What it is, how it works and examples

What is a Triple Top?

The triple top is a type of chart pattern used in technical analysis to predict the reversal in the movement of an asset’s price. Consisting of three peaks, a triple top indicates that the asset may no longer rally, and that lower prices may be on the way.

For the pattern to be considered a triple top, it must occur after an uptrend. The opposite of a triple is a triple bottom, which indicates that the asset’s price is no longer falling and may rise higher.

How a Triple Top Works

The triple top pattern occurs when the price of an asset creates three peaks at nearly the same price level. The area of ​​the peaks is resistance. The pullbacks between the peaks are called the swing lows. After the third peak, if the price falls below the swing low, the pattern is considered complete and traders look for a further move to the downside.

The three consecutive peaks make the triple top visually similar to the head and shoulders pattern; however, in this case the center peak is almost equal to the other peaks rather than being higher. The pattern is also similar to the double top pattern, when the price touches the resistance area twice, creating a pair of highs before falling.

Say a stock’s price hits a high of $119, pulls back to $110, rises to $119.25, pulls back to $111, rises to $118, then falls below $111, this is a triple top and indicates that the stock probably heading lower. It will look like the chart below.

Importance of the Triple Top

Technically, a triple top pattern shows us that the price cannot enter the territory of the peaks. Translated into real events, this means that after several attempts, the asset cannot find many buyers in that price range.

As the price falls, it puts pressure on all those traders who bought during the pattern to start selling. If the price cannot rise above resistance, there is limited profit potential in holding on to it. As the price drops below the swing lows of the pattern, selling can escalate as former losing buyers exit long positions and new traders jump into short positions. This is the psychology of the pattern, and what helps fuel the sale after the pattern is complete.

No pattern works all the time. Sometimes a triple top will form and complete, leading traders to believe that the asset will continue to fall. But then the price can then recover and move above the resistance area.

For protection, a trader can place a stop loss on short positions above the latest peak, or above a recent swing high within the pattern. This move limits the risk of the trade if the price does not fall and instead rises.

Trade Triple Top Patterns

Some traders will enter a short position, or exit long positions, once the price of the asset falls below pattern support. The support level of the pattern is the most recent swing low after the second peak, or alternatively, a trader can connect the swing lows between the peaks with a trend line. When the price falls below the trend line, the pattern is considered complete and a further drop in price is expected.

To add confirmation to the pattern, traders will look for heavy volume if the price falls through support. Volume should pick up and shows a strong interest in selling. If the volume does not increase, the pattern is more likely to fail (price does not rise or fall as expected).

The pattern provides a downside target equal to the height of the pattern minus the breakout point. This target is an estimate. Sometimes the price will fall well below the target, other times it will not reach the target.

Other technical indicators and chart patterns can also be used in conjunction with the triple top. For example, a trader can look for a bearish MACD crossover to the third peak, or for the RSI to fall out of overbought territory to help confirm the price decline.

Real-World Example of a Triple Top

The following chart shows an example of a triple top in Bruker Corp. (BRKR). The price reaches almost $36.50 on three consecutive attempts. The price retreats between each attempt, creating the triple top pattern. The stock quickly broke below trendline support at $34 and continued to decline on escalating volume.

Traders can enter shorts or exits when the price drops below support at $34. A stop loss can initially be placed just above the major resistance area.

The estimated target for the decline is the height of the pattern, around $3.25, minus the $34 breakout. Therefore, the target is $30.75. The target was reached before the price began to bounce, although this will not always happen.

Special considerations for a Triple Top

As with double tops and bottoms, the risk/reward ratio is a downside to these triple patterns. Since both the stop loss and target are based on the height of the pattern, they are roughly equal. Patterns in which the potential profit is greater than the risk are preferred by most professional traders.

Placing the stop loss inside the pattern, instead of above it (triple top) or below it (triple bottom) improves the reward relative to the risk. The risk is based on only a portion of the pattern height, while the target is based on the full pattern height.

Depending on which entry points are used – the trend line or the recent retracement low – it is possible to have two profit targets as the height of the pattern can be added to either of these breakout points. Traders can choose which target breakout level they prefer to extract more profit from the trade.

The Bottom Line

The triple top is used in technical analysis to predict the reversal in the movement of an asset’s price. A triple top occurs when the price peaks, falls back, rallies to a similar peak, pulls back, rises again to a similar high, and then falls again.

A triple top is considered complete once the price moves below pattern support and the trend changes to the downside. Then a trader may decide to exit longs or enter shorts.

The triple bottom chart pattern is an upside down version of the triple top and indicates the end of a downtrend.