Triple Top Pattern

What is a triple top pattern?

A triple top is a chart pattern that signals a bearish reversal, or the end of an uptrend. It is similar to a double top, and easy to spot due to its simple structure, but consists of three peaks instead of two, which makes its appearance somewhat rarer.

 

Is a triple top bullish or bearish?

A triple top is exclusively a bearish pattern (the bullish variant is known as a triple bottom). The price action is signaling that buyers are losing control as the price of the asset has repeatedly failed to break above the key resistance level. This indicates that a trend reversal could be imminent.

 

How to identify a triple top

A triple top is composed of three distinctive peaks that are roughly at the same level. When you connect those three peaks, they will form a clear resistance line.

Another major component of the triple top pattern is the neckline, the support level between the three peaks that must be breached to confirm the pattern.

Once the price of the asset breaks below the neckline, a triple top is confirmed, signaling the beginning of a downtrend.

The triple top pattern suggests that the asset keeps failing at the same resistance level, indicating that momentum is waning and that sellers are taking over control.

While the triple top and double top share several characteristics, the fact that the price failed to break above the same level of resistance three times instead of twice signals an even better chance of a bearish trend reversal.

Triple top vs triple bottom

A triple top occurs in an uptrend and is always a bearish chart pattern. On the other hand, a triple bottom occurs during a downtrend and is signaling a bullish reversal.

A triple top consists of three peaks (highs) while a triple bottom consists of three bottoms (lows). Both patterns have a neckline - i.e., a support/resistance line connecting the valleys.

Both the triple top and triple bottom are confirmed once the price has breached the neckline - i.e., a breakout below/above the support/resistance line has occurred.

Additionally, both chart patterns can be traded across different timeframes and various trading instruments.

 

How to trade a triple top chart pattern

The first step of trading a triple top is to be able to identify it on the charts. What we are looking for is an existing uptrend and three separate peaks (highs) that are located at approximately the same price level and two valleys between the peaks.

The valleys represent the pullbacks after the price failed to breach the resistance line, forming a peak.

The neckline is the support level that connects the three peaks at the valley. This level is crucial, as the actual entry takes place once the price has breached this level.

Following a breakout below the neckline, traders will be looking to enter a short position, either by placing a market order or by having a limit order ready.

It is important to wait for the neckline to be broken, as this confirms the actual pattern, and reduces the chances of a false signal.

It is crucial to set a stop-loss order to protect yourself against excessive losses. Traders will typically place the stop-loss order slightly above the third peak. If the distance is significant, you may consider reducing your position size.

The take-profit target is calculated by measuring the distance between the peaks and the neckline. For example, if the distance is 100 pips, set the take-profit level to 100 pips below the neckline.

 

Advantages of a triple top

There are several key advantages of using the triple top pattern in trading:

It is easy to identify due to its simple structure, consisting of three peaks and a valley.

The neckline provides a clear entry point and helps in determining the take-profit order. Usually, the distance (pip value) between the neckline and the peak is taken as a reference for where to place the take-profit order.

It is, without exception, a bearish pattern.

Triple top patterns can be traded across various timeframes and trading instruments.

It can be combined with technical indicators for additional confirmation.

 

Disadvantages of a triple top

Trading triple top patterns also comes with several disadvantages:

False breakouts can occur. The price may only temporarily rest below the neckline and then quickly rebound, leaving traders with a loss.

Using the neckline-peak distance as a measurement for where to place the take-profit order, while placing the stop-loss order above the most recent peak can lead to a less favorable risk-to-reward ratio.

The three peaks might not be perfectly aligned, i.e. resting at the same level, making it harder to identify.

Market conditions matter as the triple top is better used in a trending environment rather than consolidation.

 

Conclusion

The triple top is a bearish chart pattern that indicates that the current uptrend is ending, and a reversal is imminent. It shows that the asset´s price has failed to breach a key resistance level three times, signaling that sellers are gaining the upper hand.

The triple top is easy to spot as it consists of three distinct peaks (highs) located at the same level, separated by two pullbacks. Once the price has dropped below the neckline (the line connecting the valleys), the pattern is confirmed, and traders will be looking to enter a short position.

 

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This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation and needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability with regard to the accuracy and completeness of the content in this publication. Readers should seek their own advice.