DEFINITION of 'Triple Top'

The triple top pattern is a type of chart pattern used in technical analysis to predict the reversal of a long-term uptrend. The pattern occurs when the price of a security creates three peaks at nearly the same price level. The bounce off the resistance near the third peak is a clear indication that buying interest is becoming exhausted, which leads many traders to predict that a long-term reversal is about to occur.

BREAKING DOWN 'Triple Top'

The three consecutive tops make this pattern visually similar to the head and shoulders pattern but, in this case, the middle peak is nearly equal to the other peaks rather than being higher. The pattern is also very similar to the double top pattern, whereby the security only rises to re-test its prior highs one time before breaking down. The key difference between the double top and triple top is that the double top pattern doesn't have enough bearish volume following the second peak, which leaves room for bulls to make another attempt to breakout to new highs.

Here's an example of a triple top pattern:

Example of triple top chart pattern.

In the above example, the price reaches about $36.50 three consecutive times without breaking out, forming a triple top chart pattern. The stock quickly broke down below key support levels at $34.00 to a low of around $30.00 before rebounding. 

Trading Triple Top Patterns

Many traders will enter into a short position once the price of the asset falls below the identified support level, which is often created by connecting the reaction lows during the time that the pattern forms. For example, the support level in the chart above would have been around $34.00. A short position entered at the price and exited at $31.00 would have generated an 8% profit in just a few sessions. Traders may also place a stop-loss for the short sales just above the three peaks in case the stock was to quickly reverse direction.

Traders will also look for low volume during the three peaks - suggesting that bulls have little momentum - and heavy volume during the final breakdown as bears pick up momentum. These trends are also apparent in the chart above where there's little bullish volume and significant bearish volume leading up to February 12 when the stock began to rebound. Other technical indicators and chart patterns may also be used in conjunction with the triple top to provide confirmation of a bearish trend lower.

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