The triple top is a type of chart pattern utilized in technical analysis to predict the reversal in the movement of an asset’s price. Comprising three peaks, a triple top signals that the asset may no longer be rallying, and that lower prices may be forthcoming.
Key Highlights
- Three Peaks Formation: A triple top is formed by three peaks at similar levels, with pullbacks in between.
- Pattern Completion: The pattern is considered complete — suggesting further price declines — once the price breaches the pattern’s support.
- Trading Signals: Traders often exit longs or enter shorts when the triple top fulfills.
- Risk Management: Set a stop loss above the resistance (peaks) to mitigate potential risks.
- Downside Target: The estimated downside target for the pattern is the height of the pattern subtracted from the breakout point.
How the Triple Top Works
The triple top pattern manifests when the asset’s price forms three peaks at nearly the same level. This price level signifies resistance, and the spaces between peaks are known as swing lows. Post the third peak, if the price drops below the swing lows, it’s indicating a completion of the pattern and potential further downtrend.
In appearance, the triple top closely resembles the head and shoulders pattern, but in the former, the middle peak is nearly identical to the others. It also resembles the double top pattern but with an additional peak. Triple tops are generally traded similarly to head and shoulders patterns.
Imagine a stock’s price peaks at $119, pulls back to $110, rallies to $119.25, pulls back to $111, rallies to $118, and then drops below $111 — this sequence qualifies as a triple top, signaling the stock may head lower.
Significance of the Triple Top
Technically, a triple top indicates the price’s inability to breach the peak levels, implying limited buying interest in that price range. As the price declines, pressure mounts on traders who bought within the pattern, pushing them to sell. If the price falls below swing lows, selling often escalates as traders close losing long positions and new short sellers enter.
Not every pattern persists as expected—sometimes prices can recover after breaching below the support. A trader can place a stop loss for protection above the latest peak or a recent swing high to limit potential losses.
Trading Triple Top Patterns
Traders commonly enter short positions or exit longs once the asset’s price dips below the pattern’s support. This support level is often based on the recent swing low following the second peak or a trendline connecting the swing lows between peaks. A strong volume increase as the price breaks support confirms the pattern and suggests a further decline.
The estimated downside target is the pattern’s height subtracted from the breakout point — an approximate value since the price might either drop significantly lower or not quite hit the target. Traders can also incorporate other technical indicators such as a bearish MACD crossover or a falling RSI out of the overbought region for additional confirmation.
Real-World Example of a Triple Top
Consider the chart of Bruker Corp. ($BRKR), where the price hits near $36.50 on three occasions, declining each time to create a triple top. The trend breaks below $34 and moves downward with increasing volume.
Traders could place an initial stop-loss order just above the major resistance level and aim for a target near $30.75, calculated from the pattern’s height subtracted from the breakout point.
Special Considerations for a Triple Top
One drawback of triple top patterns is their risk/reward ratio since both stop loss and target derive from the pattern’s height. Traders prefer patterns with profits exceeding potential risks. By placing a stop loss within the pattern, traders may improve profit potential. Additionally, multiple targets — based on entry points at trendline breaks or recent low pullbacks — can be set for better risk management.
FAQ
Is a Triple Top Bullish or Bearish?
The triple top indicates a bearish reversal leading to downward trend changes. Conversely, a triple bottom suggests bullish reversals and upward movements.
Are Triple Tops Rare?
Triple top patterns occur less frequently than double tops due to the extra peak formation but offer significant trading signals when identified.
How Long Does the Triple Top Pattern Take to Form?
Triple top patterns typically develop over three to six months, aligning with other major reversal patterns.
The Bottom Line
Triple top patterns in technical analysis forecast potential price reversals. Identifying these patterns involves recognizing multiple peaks, retracements, and a final shift when prices fall below the pattern’s support. Conversely, triple bottom patterns reverse this logic for predicting upward movements. Incorporating strategies and preserving precautionary measures enables traders to harness triple tops effectively in their trading journey.
Related Terms: Technical Analysis, Head and Shoulders Pattern, Double Top, Swing High, Swing Low.
References
- ThinkMatters. “Triple Top Candlestick Pattern Trading Strategy”.
- StockCharts. “Triple Top Reversal”.
