What is a Triple Top?
The triple top pattern is a type of chart pattern used in technical analysis to predict the reversal of an uptrend. The 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.
Triple tops may occur on all time frames, but in order for it to be considered a triple top the pattern must occur following an uptrend.
How a Triple Top Works
The three consecutive peaks make this pattern visually similar to the head and shoulders pattern, but in the case of the triple top, the middle peak is nearly equal to the other peaks rather than being higher. The pattern is also similar to the double top pattern which is when the pattern touches the resistance area twice (instead of three times) before falling.
The pattern is showing that the price is unable to penetrate the area of the peaks. After multiple attempts, the price was unable to find many buyers in that area. 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 being long. 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 a further price drop is coming. The price may then rally and move above the resistance area.
- 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.
- Trader exits longs or enters shorts when the price breaks below support.
- 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.
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).
If entering short, an initial stop loss can be placed above the most recent peak.
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.