Triple Top Pattern: Definition, Formation, and How To Trade

What Is A Triple-Top Chart Pattern?

A triple top pattern is a bearish reversal candlestick pattern that signals a reversal from an uptrend to a downtrend.

It consists of three distinct peaks, all reaching similar price levels, followed by a breakout below the support level formed at the pattern's lowest points.

This pattern is crucial in technical analysis, as it indicates that the market has tested a resistance level three times without breaking through, suggesting a weakening bullish trend and a potential shift to bearish market conditions.

Identifying Triple Top Patterns

Identifying triple top patterns involves looking for specific characteristics on your charts:

1. Three Peaks: Look for three peaks at roughly the same price level.

2. Resistance Level: These peaks form a horizontal resistance line.

3. Support Level: A horizontal support line forms at the lowest point between the peaks.

4. Decreasing Volume: Volume tends to decrease with each peak, indicating weakening buying pressure.

5. Breakout: The pattern confirms when the price breaks below the support level with increased volume.

Interpretation of A Triple Top Pattern

Interpreting the triple top candlestick pattern involves understanding the significance of each component and what it indicates about market sentiment and price behavior.

Let's break down the interpretation of each element in the triple top pattern:

1. Three Peaks at Similar Levels

The formation of three peaks at similar price levels is the major identification point of the triple top pattern.

Each peak represents a point where the market has reached a resistance level and failed to break through.

• First Peak: The first peak suggests that the price faces resistance at a certain level. However, it might still be seen as a normal pullback in an uptrend.

• Second Peak: When the price rallies again to the same resistance level and fails to break it, traders notice a potential double top pattern. This second peak reinforces the idea that the resistance level is significant.

• Third Peak: The third peak confirms the strength of the resistance level. The market's inability to break through this level three times is a strong bearish signal, indicating that sellers are overpowering buyers at this price point.

This repeated failure indicates that the buying pressure is insufficient to push the price above this resistance.

2. Resistance Level of the Triple Top Pattern

The horizontal line drawn through the peaks represents the resistance level. This level acts as a ceiling that the price cannot seem to break.

It indicates the maximum price the market is willing to pay for the asset during this period. The resistance level reflects a strong ‘sell zone’ sellers outnumber buyers, preventing the price from rising further.

3. Support Level of the Triple Top Pattern

The support level is identified by the lows formed between the peaks. It acts as a floor for the price during the pattern formation.

The support level signifies a price point where buyers are willing to step in and purchase the asset, preventing further decline.

The support level is crucial in a triple top pattern because the bearish signal is only confirmed when the price breaks below this level.

4. Volume Decrease

Typically, the volume decreases with each successive peak. This indicates that the buyers are losing momentum and enthusiasm, even as the price approaches the resistance level.

Low volume during the formation of the peaks suggests that the bullish trend is weakening, increasing the likelihood of a bearish reversal.

5. Triple Top Breakout Below Support Level

The triple top chart pattern is confirmed when the price breaks below the support level, usually accompanied by increased volume. A breakout below the support level signifies that the sellers have gained control over the market.

The increase in volume during the breakout confirms the strength of the bearish sentiment and the validity of the pattern. This breakout is often followed by a significant price decline as the market shifts from a bullish to a bearish trend.

Therefore, the triple top pattern is a powerful bearish reversal signal. It indicates that the market has tested the resistance level three times and failed to break through, showing that the bullish momentum is exhausted.

The decreasing volume and the final breakout below the support level confirm that the sellers have taken control, suggesting a significant downward price movement.

Triple Top Pattern vs Other Trading Patterns

Now that you know what the triple top pattern look like, you must know other patterns that might look similar. Here are some of the patterns that traders confuse with the triple top.

Triple Top Pattern vs Double Top Pattern

Due to the additional peak, the triple top pattern, featuring three peaks at similar levels, is generally more reliable than the double top pattern.

