit these unprofitable long positions and new buyers enter into short ones.
It is imperative to remember that no pattern is foolproof. There will be instances where a triple top materialises, giving traders the impression the asset’s price will fall further. But then, surprisingly, the price rallies, moving beyond the resistance.
To play it safe, traders could place a stop loss order on a short position right above the most recent peak or above the latest swing high within the pattern. This tactic mitigates the trade’s risk level if the price rebounds instead of dropping.
Importance of the triple top pattern
The Triple Top Pattern is a valuable tool for traders and investors as it offers insights into market dynamics. By recognizing this pattern, traders can anticipate potential trend reversals and adjust their trading strategies accordingly. This enables them to exit long positions or even take short positions to capitalize on the impending downward move. When combined with other technical indicators, the Triple Top Pattern can serve as a confirmation tool, strengthening the confidence in a trend reversal.
How to identify a triple top pattern?
To pinpoint a triple top chart pattern, look for the features mentioned below.
- A prolonged uptrend in the price chart.
- Three consecutive peaks that are approximately identical in height and establish a resistance level, which is either flat or slightly sloping.
- Two minor pullbacks in the middle of the peaks.
- A low volume, signalling the waning interest of buyers.
How to trade a triple top pattern?
While trading a triple top pattern, you need to meticulously assess the entry and exit points to optimise your gains. Here are some strategies that can help you make the most of such trades.
- Entry manoeuver: Usually, traders wait for the prices to dive below the support level to confirm the triple top’s completion. Such drops act as indications for you to enter short positions.
- Take-profit levels: You can determine take-profit levels by calculating the pattern’s height and projecting it downwards from the breakout point. Furthermore, prior swing lows or support levels can act as possible targets.
- Stop-loss order: By placing a stop-loss order above the resistance area, you can restrict potential losses if the triple pattern fails and the prices bounce back.
Additional read: Intraday chart patterns
How to interpret price movements using the triple top pattern?
These three important steps help to interpret the triple top chart pattern.
- Spot: While it is simpler to spot patterns in historical data, it is equally tricky to zero in on ones that are forming in real time. You can utilise the historical datasets as your point of reference to study methods used for constructing trendlines. Often, trendlines are created using closing prices, highs and lows, or alternative data points in every price bar.
- Assess: Once you find a triple top pattern, verify its credibility. Take into account factors such as trading volumes and the price swings’ volatility with the pattern.
- Predict: After spotting and assessing the pattern, you can use this intel to anticipate price trajectories in the future. As pointed out earlier, price patterns can adopt the bullish tone again, so nothing is guaranteed. However, by analysing and forecasting, you can at least be prepared for quickly responding to an opportune circumstance.
Advantages and disadvantages of the triple top pattern
advantages
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disadvantages
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Early Warning Signal: The triple top pattern provides an early indication of potential trend reversals, allowing traders to prepare in advance.
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False Breakdowns: Sometimes, support breaks temporarily before the price returns above it. This can invalidate the pattern and lead to lost trades.
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Defined Risk-Reward: Entering near support with stops placed above the triple tops offers a defined risk-reward ratio. Profit targets can be set below the support level.
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Resistance Break: The pattern can be nullified if resistance breaks to the upside. Traders must be ready to exit losing trades quickly.
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Statistical Reliability: Statistical research suggests that the triple top often resolves in the predicted direction once support breaks. This high probability of success can enhance trading strategies.
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Trend-Following Pattern: Triple tops are best suited for trending markets. In range-bound markets, frequent failures and pauses can occur.
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Objective Trading: The pattern encourages disciplined trading by providing clear entry and exit points. Traders can avoid impulsive decisions and focus on well-defined setups.
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Confirmation Required: The pattern should ideally be combined with other technical indicators to confirm the reversal and increase the likelihood of success.
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Volume Confirmation: Reduced volume at each peak and increased volume at the breakdown can strengthen the pattern's validity. Combining volume analysis with the pattern can enhance confidence.
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Premature Entry: Entering at the second top in anticipation of a breakdown increases the risk of failure compared to waiting for confirmation.
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Closing thoughts
A triple top pattern can be an insightful tool for predicting reversals in the price movements of an asset and help you make lucrative moves in your intraday trading activities. However, it is worth noting that such patterns are heavily influenced by price trends, shifting in a matter of seconds. So, this pattern needs to be accurately identified. Plus, it must be used in conjunction with additional technical indicators for confirmation. Ensure to exercise due diligence before placing trades instead of relying only on triple top patterns to make decisions.
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