Understanding Triple Top Patterns

The triple top pattern is a bearish reversal pattern with three distinct peaks, signaling the end of an uptrend and the start of a downtrend.

A triple top pattern is a stock chart pattern used in technical analysis to identify a bearish trend reversal. It appears in various financial markets, making it useful when swing trading assets such as stocks, forex, or cryptocurrencies.

Put simply, it’s the inverse of a triple bottom pattern. Unlike a triple bottom pattern, which appears after a downtrend, a triple top pattern follows an uptrend. It contains three peaks or tops around the same price level, with two troughs or pullbacks in between. The pattern concludes when the price breaks below the support level, signaling a further decline.

Suppose a stock’s price peaks at $100 and falls to $90. This process then repeats, with the price rallying to $99, pulling back to $91, rallying to $98, and dropping below $90. This price action forms a triple top pattern, as the price pulls back from the resistance level three times before falling below the support line.

The triple top chart pattern can help investors identify bearish trend reversals. Let’s analyze triple top stock patterns, how they work, and critical trading considerations. We’ll also explore how Composer’s trading platform can empower your triple trade strategy.

How does it work?

Triple top pattern formation occurs when sellers take control of price action from buyers. The pattern forms when the price hits a resistance level, pulls back, and retests this process twice, creating three peaks. The peaks often decline over time as upward momentum slows and downward pressure increases.

Buyers will begin selling if the price can’t break through the resistance level, as the asset has limited profit potential. Once the price drops below the pattern’s swing lows, selling intensifies as bullish traders exit their positions and bearish investors enter short positions.

The main components in triple top pattern formation include the following:

Three peaks

With its three distinctive peaks, the triple top resembles the head and shoulders pattern, another popular bearish candlestick pattern. Unlike the head and shoulders, each peak in the triple top forms at roughly the same price level.

Troughs

Intermediate troughs separate each peak in the triple top pattern. These troughs form around the same price level, known as the neckline. The troughs between the peaks indicate a support level, as bearish price action could not push the price further down after each peak.

Resistance level

The resistance level is the line connecting the three peaks in the triple top pattern. This line serves as a barrier preventing the price from rising further. Each successive peak solidifies the barrier, making a breakout increasingly unlikely.

Volume

Typically, trading volume declines during a triple top pattern. In some cases, volume increases briefly during the troughs but diminishes overall as the pattern progresses. Decreased volume indicates weakening price momentum, reinforcing a bearish reversal. Volume usually spikes after the breakout below the support level, signaling the start of a downtrend.

Neckline

The neckline connects the troughs in the triple top pattern. This line represents a critical entry and exit point in the pattern. Many traders use the neckline as a trigger for stop-loss orders or a signal for buying puts and selling short.

Reversal Signal

Most traders recognize the triple top pattern as a bearish reversal signal. Its three peaks and declining volume suggest a weakening uptrend, indicating a subsequent price reversal. This pattern helps investors make informed decisions, making it an essential indicator in any trading strategy relying on technical analysis.

(Ready to discover how to trade triple top patterns with confidence? Head to Composer, and start a free 14-day trial today.)

Importance of a triple top pattern

The triple top pattern holds significance for investors because it offers insight into market forces. By demonstrating that the price can’t breach the resistance level, the triple top pattern confirms that the asset doesn’t have enough buyers in that price range.

Traders predict future reversals by recognizing this pattern. Those who recognize triple tops early have time to adapt their strategy. With this knowledge, traders can limit losses, capitalize on potential price movements, and better manage risk.

Although relatively rare, you can find numerous real-world examples of triple top patterns. For instance, between May 24, 2022, and August 4, 2022, Tesla (TSLA) rose in price from $209.39 to $308.63 per share. A triple top pattern formed between August 4, 2022, and September 20, 2022, with three distinct peaks separated by declining troughs. After the price broke below the support level at $265.25 per share on September 30, 2022, TSLA’s price fell to $109.10 per share by December 27, 2022.

Trading triple top patterns

Traders use various systemic investing strategies when trading triple top patterns. Some top methods include:

Entry points

Well-timed entry points can maximize your profit and limit your losses. When you spot a triple top pattern, look for entry points when the price breaks below the neckline. This breakout often confirms the pattern’s accuracy and signals a future downtrend. With the downtrend verified, you can implement your entry strategy, whether that means buying puts or selling short.

Stop-loss placement

If you buy long and spot a triple top pattern, you should leverage stop-loss orders to safeguard your profits. Stop-loss orders at or below the pattern’s peaks protect your capital if the price reverses.

Profit target

Most experienced traders set price targets for when they should collect profits. You can estimate your triple top price target by calculating the distance between the pattern’s top and neckline. Project this measurement down from the breakout point for your potential profit target.

Confirmation indicators

Although a triple top pattern may identify a coming downtrend, you should confirm the reversal with other technical indicators. Popular indicators include moving average convergence divergence (MACD), stochastic oscillators, and relative strength index (RSI).

Monitoring volume

You’ll ascertain a triple top pattern’s validity by monitoring the trading volume. Declining volume during the pattern’s peaks indicates weakening bullish momentum, and increasing volume after the breakout strengthens the pattern’s bearish prediction.

Risk management

Proper risk management protocols protect your capital and help you avoid unnecessary losses. When designing your risk management strategy, consider your position sizing, risk-reward ratio, price targets, and stop-loss orders. Try backtesting your strategy in a paper trading account for added practice and security.

Analysis considerations for a triple top

Always confirm a triple top pattern before you begin trading. Avoid entering short trades too soon, as the price may recover above the support level shortly after breaking through. At the same time, overreliance on lagging indicators may mean you miss your entry point, resulting in reduced potential profit.

Pattern identification is not an exact science; recognition differs based on individual interpretation. Multiple clustered peaks can make identification difficult, as can inconsistent price levels. Use various time frames during your analysis, including intraday and long-term charts, to help you during this stage.

During the pattern’s formation, volume analysis and technical indicators provide valuable insight into the market dynamics behind the scenes. Look for bearish MACD crossovers after the third peak and for RSI to drop below 70 (overbought), as these signals strengthen a triple top pattern’s validity.

Trading using technical indicators made easier with Composer

Composer’s revolutionary platform offers a no-code solution for complex trading, providing an easier way to analyze chart patterns and design a triple top trading strategy.

Whether you are a beginner or an experienced trader, Composer’s automated trading strategies can enhance your investing potential. Plus, our dedicated user forums make sharing and learning techniques and tips easy.