How to Trade with the Triple Top Pattern

FXOpen

Traders are always on the lookout for reliable analysis tools that can help them make correct trading decisions. One such tool is the triple top trading pattern. It is a bearish reversal formation that can help traders identify potential trend reversals and take advantage of market opportunities.

In this FXOpen article, we will explore what the triple top pattern is, what it indicates, how to identify it, how to trade it, and provide an example to help you understand how to use it effectively.

What Is a Triple Top Pattern Meaning?

A triple top is a technical analysis reversal figure that forms when the price of an asset reaches a particular resistance level three times and fails to break through it. So is the triple top pattern bullish or bearish? It is a bearish formation that shows that the buyers are losing their strength, and the sellers are starting to take control of the market.

The triple top is a reliable trading signal for traders who are looking to take advantage of a potential downtrend. It is typically formed over a more extended period, and it can take weeks, months, or even years to complete. When identifying it on a price chart traders use it as a signal to sell their long positions and potentially profit from a downward price movement.

It is important to note that while the triple top is an effective trading tool, it is not always a guarantee of a trend reversal. Therefore, traders always use technical analysis instruments to confirm its validity before making trading decisions.

You may ask, “What does a triple top mean in stocks?” or “What is a triple top in stocks?” The triple top formation has the same structure and provides the same signals on a chart of any financial instrument and in any timeframe. You can use it for stock, forex, index, cryptocurrency*, and commodity trading.

How to Identify the Triple Top

To identify the triple top formation, traders look for three distinct peaks formed at the same price level, separated by two troughs. These peaks are formed when the price hits a particular resistance level three times and fails to break through it. The troughs are formed when the price retraces some of its gains from the resistance level.

Triple Top Chart Pattern Trading Strategy

Once traders have identified this formation, they can use various trading strategies to take advantage of it. However, there are common rules that are used as the basis:

  • Entry: Traders can enter a short position when the price breaks below the neckline, which is the level that connects the two troughs that separate the peaks. This level is a critical support level, and when it is broken, it confirms the triple top candlestick pattern and indicates that the trend is reversing.
  • Stop Loss: To manage risk, traders can place a stop-loss order above the neckline. If the price starts to rise again, the stop-loss order will limit their losses. The theory states that traders can place a stop-loss on the neckline. However, the price often retests the support level after a breakout, so the risk of an early exit rises.
  • Take Profit: There are several ways of determining a profit target. The most common technique is to measure the distance between the tops and bottoms and add it to the breakout point.

Another strategy is to identify the target based on the closest support levels. However, this may limit potential profits if the support is too close to the entry point. Therefore, traders sometimes use trailing stops to lock in profits as the price continues to fall.

Trading Example

In the chart above, the price formed the triple top. We could have entered a short position once the price broke below the neckline and closed it either at the point equalled to the distance between the peaks and the neckline or at the closest support level, as the levels are almost equal. However, selling volumes were low (1) at the breakout level, so we could have expected an upcoming bullish reversal. Therefore, we wouldn’t have kept the position beyond the initial take-profit target.

How to Confirm the Triple Top

Traders can use various technical indicators that provide reversal signals to confirm the triple top. One common method is to look for a decrease in trading volume as the price approaches the third peak. This suggests that the buyers are losing their strength, and the sellers are starting to take control. At the same time, volumes should rise when the neckline is broken. This validates the formation and signals that bears have the power to pull the price down.

Other indicators include the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicator. The RSI may provide a downward reversal signal when it leaves the overbought area or when it forms a bearish divergence with the price chart. The MACD may provide bearish reversal signals when the MACD line breaks below the signal line or when there is a bearish divergence between the indicator and the price.

However, this isn’t a comprehensive list; you can test different indicators on the TickTrader platform for free to determine the one that will validate the triple top formation with the highest success rate.

Triple Top vs Triple Bottom

It is important to distinguish between the triple top and the triple bottom pattern, as the former  is the bearish setup, while the latter is a bullish reversal formation. The triple bottom setup forms when the price hits a particular support level three times and fails to break through it. It suggests that the sellers have lost their strength, and the buyers are starting to take control. The bottoms are separated by two peaks, which occur when the price retraces some of its gains from the support level.

Traders can use the same principles to trade the triple bottom as they would the triple top. They can enter a long position when the price breaks above the neckline and set a stop-loss order below it. The take-profit target may equal the distance between bottoms and peaks or be set at the closest resistance level.

Final Thoughts

The triple top is a reliable bearish reversal setup that can help traders identify potential trend reversals and take advantage of market opportunities. Traders can use technical analysis tools to identify it, confirm it, and use various trading strategies to profit from it.

However, it is essential to manage risk when trading this formation, as it is not always a guarantee of a trend reversal. Traders use stop-loss orders and consider market conditions, news events, and other factors that may impact an asset's price before taking a position.

Once you feel confident and ready to implement this pattern into your trading strategy, you can open an FXOpen account.

*At FXOpen UK and FXOpen AU, Cryptocurrency CFDs are only available for trading by those clients categorised as Professional clients under FCA Rules and Professional clients under ASIC Rules, respectively. They are not available for trading by Retail clients.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

Latest from Trader’s Tools

What Is a Darvas Box Theory and How Does It Work in Trading? Fair Value Gaps vs Liquidity Voids in Trading Is There the Best Time to Trade Stock CFDs? What Order Imbalance Is and How To Use It in a Trading Strategy What Is a Break of Structure and How Can You Trade It?

Latest articles

Weekly Market Wrap With Gary Thomson: UK100, USD, GOLD, OIL
Financial Market News

Weekly Market Wrap With Gary Thomson: UK100, USD, GOLD, OIL

Get the latest scoop on the week's hottest headlines, all in one convenient video. Join Gary Thomson, the COO of  FXOpen UK, as he breaks down the most significant news reports and shares his expert insights.

  • UK100 Share Index Rises
Trader’s Tools

What Is a Darvas Box Theory and How Does It Work in Trading?

The Darvas Box Theory, pioneered by Nicolas Darvas in the 1950s, has transcended its stock market origins to become a valuable tool for forex traders. This method leverages specific price movements and patterns, known as the Darvas Box, to track

Shares

NFLX Stock Price Falls Despite Subscriber Growth

Yesterday, after the close of the main trading session on the stock market, Netflix reported to investors for the 1st quarter of 2024.

The report turned out better than expected:
→ earnings per share: actual = USD 5.28, forecast = USD 4.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 60% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.