Humans are designed to recognize patterns. It’s innately built into us.
We can tap into this ancient wisdom, and apply it to the stock market to help capture profit. One common way to do this is to recognize chart patterns. Chart patterns can help us predict the future, which is advantageous to us if we want to turn money into more money, of course.
There are, however, many different chart patterns to know. Head and shoulders, cup and handle, etcetera. Where to start? We’re going to give you an in depth guide of a common, and useful chart pattern, the triple top.
Let’s dive into this bearish pattern and learn how it can be utilized. But first, what exactly is a triple top pattern?
What you’ll learn
- What is the Triple Top Pattern?
- What Does the Triple Top Pattern Tell Traders?
- Importance of Triple Top Pattern
- Trading the Triple Top Pattern
- Diving Into a Real-World Example
- The Triple Top’s Opposite: The Triple Bottom
- Should You Consider Trading the Triple Top?
- Conclusion
What is the Triple Top Pattern?
A triple top pattern is a chart pattern represented by three distinct peaks of the price of a security hitting a line of resistance, as well as two distinct pullbacks the price of the asset hitting a support line. The pattern is considered complete when the price moves below the support line following the last peak. Lastly, it can only be classified as a triple top pattern if the pattern begins with an uptrend in price.
If you were to trace a line following the chart pattern, it would kind of look like a mountain with three peaks at, or close to the same altitude, with canyons also at the same altitude in between the peaks. Another way to visualize it, is a zig-zag line drawn between two parallel lines. You can see this represented in the image below.
Technical analysts utilize chart patterns like the triple top to predict a change in the direction of an asset’s price movement.
How is a Triple Top Pattern Formed?
A triple top pattern is formed when an asset’s price hits a resistance line three times after an upward trend in price, while also creating what are called swing lows that hit a support line. Swing lows are when the price of an asset pulls back from the resistance line and falls to rest on the support line. There are two distinct pullbacks in a triple top pattern.
Criteria Used to Identify the Triple Top Pattern
Prior Trend
The first thing that needs to happen in order for the pattern to be considered a triple top, is the price movement before the creation of the first peak needs to be an upward trend. If the prior price movement is in a downward trend, it could be considered what is called a triple bottom, the triple tops opposite, but at the very least, it cannot be considered a triple top.
Uptrends are defined by higher peaks and troughs over time and indicate bullish sentiment among investors.
Three Highs
The three peaks, or highs of the triple top pattern hit a line of resistance. The line of resistance is horizontal, and the prices at the peaks are all about the same. They do not have to be exact, as it’s unlikely they’d be the same price to the cent, but they need to be close.
Volume
If a trader is following the triple top pattern, and sees the price break through the support line, they need to start paying close attention to the trend in volume. What they need to be looking for are much higher volume trends, indicating a larger selloff.
If the volume does not trend very high relative to the volume throughout the pattern, the selloff could be quite weak, and the pattern will not be as reliable.
Support Break
A clear sign that there is a triple top pattern formed, and ended, is when the price of the asset breaks through the support line that the pullbacks were hitting. If there is not a clear break in the support line after the three highs were formed, it’d be difficult to say where the price could go, and it is not necessarily considered a triple top.
Price Target
After the triple top is completed, represented by a break through the support line, it is estimated that the price will fall the same distance as the difference between the price at the resistance line and the price at the support line. Then, statistically, the price will rebound a little after hitting its downward target.
This will be explained in more detail later on, and an example will be provided to help this information stick.
What Does the Triple Top Pattern Tell Traders?
When a trader identifies this pattern, and sees the price fall below the support line, it tells traders that the price will most likely continue a fall, signaling them to sell long positions and/ or purchase short positions. A trader needs to make sure that there is a heavy trend in volume following the break through the support line. This is the most advantageous condition for a trader following the trend.
The triple top also tells traders that, at the top of the peaks, buyers aren’t necessarily interested in buying for more than the three highs – it’s as if the price retreats from the highs after testing the waters a few times. Traders that held long positions during the peaks feel that they need to retreat as well, causing an increase in volume in both the selling of long positions, and the buying of short positions.
