Triple Top Pattern Explained
This blog post will cover:
- Triple top pattern concept
- How does it work?
- Looking for the pattern
- Mistakes to avoid
- Triple top versus head and shoulder pattern
Traders have been leveraging price chart patterns to study and forecast price movements in the foreign exchange market for decades. These patterns repeatedly occur in price charts which are data for finding perfect reading opportunities using statistical trends.
A good example of these chart patterns is the triple top, which shows a potential downward movement. Over time, it has been found that this chart pattern occurs less regularly than the head and shoulder pattern. However, considering it before trading can make a difference for traders.
In this article, we will give deep insights into chart patterns to help you understand the core concept and how to use it.
Triple top pattern concept
It is a reversal pattern that shows the end of an uptrend. Triple tops help traders to forecast an upcoming downtrend for forex, crypto, and stock prices. They usually occur as three peaks with matching or near similar price points with areas of constrictions separating them.
When a triple top occurs, it most likely means that the asset’s price is unable to beat the peaks. A possible downward move follows the occurrence of this pattern, causing the price to fall.
How does it work?
Since it’s made up from a previous uptrend, it starts at the lower left bottom and forms three peaks and support and resistance zones at the bottom and top, respectively. With a confirmed downward trend, traders can take a sell trade when the price breaches the support zone.
Basically, this means that the price steadily increases until it reaches a resistance level and drops back into a support zone. Triple tops depict an unsuccessful attempt for the price to escape from the resistance area 3 times in a row.
At this moment, it is safe to say that the market has lost its buying steam. When there’s low buying sentiment, sellers gain full control, resulting in a downslide.
Now we’ll learn some tips on how to indicate the triple top pattern.
Looking for the pattern
When looking for triple tops, it is essential to know that certain elements and factors are needed for the pattern to occur. The elements include:
- Uptrend: Triple tops usually occur following an existing uptrend. It interrupts this trend, resulting in price reversal to the point where the price cannot break out from the resistance zone, eventually falling into the support zone.
- Horizontal resistance: a horizontal line connects the three similar peaks.
- The neckline: It serves as the connecting dot for the swing lows. A break in the neckline signifies the start of the pattern formation.
In addition, other points that traders must consider include the pattern's timeframe, volume, and volatility. It’s essential to think about the timeframe while reading and forecasting future outcomes, as they play a vital role in the prediction’s accuracy.
The volume on the 1st peak of a triple top will usually be raised with a significant reduction in the third. Furthermore, that of the second trough will also be enhanced, and there will be rapid growth at the break. The volatility measures the magnitude of price fluctuation, which should be high for triple tops. This is because it is believed that the coin or asset has ceased to rally.
The ability to spot these in a chart is crucial for a better understanding and analysis of the triple tops. When done correctly, there is a higher chance of making precise, accurate, and on-the-spot predictions.
Following the predictions, the next step is deciding whether it is right or not to trade at this point. However, if the prediction points to the direction of trading, it is crucial to avoid making inevitable mistakes when selling with this pattern.
Mistakes to avoid
The first avoidable mistake is selling too quickly. Sellers gain higher shares in such a market since they control and dictate the prices. Hence, they have this eagerness to start making sales. However, it should be noted that trading too quickly is a high risk, especially when patterns can be recognized easily.
The reason is that the seller might short into a support area where the buying pressure is so high that the prices are further raised. Hence, it is best to start shorting the market only when patterns are thoroughly analyzed and verified.
It is also essential to avoid shorting the market too late. This is because there might be price stagnation or reversal at that point due to the intense selling pressure. Therefore, always study the pattern thoroughly to locate the best entry point.
Total dependence on the break points is another mistake that could cause you loss, hence, it should be avoided. When there is a break in the support zone, it usually signifies the market took a nosedive to the extent that there is a high tendency for pullbacks to occur.
Some traders believe that the best way to execute a triple top trade is to allow the price to retest the breakout point and form a new resistance. You can also check for confluences with price action and technical indicators (if you use any).
Although triple tops are instrumental in market examination and analysis, relying on them may fail you since they rarely occur. There are more frequently occurring patterns that can be used for the market survey, and one of them is the head and shoulder pattern.
Triple top versus head and shoulder pattern
There are similarities between these two patterns. Firstly, they are good indicators for bearish reversal. Also, they have similar trade execution styles since they both show an imminent downward movement due to a break in the support zone.
Traders also make use of the inverted head and shoulder, a pattern that shows an imminent upward move.
Regarding the difference between triple tops and head and shoulders, the former has a middle peak that is nearly at the same level as the flanking peaks. On the other hand, the latter’s middle peak is considerably higher than the flanking peaks.
Overall, traders with the right experience can use both patterns to their full advantage; however, they must maintain proper risk management.
The triple top pattern is basically a competition between the bulls and the bears, in which the latter comes out victorious.
While it might be a rarely used pattern, understanding what it is all about will help traders and investors who are looking for the best trade opportunities to make profits.
SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.