Last Updated on 17 November, 2020 by Samuelsson
There are many chart patterns that are believed to signal an imminent market move. One such pattern is the triple top chart pattern.
A triple top is a bearish reversal chart pattern that signals that buyers are losing control to the sellers. Thus, it’s commonly interpreted as a sign of a coming bearish trend.
In this complete guide to the triple top pattern, you’ll learn the common interpretation of the pattern, as well as how you may go about to improve its performance.
Triple Top Definition- What is the Triple Top Pattern?
As its name implies, a triple top chart pattern consists of three tops that occur after a bullish trend, signaling that the market is about to turn bearish. A perfect triple top is supposed to have three peaks at the same level, implying that the market didn’t have the strength to break through the previous highs. However, in most real cases you will see that the tops may not be aligned perfectly which is perfectly fine as well.
As you see in the image below, the triple top, in fact, creates a consolidating price range.
Once the price breaks down below the consolidation range, which is drawn as a line that connects the two lows of the pattern, we get a breakout signal according to the traditional interpretation.
And as we’ll see soon, it might be a good idea to go for such a trade, for several reasons.
Psychology of Triple Tops
When a market forms a chart pattern like the triple top, it tells us something about the market and its current sentiment. And knowing what lead a market to perform as it did, may provide valuable insights that can help your trading!
So, let’s just briefly cover the trading psychology behind the triple top pattern!
1.The First Top
At first, the market is in an uptrend which means that bullish market sentiment is dominant. Most traders believe that the market is headed higher, and subsequently place buy orders that push the market higher.
Soon the market enters a pullback, which isn’t deemed strange by most market participants. After all, all trends have some pullbacks, and they are simply signs of a healthy market.
2. The Second Top
Having been in a pullback for some time, most market players now believe that it’s probable that the market is going to continue in the direction of the bullish trend. In other words, they expect the market to make a new high.
However, as the market approaches the last high, selling pressure starts to set in which keeps prices from going any higher. Market participants are simply becoming increasingly worried that the trend, which has lasted for quite some time now, soon will turn around.
Following this, the first top gets accompanied by a second top when the market once again recedes due to an increase in sell orders.
3. The Third Top
As the market falls from the second top, more fear is setting in that the market doesn’t have what it takes to push prices further up.
Still, quite some traders are watching the support area around the low of the previous pullback. This results in waves of buy orders entering the market as it approaches these levels and once again pushes the market up to attempt a third breakout.
However, upon approaching the resistance level around the previous two highs, we once again see how selling pressure sets in which leads to a third pullback.
4. The Breakout
Now that buyers have gotten three chances to push the market in the direction of the preceding trend and failed each time, it’s becoming increasingly clear that there simply isn’t enough optimism in the market to make it climb higher.
Realizing this, more market players turn bearish and decide to sell their positions, and the sudden increase in selling pressure makes the market go below the previous low. Upon noticing this, more traders decide to get out of their long positions, which further fuels the downturn. And as the market sentiment turns more bearish we soon have a fully developed bearish trend.
Do Triple Tops Work?
There are many chart patterns in trading that are believed to signal different things about a market. However, in our experience, many don’t work that well.
However, we’re still confident that the triple top pattern can be applied successfully to some markets and timeframes! The absolutely best way to find out where it works is through backtesting.
How to Trade Triple Tops
Having covered the psychology behind a triple top, we thought that it might be good to have a look at how you can go about to trade the pattern. There are a lot of things you need to be aware of, especially when it comes to avoiding false breakouts that may hurt your trading performance significantly.
In fact, you will find that many times what appears to be a triple top, instead ends as a continuation pattern where the market takes off to the upside.
Other times you’ll see how a market produces a false breakout following the three tops, and then just continues to go sideways in the trading range for a long time.
Now, in this part of the guide, we’ll cover some methods you could use to improve the accuracy of the triple top pattern and avoid these false signals.
Just remember that all markets and timeframes don’t work the same way and that you will have to adapt your approach to the market you’re working with
Having said this, let’s dive right into the tips we’re talking about!
1. A Retest of the Breakout Level
A triple top isn’t complete before the market has turned below the breakout level. And while it might be easy to spot a breakout, you don’t know if the market just is going to snap up quickly again, or continue falling.
One way to combat this issue could be to demand that the market moves a certain distance below the breakout level.
