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This is one of the more popular bearish reversal patterns in technical analysis.
In the world of technical analysis, traders and investors are always looking for reliable patterns and signals that can provide them with an edge over others. Amongst the plethora of knowledge that already exists in this realm, traders are always looking for precise technical signals that work more often than not — like the triple top pattern.
The triple-top chart pattern shows market psychology and price action’s complexity. This pattern helps traders predict price reversals accurately and securely.
This article will examine the Triple Top Pattern’s mechanics why it’s so important and how it can be used to generate strong technical signals. Skillfully identifying the triple bottom chart pattern is timeless for investors and traders alike.
What is the triple-top pattern?
The triple top is a candlestick pattern that’s used frequently in technical analysis to identify a movement reversal – from a bullish to a bearish sentiment. The TTP consists of three peaks and its occurrence might signal that the price rally may no longer continue or that price dips might be imminent.
However, there are requirements. Triple tops must follow uptrends. Triple bottoms signal downtrend-to-uptrend reversals.
What does it look like?
The triple t chart pattern occurs when an asset’s candlestick price has three peaks at about the same level. These peaks are dubbed resistance because the market ‘resists’ further price appreciation there.
The prices drop after each high before rising again. Intermediate pullbacks are swing lows. The pattern is complete if the pullback following the third peak falls below all swing lows. Then traders expect the price to decrease and reverse.
How is this different from other patterns?
- The head and shoulders pattern – The head and shoulders is quite similar to the triple top. However, a subtle difference between the two is that for the latter, the middle peak is created right around the same level as the other two. In the former, however, the middle peak is a tad higher.
- Double top – The triple top is the three candle pattern which has three consecutive peaks at the same level and a pullback, unlike the double top, which only has two followed by a pullback
Analysing the triple-top
Here’s what each stage in the triple top means from a trading perspective:
- The first peak is usually created when the price rallies in a bullish movement and hits a strong resistance level somewhere on the way to the top. It eventually falls into a support area which forms the basis for further pullback references.
- The next step is another rally that goes right up to the last peak but doesn’t break the resistance. The resistance wins and the price falls back to the previous pullback support.
- The third stage occurs when the price tries yet again to break the resistance but can’t. However, this time, the pullback is stronger. If this pullback falls below the support levels of the previous two dips, the pattern is said to have been completed.
Prices constantly testing resistance and support levels are believed to represent a tug of war between buyers and sellers. The market usually views significant selling pressure as bearish after buyers fail to break resistance levels for the third time. Due to a shortage of consumers in that price range, selling pressure drives the price down with large volume.
Trading with the triple-top pattern
Trading on the triple top usually occurs after the pattern is completed and the retreat breaks support. Traders usually short or exit long positions at breaks. Other traders may wait until a trendline connecting the prior two pullbacks supports breaks.
Hence, there are two main ways of entry into the triple-top pattern:
- After the breakout candle closes below the last pullback support (also known as the ‘neckline’)
- After the broken neckline is retested
Using a stop loss – SL placements are crucial in trading patterns. Since no pattern is always correct, risk management is essential when trading. These large stop losses are above triple-top resistance levels. This will reduce short losses if the pattern fails and the price rises.
Booking profits – There is a popular approach to determine where to book profits when trading triple tops. Project the same length downward from the breakout point as the pattern height. Profit booking could occur at the end of this line.
Looking for volume – Look for high volume as the price falls below the support to confirm the pattern. Selling volumes usually rise as support breaks. Without volume growth, the pattern may fail.
Conclusion
Price trends are obvious on two-minute charts for intra-day trading and monthly charts for retirement portfolios. Remember that technical analysis is not science. Despite your good study and everything going in the right direction, the market may change course without reason.
While losses are unavoidable, adopting many indicators and metrics to track market changes can improve your odds. Never relying on one pattern (even the triple top) and risk management can help your pocketbook!
FAQs
The Triple Top pattern is a reliable technical analysis tool used to predict a bearish reversal in a stock’s price. It’s characterised by three peaks at nearly the same level. However, its reliability depends on the market context and confirmation through a significant break below the support level. Like all trading patterns, it should be used in conjunction with other indicators for increased accuracy.
The time frame for a triple-top pattern can vary significantly depending on the chart being analysed. It can form over a few weeks to several months or even years. The key is the pattern’s structure of three distinct peaks at a similar price level. However, longer time frames typically provide more reliable signals, as they reflect more sustained trading behaviour.
After a triple-top pattern, a bearish reversal typically follows. This is signalled by a significant break below the support level, which was previously the lowest point between the three peaks. The price is expected to drop approximately the same distance as the height of the pattern. However, it’s crucial to confirm this with other indicators and market context for more reliable trading decisions.
The Bullish Flag pattern is a chart pattern that occurs when a stock sharply rises in price, followed by a sideways or downward trend (the ‘flag’), and then continues to rise. The initial sharp rise forms the ‘flagpole’. This pattern is seen as a continuation pattern, with the breakout from the flag signalling a likely continuation of the prior uptrend. It’s considered a bullish signal in technical analysis.
A failed Bullish Flag pattern occurs when the price does not follow the expected uptrend after the flag formation. Instead of breaking out above the upper trendline of the flag, the price breaks down below the lower trendline, invalidating the pattern. This unexpected price movement can be due to various market factors and it’s a reminder that no pattern provides a guaranteed outcome in trading.
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