What Is a Triple Top?
The triple top is a type of chart pattern used in technical analysis to predict the reversal in the movement of an asset's price. Consisting of three peaks, a triple top signals that the asset may no longer be rallying, and that lower prices may be on the way.
In order for the pattern to be considered a triple top, it must occur after an uptrend. The opposite of a triple is a triple bottom, which indicates the asset's price is no longer falling and could head higher.
Key Takeaways
- A triple top is formed by three peaks moving into the same area, with pullbacks in between.
- A triple top is considered complete, indicating a further price slide, once the price moves below pattern support.
- A trader exits longs or enters shorts when the triple top completes.
- If trading the pattern, a stop loss can be placed above resistance (peaks).
- The estimated downside target for the pattern is the height of the pattern subtracted from the breakout point.
How a Triple Top Works
The triple toppattern occurswhen the price of an asset creates three peaks at nearly the same price level. The area of the peaks is resistance. The pullbacks between the peaks are called the swing lows. After the third peak, if the price falls below the swing lows, the pattern is considered complete and traders watch for a further move to the downside.
The three consecutive peaks make the triple top visually similar to the head and shoulders pattern; however, in this case,the middle peak is nearly equal to the other peaks rather than being higher. The pattern is also similar to the double top pattern, when the price touches the resistance area twice, creating a pair of high points before falling.
Triple tops are traded in essentially the same way as head and shoulders patterns.
Say a stock's price peaks at $119, pulls back to $110, rallies to $119.25, pulls back to $111, rallies to $118, then drops below $111, that is a triple top and signals the stock is likely heading lower. It would look like the chart below.
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Significance of the Triple Top
Technically, a triple top pattern shows us that the price is unable to penetrate the area of the peaks. Translated into real-life events, it means that, after multiple attempts, the asset is unable to find many buyers in that price range.
As the price falls, it puts pressure on all those traders who bought during the pattern to start selling. If the price can't rise above resistance there is limited profit potential in holding onto it. As the price falls below the swing lows of the pattern, selling may escalate as former buyers exit losing long positions and new traders jump into short positions. This is the psychology of the pattern, and what helps fuel the selloff after the pattern completes.
No pattern works all the time. Sometimes a triple top will form and complete, leading traders to believe the asset will continue to fall. But then, the price may then recover and move above the resistance area.
For protection, a trader could place a stop loss on short positions above the latest peak, or above a recent swing high within the pattern.This move limits the risk of the trade if the price doesn't drop and instead rallies.
Trading Triple Top Patterns
Some traders will enter into a short position, or exit long positions, once the price of the asset falls below pattern support. The support level of the pattern is the most recent swing low following the second peak, or alternatively, a trader could connect the swing lows between the peaks with a trendline. When the price falls below the trendline the pattern is considered complete and a further decline in price is expected.
To add confirmation to the pattern, traders will watch for heavy volume as the price falls through support. Volume should pick up showing a strong interest in selling. If the volume doesn't increase, the pattern is more prone to failure (price rallying or not falling as expected).
The pattern provides a downside target equal to the height of the pattern subtracted from the breakout point. This target is an estimate. Sometimes the price will drop much lower than the target, other times it won't reach the target.
Other technical indicators and chart patterns may also be used in conjunction with the triple top. For example, a trader may watch for a bearish MACD crossover following the third peak, or for the RSI to drop out of overbought territory to help confirm the price drop.
Real-World Example of a Triple Top
The following chart shows an example of a triple top in Bruker Corp. (BRKR). The price reaches near $36.50 on three consecutive attempts. The price pulls back between each attempt, creating the triple top pattern. The stock quickly broke below trendline support at $34 and continued to decline on escalating volume.
:max_bytes(150000):strip_icc()/dotdash_Final_Triple_Top_Dec_2020-02-f2c3428399574d4181d943daf126cf77.jpg "Triple Top: What It Is, How It Works, and Examples (2)")
Traders could enter short or exit longs when the price drops below support at $34. A stop-loss could initially be placed just above the major resistance area.
