Triple Top Pattern

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21 Aug, 2024

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A triple top pattern refers to a chart pattern in technical analysis that appears following an extended uptrend in a market. This bearish signal indicates that the financial asset’s price may not be surging and assists traders and analysts in predicting a trend reversal.

It features three peaks in a row at roughly an identical price level and consists of a couple of minor pullbacks between them. These peaks establish a level of resistance that the security’s price cannot break, which signals inadequate buying pressure. The failure to breach the resistance level thrice indicates a high chance of a trend reversal.

Triple Top Pattern Meaning

Triple top patterns refer to a bearish reversal pattern that one can spot after an uptrend in a security’s price. One can utilize this pattern to set entry or exit points and make financial gains.
People can identify this chart by spotting the three tops, two minor pullbacks, and the neckline or support.
There are various key advantages of trading triple top patterns. For example, they provide objective rules for fixing an entry or exit point. Moreover, they prevent overtrading and help manage losses.
A noteworthy disadvantage of this pattern is that its identification can be tricky.

Triple Top Chart Pattern Explained

A triple top pattern refers to a straightforward chart pattern comprising three consecutive tops or highs near or at the same price level. It signals that a downward trend is on the horizon, enabling individuals to exit their long positions. Moreover, it allows traders to enter short positions and make the most of the forthcoming downward movement.

One can only consider a chart pattern triple top if it follows an uptrend. When individuals identify this bearish reversal pattern on a financial instrument’s price chart, it indicates insufficient buying momentum and selling pressure’s emergence. The peaks’ area represents resistance, while the pullbacks in between those peaks are the swing lows.

Following the third peak, in case the price of a security drops below these swing lows, traders may consider the pattern complete. At this point, they keep an eye out for a downward movement, which often leads to a trend reversal.

Besides spotting the key features in a triple top pattern chart, for example, the three peaks and preceding uptrend, individuals must analyze the trading volume at the time of the pattern’s formation. Note that if the volume is falling, it may indicate decreasing buying interest.

Chart Interpretation

Let us look at a triple top pattern chart from TradingView to understand the concept better.

Source

In the above Dow Jones Industrial Average chart, we can see that after an uptrend, three tops or peaks appear, along with a couple of minor pullbacks between them. The blue line passing through the three peaks denotes the resistance level.

One can find that on June 9, 2023, the price breached the support level, and a downtrend materialized. If one had entered a short position at the point of breakout, they could have earned significant profits as the price dropped further. Also, any person who was holding a long position could set their exit point at or just below the support or neckline to limit their losses.

How To Trade?

One must keep the following pointers in mind for effective triple top pattern trading.

Entry And Exit Strategy: Traders can enter a short position or enter a long position after the asset’s price drops under the support level of the pattern. They can look for heavy trading volume as the price falls via support. Note that the volume must pick up, demonstrating strong selling interest. If the trading volume does not rise, this pattern is more susceptible to failure.
Placement Of Stop-Loss: Traders can consider placing a stop-loss above the level of resistance to restrict the potential losses in case of the pattern’s failure and an increase in price.
Take-Profit Levels: People can fix their take-profit levels through the measurement of this pattern’s height and its projection down from the point of breakout. In addition, price swing lows or support levels can act as potential targets.

One must remember that they can utilize this pattern with other chart patterns and technical indicators, like the relative strength index or moving average convergence divergence (MACD). This would increase their chances of achieving success in financial markets.

Examples

Let us look at a few triple top pattern examples to understand the concept better.

Example #1

Suppose James is a stock trader who held ABC stock in his portfolio for more than 4 months. He was seeking a good exit point. He observed that after an uptrend, three peaks formed in the chart with two pullbacks in between them. The next day, the price fell below the support line and he noticed a significant increase in volume, indicating a strong selling momentum. The formation of the triple top pattern was clear to him.

To avoid losing out on his profits, he sold his ABC shares just below the support line. It turned out to be a wise move as the stock price plummeted 10% from the support line. Although James lost out on some of the gains, he could avoid incurring losses because of the identification of the pattern.

Example #2

The largest gold miner worldwide, Newmont, has been under quite some pressure after reaching its peak in 2022. As gold prices dropped, its shares plummeted to $35.40 on October 3, 2023. The worst part was that the precious metal price chart had formed a triple-top pattern, indicating more downside on the horizon. It meant that the gold price could plunge to $1,606, the pattern’s neckline, as shown below.

Source

Moreover, at that time, Newmont’s recent results showed that the organization’s production was failing because of the increased cost of running the business. That said, over the long term, the shares were expected to make a recovery as the demand for the precious metal increased.

Benefits

Let us look at the benefits of this chart pattern.

It provides an indication of a potential bearish reversal.
In many cases, this pattern resolves in the anticipated direction once the support breaks. Its high chance of success boosts the profit potential.
It prevents overtrading
The chart pattern offers an objective context for avoiding or executing trades.
Combining this pattern with volume analysis provides traders with increased confidence.
The clearly defined resistance and support levels offer objective rules concerning exiting and entering trades.
This pattern provides traders with flexibility through the use of options, throwback entries, hedges, etc.
Traders can place logical stops because of the well-defined resistance and support levels. This helps individuals manage their losses.

Risks

The risks associated with this chart pattern are as follows:

A false breakdown can invalidate the pattern, which can result in losing trades.
Traders may end up entering short trades prior to the confirmation. This increases the chances of failure.
Lagging indicators do not reflect the trend alteration implied by this chart pattern quickly. This results in late reactions.
This pattern is suitable for trending markets. When range-bound conditions exist, repeated failures tend to occur.
Various minor peaks near the same price level make it difficult for traders to determine the three peaks they can utilize to trade.

Triple Top Pattern vs Triple Bottom Pattern

The concepts of triple top and triple bottom patterns can appear to be confusing if one is not familiar with them. They can avoid any confusion if they are aware of the patterns’ key differences. So, let us find out how these concepts differ.

Triple Top Pattern	Triple Bottom Pattern
It is a bearish reversal pattern.	The Tipple bottom pattern is a bullish reversal chart pattern.
This pattern features three consecutive tops.	It features three bottoms in a row.
This pattern’s formation takes place after a downtrend.	Its formation occurs after an uptrend.

Frequently Asked Questions (FAQs)

What is the difference between double top and triple top patterns?

The differences between double top and triple top patterns are as follows:

- Double top patterns appear more frequently than triple top chart patterns. This is because one more peak needs to materialize in the latter's case.
- In the case of a triple top chart pattern, the chances of breaching the resistance level are comparatively less because following the third failure, the buyers in the market cannot generate sufficient buying pressure to drive up the price.

How accurate is a triple top pattern?

This pattern can be quite useful for traders to make financial gains in the market. That said, one must remember that it is not 100% accurate. Individuals must consider using it with other patterns and indicators to maximize the chances of generating gains in the market.

Is a triple top pattern good or bad?

There is no perfect answer to this. This pattern can be good or bad depending on different factors, for example, one’s trading style, experience, market conditions, preferences, and more.