If you have begun to explore the various components of technical analysis, the triple top pattern is an important one you shouldn’t miss. One of the key aspects of technical analysis is to spot trend reversals. A triple top chart pattern is among the patterns that can help predict reversal in asset price movement.
What exactly does a triple top formation look like?
The triple top formation, as the name suggests, is a pattern that has three peaks, and has pullbacks between the peaks. The three peaks are all located in a similar price region. So there are a couple of retracements involved. Connect the retracement dips with a trendline, and then extend this line towards the right. When the price dips below this trendline, you can use it as a point of entry. However, this is useful if the second dip is slightly higher than the first one. In case the second retracement dip is above the first or below, the trendline may be at an angle and not prove to be useful.
Triple top and other patterns
While talking about the triple top pattern, you will also find that it is similar to the head and shoulders pattern. Although the two may look similar, the difference between the two patterns is that in the head and shoulders pattern, the middle peak is way higher than the other two peaks on the left and the right sides. The other two peaks are usually aligned at the same level. Another pattern similar to the triple top formations is the double top, where an asset touches a high price twice with a fall between the two peaks.
Interpretation of a triple top pattern
When a triple top forms, there are three stages to consider:
1. The first is that price keeps moving higher before finally hitting a resistance level and falling into a support area.
2. The next step is that the price tries to test the level of resistance again but fails and comes back to the level of support.
3. The third stage is when the price tries yet again but fails to breakthrough resistance levels, and falls back.
This action is a tug of war between the buyers and the sellers. As the buyers keep trying to lift the price of an asset, the sellers are trying to bring the price to a lower level. After three such efforts, sellers gain the upper hand and the price of the asset drops, thus indicating a reversal of trend. The triple top chart pattern is thus indicative of a bearish trend.
The triple top pattern is incomplete if there is no support break. The lowest point of the triple top formation, ie, the lowest of all the lows, is the support level.
Some points to consider while interpreting triple top chart pattern:
– Although the three tops have to occur at the similar level, they are seldom at the exact same level. Observing the three peaks can be an advantage, as you can assess the bullish sentiment. For example, if the last top is at a lower level than the first peak, it indicates that the selling pressure is substantial. Buyers could not muster enough strength to even push the market to the recent peak.
– What if the last peak is a little higher than the previous highs? This tells us that the bulls are still putting up a fight. It could also tell us that the triple top pattern formed is not a very reliable one.
– When the triple top formation occurs, traders wait for the market to drop below the line connecting the three troughs, which is the level of breakout. However, there are false signs to be wary of, wherein the market drops a bit below breakout and shortly later recovers. Therefore, adding some distance to this level is important so as to avoid false signals.
– While some traders get into a short position, others exit the long positions once the asset price drops below support level of the pattern.
– Sometimes, even after a triple top is formed and is complete, price could recover and rise above the area of resistance. In such a scenario, a trader may place a stop loss on the short positions over the latest high. This helps lower risk if the price begins to rally instead of dropping.
The triple top chart pattern is a reliable indicator that tells a trader to sell. It essentially tells a trader that after attempts to push prices up, there is indication that the asset is not rallying any more, and is unable to find buyers in that specific price level.