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 signals that the asset may no longer be rallying, and that lower prices may be on the way.
Triple tops may occur on all time frames, but in order for the pattern to be considered a triple top, it must occur after an uptrend. However, the opposite of a triple is a triple bottom, which indicates the asset's price is no longer falling and could head higher.
- A triple top is formed by three peaks moving into the same area, with pullbacks in between.
- A triple top is considered complete, indicating a further price slide, once the price moves below pattern support.
- A trader exits longs or enters shorts when the triple top completes.
- If trading the pattern, a stop loss can be placed above resistance (peaks).
- The estimated downside target for the pattern is the height of the pattern subtracted from the breakout point.
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 lows, the pattern is considered complete and traders watch 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 middle peak is nearly 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 high points before falling.
Triple tops are traded in essentially the same way as head and shoulders patterns.
Say a stock's price peaks at $119, pulls back to $110, rallies to $119.25, pulls back to $111, rallies to $118, then drops below $111, that is a triple top and signals the stock is likely heading lower. It would look like the chart below.
Significance of the Triple Top
Technically, a triple top pattern shows us that the price is unable to penetrate the area of the peaks. Translated into real-life events, it means that, after multiple attempts, the asset is unable to 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 can't rise above resistance there is limited profit potential in holding onto it. As the price falls below the swing lows of the pattern, selling may escalate as former buyers exit losing long positions and new traders jump into short positions. This is the psychology of the pattern, and what helps fuel the selloff after the pattern completes.
No pattern works all the time. Sometimes a triple top will form and complete, leading traders to believe the asset will continue to fall. But then, the price may then recover and move above the resistance area.
For protection, a trader could 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 doesn't drop and instead rallies.
Trading Triple Top Patterns
Some traders will enter into 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 following the second peak, or alternatively, a trader could connect the swing lows between the peaks with a trendline. When the price falls below the trendline the pattern is considered complete and a further decline in price is expected.
To add confirmation to the pattern, traders will watch for heavy volume as the price falls through support. Volume should pick up showing a strong interest in selling. If the volume doesn't increase, the pattern is more prone to failure (price rallying or not falling as expected).
The pattern provides a downside target equal to the height of the pattern subtracted from the breakout point. This target is an estimate. Sometimes the price will drop much lower than the target, other times it won't reach the target.
Other technical indicators and chart patterns may also be used in conjunction with the triple top. For example, a trader may watch for a bearish MACD crossover following the third peak, or for the RSI to drop out of overbought territory to help confirm the price drop.
Real-World Example of a Triple Top
The following chart shows an example of a triple top in Bruker Corp. (BRKR). The price reaches near $36.50 on three consecutive attempts. The price pulls back 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 could enter short or exit longs when the price drops below support at $34. A stop-loss could initially be placed just above the major resistance area.
The estimated target for the decline is the height of the pattern, about $3.25, subtracted from the $34 breakout point. Therefore, the target is $30.75. The target was reached before the price started bouncing, although that won't always happen.
Special Considerations for a Triple Top
As with double tops and bottoms, the risk/reward ratio is a drawback of 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.
By placing the stop loss within 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 trendline or the recent pullback low—it is possible to have two profit targets since the height of the pattern can be added to either of these breakout points. Traders can choose which target breakout level they prefer in order to extract more profit from the trade.