The estimated target for the decline is the height of the pattern, about $3.25, subtracted from the $34 breakout point. Therefore, the target is $30.75. The target was reached before the price started bouncing, although that won't always happen.
Special Considerations for a Triple Top
As with double tops and bottoms, the risk/reward ratio is a drawback of these triple patterns. Since both the stop loss and target are based on the height of the pattern, they are roughly equal. Patterns in which the potential profit is greater than the risk are preferred by most professional traders.
By placing the stop loss within the pattern, instead of above it (triple top) or below it (triple bottom) improves the reward relative to the risk. The risk is based on only a portion of the pattern height, while the target is based on the full pattern height.
Depending on which entry points are used—the trendline or the recent pullback low—it is possible to have two profit targets since the height of the pattern can be added to either of these breakout points. Traders can choose which target breakout level they prefer in order to extract more profit from the trade.
Is a Triple Top Bullish or Bearish?
The triple top is a bearish reversal chart pattern that leads to the trend change to the downside. On the other hand, the triple bottom pattern is a bullish reversal chart pattern that leads to the trend change to the upside.
Are Triple Tops Rare?
Triple top patterns occur less frequently than double top patterns, where there is one peak less to happen. But the fact that it is a rare chart formation is also the biggest weakness of a triple top.
How Long Does the Triple Top Pattern Take to Form?
As other major reversal patterns, the triple top pattern usually form over a three- to six- month period.
The Bottom Line
The triple top is used in technical analysis to predict the reversal in the movement of an asset's price. A triple top occurs when the price peaks, retraces, rallies to a similar peak, retraces, rallies to a similar high again then declines again.
A triple top is considered complete once the price moves below pattern support and the trend changes to the downside. Then, a trader may decide to exit longs or enter shorts.
The triple bottom chart pattern is an upside-down version of the triple top and marks the end of a downtrend.
As an enthusiast with a deep understanding of technical analysis and chart patterns, I've extensively studied and applied various patterns to predict market movements. My expertise stems from years of hands-on experience in analyzing financial markets, utilizing technical indicators, and successfully identifying trend reversals.
Now, delving into the concepts discussed in the article about the "Triple Top" pattern:
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Triple Top Formation:
- A triple top is a chart pattern characterized by three consecutive peaks at nearly the same price level.
- It signifies potential reversal in the movement of an asset's price and typically follows an uptrend.
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Pattern Components:
- The three peaks form resistance, while the pullbacks between the peaks are known as swing lows.
- The pattern is considered complete when the price falls below the swing lows after the third peak.
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Trading the Triple Top:
- Traders often exit long positions or enter short positions when the triple top pattern completes.
- A stop loss can be placed above resistance (the peaks) to manage risk.
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Price Target and Analysis:
- The estimated downside target is calculated by subtracting the height of the pattern from the breakout point.
- Technical indicators like MACD and RSI can be used in conjunction for confirmation.
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Real-World Example:
- The article provides a real-world example of a triple top in Bruker Corp. (BRKR), demonstrating how traders could enter short or exit long positions based on the pattern.
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Triple Top's Significance:
- Indicates that the price is unable to penetrate the resistance area, suggesting a lack of buyers in that price range.
- Triggers selling pressure as the price falls, leading to a potential selloff after the pattern completes.
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Risk Management:
- Placing a stop loss on short positions above the latest peak or a recent swing high within the pattern helps manage risk.
- Risk/reward ratio is a consideration, and placing the stop loss within the pattern can improve it.
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Triple Top vs. Triple Bottom:
- Triple top is a bearish reversal pattern, indicating a potential downtrend.
- Triple bottom, its counterpart, is a bullish reversal pattern, signaling a potential uptrend.
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Frequency and Formation Time:
- Triple tops occur less frequently than double tops.
- The pattern usually forms over a three- to six-month period.
In conclusion, the triple top is a powerful tool in technical analysis, providing valuable insights into potential trend reversals. Traders can use this pattern, along with risk management strategies and additional technical indicators, to make informed decisions in the dynamic world of financial markets.