Lastly, a triple top pattern can even hint to traders where the price will go after it breaks through the support line. As explained before, the target for that downward price is equal to the difference between the price at the resistance line and the price at the support, minus the price at the support line.
For example, if the price at the resistance is $100, and the price at the support is $85, the difference is $15. Then, take $15, and subtract it from the price at the support, making the downward target price estimated to be $70.
Here’s an example:
See below that the difference in price between the support line and the resistance line is just about the same as the difference between the support line and the downward target price.
The triple top indicates to a trader that, despite attempts to drive prices higher, the asset is no longer rising and is unable to find buyers at that price level.
Importance of Triple Top Pattern
A triple top pattern, like all chart patterns, is an important piece of technical analysis. Used in combination with other forms of technical and fundamental analysis, a trader can get a good feel for the past and present movement of the asset’s price, and therefore make statistically viable predictions in the future movement in price.
All chart patterns are equally important, just as flavors are in cooking. But some are more common than others, so understanding the triple top gives traders a good idea of one of the more customary patterns.
Trading the Triple Top Pattern
To trade the triple top pattern, first make sure that all of the criteria is met. Namely, there was an upward trend in price, three highs at a resistance line, two lows at a support line in between the highs, and a break through the support line following the third high.
Now, the trader needs to pay more attention to the trend in volume. A trader needs to identify a large increase in volume relative to the volume throughout the pattern in order to successfully trade it. Once the trader has successfully identified a substantial increase in volume, they can reasonably assume that that indicates a selloff.
Lastly, the trader could choose to reenter the position at the downward price target, or if they held short positions, they could close them at, or near that same price target. This pattern is generally used by advanced traders. For those with less experience, it’s useful to start by subscribing to options trading signals where traders can receive tips and positions to look into from an experienced team of senior traders.
Pro tip: With the concepts of the triple top in mind, if a trader sees the pattern form, and sees the price start to fall close to the support line, they could place a stop-loss order for their long positions so that they don’t take as heavy of a loss if the price falls.
If there is concern that they won’t be able to sell at the price they want, they can place a stop-limit order to lock in the price to sell at. Because if they place a market order, they could end up selling for an unfavorable price due to high selling volume.
Diving Into a Real-World Example
Now for an in-depth example using the stock Chevron (CVX).
Let’s say that earlier this year, CVX’s price movement had been on the rise over the course of a couple weeks. The rise in price began at $135.00, and about two weeks later the price hit $170.00. A huge upward trend.
Then, there was a brief pullback, causing the price to fall to $158.00. After the brief pullback, the price rebounded a little bit, getting closer and closer to $170.00. A few trading days later, its price hit $169.00, creating what may start to look like a resistance line.
Graphically, this created the first peak (at $170.00), and the first valley (at $158.00).
Continuing to follow its price movement, after hitting $169.00, over the course of several more trading days, the price falls again before bottoming out near the first valley, this time at $156.00. Shortly after hitting $156.00, the price rebounds once again, bouncing off what traders may start to recognize as a support line. This could start to capture the attention of more traders, as they could reasonably predict another bullish move in CVX’s price.
Sure enough, traders decide to enter into long positions, so the price continues to rise, and hits the resistance line near the first two peaks at $168.00. But due to market psychology, the price again falls after hitting the resistance, forming the final of the three peaks.
The philosophy behind this could be that traders are reluctant to continue to buy at prices near the resistance line because they have recognized a trend. So perhaps they’re waiting for more people to make a move so that the price can break through the resistance. But, in this case, due to uncertainty and traders reluctance, the price falls, but this time it starts to fall below the support line. Now the triple top pattern is complete. Let’s see what happens after the price falls below the support line.
Traders start getting a little panicky. Some, to protect themselves against potential losses, decide to sell out quickly. Stop-loss orders set by traders that planned ahead start getting triggered near the support line price, causing an even further decline. Recognizing this, traders start selling as fast as they can to get out before they take larger losses, and more traders start to enter short positions. Maybe because they spotted the triple top pattern, or maybe they didn’t, and they just want to capture a little profit on the downward movement. Either way this causes the price to keep falling.
