What is Triple Top chart Pattern?
Triple Top is a chart pattern, formed by price action, with three swing tops placed side by side, almost at the same level. It is quiet profitable reversal chart patterns. It is very reliable with 50-60% probability. This is created in an uptrend when the price hits a resistance level thrice and reverses to continue in a downtrend.
They are the pressure areas in a stock chart, which may be a major resistance area, or it may even be a major target area. Here most traders having long position book profit. And selling for short trade begins. The trend changes from uptrend to downtrend. The resistance trend line of this pattern is an almost horizontal line connecting the three swing tops of the pattern.
It is so named because the pattern has two swing bottoms and three swing tops. Hence the name Triple Top Chart Pattern.
Trend is your friend. Dance with the friend. Tune to the trend.
There are two great forces which move the price up and down. They are demand and supply. Triple Top is the result of systematic and rhythmic increase in supply over demand for the stock.
The whole formation is similar to Double Top formation. But the price swing drama is repeated once more to create one more swing bottom and one more swing top.
In an uptrend the price keep making higher high swing highs and higher high swing lows. As the target area or the resistance area is approached there is increased selling. As the supply increases the price falls down forming a swing high. This swing high forms the first swing top of triple top chart pattern formation.
Because of increase in supply over demand for the stock, the price falls. When price fall considerably, buying continues because it is a bargain price to buy at a lower level in view of previous price rise. So there is an increase in the demand for the stock and the price rises. This price rise creates the first swing bottom of this pattern.
Although many traders are buying and the price is rising, it is not backed by smart money. Major funds are not buying. Instead they are interested in selling at this level. This time the price does not rise much above the previous swing high. It does not make a higher swing high. Rather it just rises to the level of previous swing high which is the major resistance level.
Here the supply again increases and the price swings down forming the second swing top of this triple top chart pattern. This falling price exhausts at a level and moves up again, making second swing bottom.
The rising price hits the resistance for the third time. It fails to penetrate it. All the traders who were bullish have now turned bearish. Those who held long position have unloaded their position. Plus short selling also starts. Now for the last time price falls to make the third swig top of this triple top chart pattern formation.
A trend line connecting the highest points of these swing tops and extended to right forms the resistance line for this pattern.
Between these three swing tops there are two swing bottoms. A horizontal trend line drawn at the lowest point of these swing bottoms, forms the support line for this pattern.
Study the chart given below.
This chart shows a Triple Top Chart Pattern which is the bearish reversal pattern in an uptrend.
Pattern trading is one of the strategies of making money in stock trading. Among the chart patterns Triple Top chart pattern formation gives us the opportunity to cover our long position and enter a short trade. Though they are rare patterns, these trades will have high rate of success.
What is invisibly going on in the market is very well expressed on the visible chart. The first top is higher high swing high with higher high swing low. This is in tune with an uptrend. But unusual increase in volume at this level should rise suspicion of heavy unloading of stock. It is easy to distribute great quantity of stock in a bullish trend.
The failure of second swing top to form higher high swing high at the level of the previous resistance, tells us that the price rise has arrested. If the resistance is strong enough to stop the further rise of the price, it is an indication that bears are active behind the screen. If the price faces resistance, it should alert the formation of two tops. The price falls down.
Now the price instead of falling below the previous swing low, it starts rising making one more swing bottom. Here the possibility are-
When the last possibility becomes true, now all the buyers are exhausted, the price falls and breakout below the support trend line of this pattern. Here the price drops below the previous swing low and a lower low swing low has formed. Now a downtrend begins. By definition downtrend is marked by lower low swing lows and lower low swing highs.
The moment you see a stock making a triple tops chart pattern cover all your long position and get ready to go short below the support line drawn below the low of the two swing lows. A close below the support trend line is a sell signal to go short. Protect this short trade by placing a stop loss buy order above the resistance trend line of this triple top chart pattern.
Once the price breaks down below the support line, many a time it pulls back to test the support turned resistance line. Those stocks which does not pullback after a breakout perform better than those which do pull back. Stocks which breakdown with heavy volume do better than those which breakdown with low volume.
If the price pulls back and falls, move the stop loss buy order to just above the swing high formed when the price falls after pull back.
The minimum target for this short trade is equal to the range of the pattern. That is the height from the support line of the pattern to the resistance line of the pattern, applied below the support line from the break down point. Though this is the minimum target, many times the reward will be many times this which increases the risk to reward ratio.
The three swing tops need not be exactly at the same level. A difference of up to three percent, is considered as acceptable.
There are many more chart pattern formation used in pattern trading. Some of them are listed below. You may click on the name of each chart pattern listed below to learn and understand more about them.
Continuation Chart Patterns