The triple top pattern can be described as a bearish reversal pattern used by trading experts and investors to predict a potential reversal from an uptrend. It is usually formed when an underlying asset is experiencing an uptrend but has hit a major resistance level that it test three times only to fail and come back down.
It is important to understand that traders and investors usually interpret the bounce off the resistance close to the third peak as a sign that buying interest is diminishing and that it may be time to look at a short option.
If you have not traded for long, then you will confuse the Triple Top chart pattern with the head and shoulder pattern. Why? They are similar in appearance that is the three peaks of Triple Top appear similar to those of head and shoulder pattern.
The only difference is that the middle peak in a Triple Top pattern is of the same height like other peaks unlike in the head and shoulder pattern where the middle peak is slightly higher than the shoulders or outside peaks.
Triple Top Components
Just like the Triple Bottom pattern, the Triple Top pattern has the following components:
a. Prior trend
Before the chart pattern is formed, an uptrend must precede it
b. Three peaks
The three peaks must be almost equal in height. They should be well spaced and have clearly marked turning points that establish resistance
As the chart forms, volume will decrease. Once the third peak is attained, volume will expand as the pattern experiences a downtrend
d. Support break
It is the lowest point experienced on the chart pattern
e. Support turn resistance
Broken support has the potential of turning into resistance
f. Price target
This refers to the distance between support break and peak. It is measured and subtracted from the support break.
How Triple Top Pattern Is Formed
The first peak of the Triple Top pattern starts to form when a new high of the upcoming uptrend is stalled as a result of selling pressure. This results in the formation of the resistance level.
Due to increasing selling pressure, the price of the underlying asset will fall. This is bound to happen until it reaches support level. One of the leading causes of the above situation is that buyers will be showing renewed interest in the asset.
This creates buying pressure which in turn increases the price of the asset close to the area of resistance. As a result, the sellers will enter the market sending the price of the security plummeting down to the support level.
With time, traders and investors will watch the up and down movement being repeated three times in a row finally giving up on the security. As a result, sellers will proceed to take over resulting in the security trending south.
What you ought to know is that the Triple Top pattern can be quite difficult to spot especially at the initial stage. To ensure that you are able to spot the pattern well, it is wise to be patient. Traders need to wait for the price to move past the resistance level before trading the security.
During the formation of the pattern, the peak should always be marked with declining volume even for other successive peaks. When the pattern is formed, the price will either be based on the distance between support and resistance or on the chart pattern.
It is important to note that it can be quite difficult to identify a Triple Top pattern. If the peaks are within reasonable proximity, then it can be identified as a Triple Top pattern.
With the Triple Top pattern, traders will suspect that the resistance is too much to overcome and will need to look at taking a short position with a stop over the resistance.