This third peak reinforces the resistance level, indicating a stronger bearish sentiment and a higher likelihood of a price reversal. 

While the double top pattern, with only two peaks, forms more quickly and provides faster signals, it may be less reliable and more prone to false reversals because it has fewer confirmations of resistance.

Triple Top Pattern vs Triple Bottom Pattern

The triple top pattern is a bearish signal formed by three peaks at similar price levels, indicating a potential reversal from an uptrend to a downtrend.

However, the triple bottom pattern is a bullish signal. It consists of three lows at similar price levels, suggesting a reversal from a downtrend to an uptrend.

The triple bottom shows that the market has repeatedly tested a support level without breaking below it, signaling diminishing selling pressure and increasing buying strength.

When Should You Use the Triple Top Pattern?

The triple top pattern is a strong bearish reversal signal, but its effectiveness depends on the market environment. Here's how to use it across different conditions. 

1. Bullish Market

The triple top pattern is most commonly found toward the end of a bullish trend. It signals that the upward momentum is weakening, and a reversal to the downside is likely. 

In this context, confirmation through volume is critical. When the breakout occurs below the support level, a volume spike suggests that the shift from bullish to bearish momentum is valid.

2. Bearish Market

While the triple top pattern is primarily a reversal signal for a bullish trend, it can also serve as a continuation pattern in a bearish market, indicating that the downtrend is likely to continue after a temporary rally.

MACD can be useful in this scenario. If MACD shows a bearish crossover after the third peak, it reinforces that the downward momentum is regaining strength, and the market will likely resume its downtrend.

3. Sideways or Ranging Market

In a sideways or ranging market, where prices fluctuate between support and resistance without forming a clear trend, the triple top pattern can help identify when the market is preparing to break.

The triple top forms as the price tests a resistance level multiple times, failing to break through, which signals the potential for a shift out of the range. 

The confirmation comes when the price breaks below the support level, which could indicate that the market is transitioning from a range-bound state into a downtrend. In this scenario, using RSI and moving averages is helpful.

How to Trade the Triple Top Pattern

Trading the triple top pattern can be highly effective if approached with a clear strategy and a good understanding of the market signals it provides.

Here’s a step-by-step guide on how to trade the triple top pattern:

1. Identify the pattern: The first step is accurately identifying the triple top candlestick pattern. Check the section above to know all the components to look for.

2. Confirm the pattern: Look for decreasing volume with each peak, indicating waning buying pressure. Then, wait for the price to break below the support level decisively.
   A mere touch or slight dip below the support level isn’t enough; the breakout should be clear and preferably accompanied by high trading volume.

3. Enter a short position: Enter the short position as soon as the price breaks below the support level with increased volume. This is your signal that the bearish trend is taking hold.

4. Set a stop-loss level: Place a stop-loss order to minimize your losses if the price unexpectedly reverses and moves above the highest peak.

5. Set a profit target: Determining where to take profits is crucial for a successful trade. So, set a profit target and even consider setting multiple to lock in gains at different stages.

Monitor your trades and make the necessary adjustments. For example, if the price moves significantly in your favor, consider moving your stop loss to break even or just below the entry point to secure profits.

Lastly, exit the trade when the price reaches your set profit targets.

When to Place a Stop Loss for Triple Top Pattern?

Placing a stop loss is crucial for managing risk. Set the stop loss for the triple top pattern just above the highest peak.

For example, if the highest peak in the triple top pattern is $50, place your stop loss slightly above this level, say at $51. This way, if the price unexpectedly rises above $50, your position will automatically close at $51, limiting potential losses.

This ensures that your losses are minimized if the price unexpectedly moves upwards, protecting your capital from significant drawdowns.

How to Set Profit Targets for the Triple Top Pattern?

Setting profit targets involves measuring the pattern's height, which is the distance from the support level to the peaks. Project this distance downward from the breakout point to establish a realistic profit target.

