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Triple Top What It Is How It Works and Examples

Triple Top What It Is How It Works and Examples

Triple Top: Definition, Mechanism, and Examples

A triple top is a chart pattern used in technical analysis to predict a reversal in an asset’s price movement. It consists of three peaks, indicating a potential end to a rally and the likelihood of lower prices.

To qualify as a triple top, the pattern must occur after an uptrend. Conversely, a triple bottom signals the end of a downtrend and the possibility of higher prices.

Key Takeaways

-A triple top consists of three peaks within the same area, separated by pullbacks.

-The pattern is considered complete once the price falls below support.

-Traders should exit long positions or enter short positions when the triple top completes.

-A stop loss can be placed above the resistance level.

-The estimated downside target for the pattern is the height of the pattern subtracted from the breakout point.

Mechanism of a Triple Top

A triple top pattern occurs when an asset’s price reaches three peaks at nearly the same level. These peaks form a resistance area, while the pullbacks between them are referred to as swing lows. If the price falls below the swing lows after the third peak, the pattern is considered complete, and further downward movement is expected.

Visually, the triple top pattern resembles the head and shoulders pattern, with the middle peak being almost equal to the other two peaks instead of higher. It is also similar to the double top pattern, where the price touches the resistance area twice before declining.

Trading Triple Top Patterns

Triple tops are traded similarly to head and shoulders patterns. To enter a short position or exit long positions, traders wait for the price to fall below pattern support. The support level can be identified as the most recent swing low after the second peak or by connecting the swing lows with a trendline. The pattern is considered complete when the price breaks below the trendline, signaling an anticipated decline in price.

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To confirm the pattern, traders look for heavy volume as the price breaks through support. Increased volume indicates strong selling interest, while a lack of volume suggests that the pattern may not play out as expected.

It is worth noting that the target for the decline is an estimate calculated by subtracting the height of the pattern from the breakout point. However, the price may not always reach the target, either falling well below or not reaching it at all.

Additional technical indicators and chart patterns can be used in conjunction with the triple top pattern, such as a bearish MACD crossover or a drop in the RSI from overbought territory.

Real-World Example of a Triple Top

The chart below illustrates a triple top pattern in the stock of Bruker Corp (BRKR). The price reaches nearly $36.50 on three consecutive attempts, with each attempt followed by a pullback. A break below the trendline support at $34 confirms the pattern. Traders could have entered short positions or exited longs at this point. The estimated target for the decline was $30.75, which was reached before the price started to rebound.

Special Considerations for a Triple Top

The risk/reward ratio is a drawback of triple top patterns, as both the stop loss and target are based on the pattern’s height and are roughly equal. Therefore, professional traders prefer patterns where the potential profit exceeds the risk.

Placing the stop loss within the pattern, rather than above it (for triple tops) or below it (for triple bottoms), improves the reward relative to the risk. By doing so, the risk is based on only a portion of the pattern height, while the target is based on the full pattern height.

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Furthermore, depending on the entry points used (trendline or recent pullback low), traders can have two profit targets by adding the pattern’s height to either of these breakout points. This allows for more profit extraction from the trade.

Conclusion

The triple top pattern is a bearish reversal pattern used in technical analysis to predict a trend change in an asset’s price movement. Traders look for three peaks, pullbacks, and confirmation through the breaking of support levels. By understanding the mechanics of this pattern and using additional indicators, traders can make informed trading decisions.

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