However, this means that you’ll have to use a big stop loss, since there is a great likelihood that the market will retest the breakout level.
So what could you do instead?
Well, you could just wait for the market to approach the breakout level again, and go short as soon as you spot some sign of weakness. For instance, you could look out for specific bearish reversal candlestick patterns such as the Doji or bearish engulfing.
Below you see how the market retested the breakout level in the pullback following the breakdown below the triple top pattern.
2. Lower Highs?
As we covered in the section on the psychology of the pattern, the three tops occurring around the same level signal that there wasn’t enough bullish strength to drive the market higher.
Now, a triple top will very seldom be perfect, in the sense that all three tops occur at the very exact same level.
In fact, this is something we could take advantage of, to gauge the positive or bullish sentiment of the market.
For instance, if the last top is lower than the first one, it shows that selling pressure was quite high, since buyers couldn’t even manage to bring the market up to its recent high. Thus, this might be a bullish sign.
On the other hand, if the last top is slightly higher than the two previous peaks, this is telling us that bulls still were in for the fight. Thus, this might be a sign that the pattern is not as reliable.
3. Volume at Tops and Bottoms
Another powerful method that we use in a lot of our strategies, is to watch the volume before taking a trade. Volume tells us how many traders and big institutions that took part in forming the market moves we see.
For instance, if volume is high, it tells us that many traders and most probably big players find it interesting to enter or exit the market at the current price level.
So, to make it all clearer, we’ll use numbers to define the bottoms and peaks of the pattern, and then discuss whether we’d like to see high or low volume for each!
Top 1: Here we’d preferably like to see high volume, since sellers should step in and push the market lower
Bottom 2: As long as the volume isn’t as high as in the peak, it should be fine. We don’t want to see too much engagement from the buyers!
Peak 3: Same as for top 1.
Bottom 4: Now it’s desirable to see that volume is getting lower compared to bottom 2. This further shows that buyers aren’t ready to push prices higher!
Top 5: Now we’d like to see the lowest volume of the three peaks, which tells us that there really are no buyers left who stand in the way for the coming breakout to the downside.
While the volume conditions above may seem sound, we want to once again point to the importance of always ensuring that the rules you use are compatible with your market. This is best done through backtesting.
4. Adding Distance to the Breakout Level
Now, as you know by now we’re in essence waiting for the market to go below the line we’ve drawn by connecting the three bottoms with each other, which is our breakout level.
In many cases, we’ll get a lot of false signals where the market just slightly goes below the breakout level only to recover shortly thereafter.
Now, in situations like these, we may add some distance to the breakout level, to ensure that we don’t get as many false breakouts. Typically, you just add a distance like the average range, to the breakout level. That way you run a smaller risk of getting a false signal, where the breakout level is breached only slightly.
For those who are interested in learning more techniques to combat false breakouts, we recommend that you have a look at our big guide to breakout strategies!
Triple Tops vs Head and Shoulders Pattern
If you know the head and shoulders pattern, you might have been able to notice that the triple top is quite reminiscent of that pattern, both in terms of appearance and meaning.
For those who don’t know, the head and shoulders pattern consists of three peaks and signals a reversion of the current bullish trend. In that sense, it’s the same as the triple top pattern.
However, where it differs, is in the height of the three peaks, which also has some impact on the forming process of the pattern. To keep it short, the head and shoulders pattern consists of a high, that’s followed by a higher high, which in turn is followed by a lower high. As you see in the image below, this makes the pattern resemble a pair of human shoulders.
Now, this also means that the market psychology of the pattern is slightly different.
In the case of the triple top, we start to see that the bullish trend is abating already as the market forms the second high of the pattern.
However, in the case of the Triple Top, the second high is higher than the first one, thus appearing to be part of the ongoing trend. It’s first as the third high closes lower, that we start to notice that bears have taken the lead.
All in all, this makes the head and shoulders pattern somewhat more sudden, since buyers were taken by surprise by the sudden shift in market sentiment. This will make some traders argue that the head and shoulders pattern is more reliable than the triple top.
Still, it remains a fact that both are quite similar, and if used right, there shouldn’t be too much of a difference between the two!
In this guide to the triple top pattern, we’ve have a look at the definition of the pattern, as well as a couple of ways you could go about to distinguish those patterns that work from failing ones. We’ve also covered the main differences between the triple top and the head and shoulders pattern, and concluded that there isn’t that much that sets the two apart.