After a sharp fall in price, CVX finally recovers a little bit after hitting $145.
The difference between the price at the resistance line and the price at the support line is about $12.00. So we can see that the predicted downward price target was hit. Here’s how to calculate the predicted downward target price:
Resistance = $169.00 = x
Support = $157.00 = y
Downward target = z
x – y = $12.00
y – (x – y) = $145.00
The Triple Top’s Opposite: The Triple Bottom
To paint a picture of a triple bottom, just imagine a triple top pattern being mirrored on a horizontal line. See image below for a full visual. This means that the triple bottom works inversely to a triple top. So instead of being a bearish pattern, it’s a bullish pattern. And instead of having three highs and two lows, there are three lows and two highs.
The pattern begins with a drop in the asset’s price, followed by the zig-zag pattern we have seen (just the reverse), and the pattern is completed when the asset’s price rises above the resistance line created by the two peaks.
In technical analysis, a triple bottom is a bullish chart pattern that consists of three identical lows followed by a breakout above the resistance level.
Should You Consider Trading the Triple Top?
It’s a great idea for every trader employing technical analysis to, at minimum, understand the key elements of this pattern. Note, however, that if you are a beginner trader, it could be dangerous to lean heavily on just your understanding of this pattern and throw a bunch of money at a security associated with it.
Instead, you could follow it without investing any money, or, maybe put a little money into it to get your feet wet. Take some time to study and learn simple options trading strategies which are easier for beginners to comprehend. In this way, you have experience trading the pattern.
It’s always better to have experience in the market versus just knowledge of it. Knowledge plus experience equals wisdom. And wise traders are those that have learned about something in the market because they’ve had first hand experience applying the knowledge. You can always get yourself a trading journal to record what you do in the market, and how successful you were after following a chart pattern and why.
Conclusion
The triple top is a useful pattern that traders can easily recognize after identifying the clear criteria highlighted here. After recognizing the pattern, a trader can capture profit in multiple ways, and also save themselves from larger losses.
It’s a good idea to amalgamate your knowledge of this pattern with other forms of technical and fundamental analysis to give yourself a much higher probability of success, as you will be a more well-rounded trader.
Triple Top Pattern: FAQs
Are Triple Tops Bullish or Bearish?
A triple top pattern is considered a bearish pattern. After the three highs are created, if the price falls below the support line of the ‘valleys’, it is predicted that the price will continue to fall, making this pattern bearish.
In Short, What is a Triple Top Pattern?
A triple top is a chart pattern used in technical analysis that is represented by an increase in the price of an asset, followed by a short pullback that hits a support line, then a brief recovery in price at a resistance line created by the first peak, or high. This bearish pattern is complete when there are three highs that hit a resistance line, two lows the rest on a support line, and finally, a fall in the price of the asset below the support line.
Does Technical Analysis Actually Work with Triple Tops?
Triple tops can only be identified through technical analysis. Therefore, technical analysis has to work in order to identify the triple top pattern. However, this does not mean that identifying early indicators of the triple top pattern will indeed result in the full pattern being displayed. In trading, technical analysis is a tool used as a general guideline—but it doesn’t predict future price movements.
What is an Ascending Triple Top Breakout?
An ascending triple top breakout is when the price rises above the resistance line after the three peaks are created, instead of breaking through the support line. If the price moves in this way, it can therefore not be considered a triple top.
How Reliable is the Triple Top?
A triple top has a similar reliability as other chart patterns. Many factors influence how reliable the pattern is, one of the chief factors being market psychology. It’s difficult to say how reliable trading a chart pattern is, so it’s a good idea to combine understandings of chart patterns with other forms of analysis.
What Happens After a Triple Top?
After a triple top is formed, statistically, the price of the asset should fall to the price that is the difference between the price at the resistance line and support line, minus the price of the support line. Note that this does not always happen, as there are many factors at play. This is just the most probable outcome.