For example, if the distance between the peaks and the support level is $10, and the breakout occurs at $40, set your profit target $10 below the breakout point at $30.

This target is calculated by subtracting the pattern height ($10) from the breakout point ($40), giving you a realistic goal for taking profits.

This method provides a clear and achievable profit goal, helping you maximize gains while managing risk.

What Indicators Work Best with the Triple Top Pattern?

Several indicators can complement the triple top pattern to enhance your trading strategy and confirm potential breakouts.

Volume

Volume is crucial for confirming breakouts. In a triple top pattern, the pattern signals a reversal from a bullish to a bearish trend. Therefore, a significant increase in volume during the breakout below the support level strengthens the validity of the pattern.

To validate the triple top, look for progressively lower volume as the three peaks form, indicating waning buying interest. Once the price breaks below the support level, a sharp increase in volume is key.

This surge confirms that sellers are taking control and that the bearish reversal has a higher likelihood of succeeding.

If the breakout occurs on low volume, it could signal a false breakout, and the pattern may fail.

Moving Averages

Moving averages help identify the overall trend direction, providing context to the triple top pattern.

 In the case of the triple top pattern, moving averages can confirm that the reversal is aligned with the broader market trend. A moving average crossover, especially between short-term and long-term averages, signals a shift in momentum that confirms the pattern’s bearish outlook.

A common approach is to use the 50-day and 200-day moving averages. If the price breaks below the support level and the 50-day MA crosses below the 200-day MA (a bearish crossover), this signals that the downtrend is likely to be sustained.

This crossover is often referred to as a death cross, which provides additional validation that the market is entering a bearish phase.

Relative Strength Index (RSI)

The RSI is a momentum oscillator that measures the speed and change of price movements. It ranges from 0 to 100 and is typically used to identify overbought or oversold conditions.

In a triple top pattern, the RSI helps confirm whether the asset is overbought, signaling that a bearish reversal is likely to follow.

An RSI value above 70 suggests that the asset is overbought, supporting the bearish outlook of the triple top pattern.

Fibonacci Retracement Levels

Fibonacci retracement levels can help identify potential support and resistance areas based on key retracement levels.

These levels are based on the Fibonacci sequence and are widely used to predict where price pullbacks may occur.

Apply Fibonacci retracement levels from the start of the uptrend to the highest peak in the triple top. Once the price breaks below the support level, look for potential targets around the 38.2% or 61.8% retracement levels.

These levels can serve as take-profit zones or areas where the price might pause or reverse temporarily.

5 Mistakes to Avoid When Trading Triple Top Pattern

While trading the triple top pattern can be very beneficial, it can cause major losses if not traded right.

Here are 5 common mistakes to avoid when trading the triple top candlestick pattern:

1. Ignoring the volume: Volume is a key indicator of the strength of a breakout. Ignoring it can lead to false signals. Always check for increased volume during the breakout to confirm the pattern's validity.

2. Entering Before Confirmation: Entering a trade before a clear breakout below the support level can result in premature and unprofitable trades. So, wait for a decisive breakout below the support level with increased volume before entering a position.

3. Setting Tight Stop Losses: Setting stop losses too close to the entry point can result in being stopped by normal market fluctuations.

4. Overlooking Market Conditions: Broader market trends and conditions can impact the effectiveness of the triple top pattern. Always consider the overall market environment and trends before making a trading decision based on the triple top pattern.

5. Neglecting Risk Management: Without proper risk management, you expose your capital to unnecessary risk, potentially leading to significant losses.

Implement a risk management strategy that includes setting appropriate stop losses, determining position sizes based on your risk tolerance, and diversifying your trades to mitigate risk.

Conclusion

The triple top pattern is a powerful tool in technical analysis, signaling a potential bearish reversal. By understanding its formation, identifying it correctly, and avoiding common mistakes, you can enhance your trading strategy and make more informed decisions.