The triple top pattern is one of the price action chart patterns that can be used to formulate a trend reversal trading strategy.
In fact, it is a potent bearish reversal chart pattern that can help you get into a new downtrend from the very beginning of the trend, while the opposite, the triple bottom, can help you get into an uptrend quite early.
While the pattern can occur in any timeframe, considering the time it takes to form, you are more likely to see the pattern in an intraday timeframe than in the daily or higher timeframes.
Nevertheless, the pattern is more potent when it is occurring in a higher timeframe or, at least, when the price structure of the higher timeframe is favorable to the pattern.
In this post, you will learn the following:
- What the triple top pattern is
- The psychology behind it
- When the pattern is likely to fail or work
- Different ways to trade the pattern
- Common mistakes to avoid when trading the pattern
What is a triple top chart pattern?
The triple top chart pattern is one of the reversal patterns you will encounter in technical analysis.
It predicts a potential change in the direction of the trend from an uptrend to a downtrend because the bulls are unable to take out a particular resistance level after three consecutive attempts.
To put it in another way, the price advanced to the same level on three occasions, and each of those occasions, it could not significantly move beyond that level.
Instead, it turned and headed downwards, showing that the bulls may have run out of steam and the bears are getting ready to seize control and push the price lower.
Just as the name implies, the triple top pattern consists of three swing highs that ended at or nearly the same price level and two swing lows formed by the retracement of the first and second swing highs.
The two troughs (swing lows) are also around the same level, and connecting them with a trend line extended to the right creates the neckline.
The neckline can either be horizontal if the two swing lows are at the same level or slightly inclined if the two swing lows are not at the same level.
While the top which the price is trying to break has become a strong resistance level, the neckline constitutes a support level.
As the bears are defending the top, so do the bulls defend and launch their assault from the support level.
Thus, the triple top reversal pattern is only considered complete when the price breaks below the neckline, as it signifies that the bulls’ territory has been breached.
There is one thing you should know though; the price rallying to a similar level on three occasions and finally breaking the swing lows does not necessarily imply a triple top, as it could be a temporary range in a downtrend.
As you would expect, for the pattern to be called a triple top reversal pattern, there must have been a preceding bullish trend before the price got held up at a particular level, leading to the formation of the pattern.
The triple top pattern resembles the head and shoulder pattern, in that they both have three consecutive swing highs, but unlike the head and shoulder pattern where the middle swing high is higher the other two, the middle swing ends at about the same level as others in the triple top pattern.
Another chart pattern that is similar to the triple top is the double top, but in this case, the price only reached a similar high twice before breaking below the support and heading downwards.
The opposite of the triple top pattern is the triple bottom chart pattern, which occurs after a downtrend and signals a possible end of the trend, with a bullish reversal around the corner.
Having got an idea of what the pattern is, let’s try to understand why the pattern forms.
The psychology behind the triple top pattern
There are two ways to look at the market psychology behind this bearish reversal chart pattern:
-The battle between the bulls and the bears
-The stage of market cycles
Bulls vs. bears
The obvious thing about the triple top chart pattern is that the price is not able to effectively go beyond a certain high level after making three attempts — whenever the price reaches that particular level, it gets pushed back.
Thus, it’s either the bulls are not aggressive enough to push the price beyond that level or they have simply given up on pushing higher.
Whatever the case, the bears are fully defending that peak level and would even start getting more aggressive after the bulls failed on their third attempt.
In fact, that third rejection at the peak level and the subsequent break below the neckline (which completes the chart pattern) is a sign that the bears are getting bolder and are ready to seize control.
The result is that the uptrend is effectively over and a new downtrend is emerging.
Now, as the price drops further below the support level (neckline), it forces the buyers who bought above the support level to cut their losses and liquidate their long positions — either by manually closing their trades or triggering their stop loss orders. And as you know, those are sell orders.
Moreover, lying below the support level are numerous sell stop orders of traders who want to be in a short position once the price breaks below that level.
In addition, those on the sidelines jump into short positions with new market orders. All these contribute to the significant price drop that is associated with the pattern.
The stage of the market cycle
As you may already know, the market moves in cycles, and there are four stages to a market cycle — accumulation, uptrend, distribution, and downtrend.
The triple top chart pattern is a perfect example of the distribution phase of the market cycle, and here is why :
-It forms after an uptrend
-The price swings up and down without making any significant move on either side
The distributive phase of the market cycle is when the institutional investors — banks, hedge funds, and investment funds — gradually offset their long positions and go short.
At this time, they are no longer buying as they used to during the uptrend, which explains why the buying pressure isn’t strong enough to breach the peak level, as retail traders that are still buying don’t have the force to move the price significantly.
The smart money doesn’t dump their positions at once since it would cause a significant decline in price and reduce their profit — their average selling price would drop.
So, they offset their positions gradually over a period of time. They may even push the price up a bit to lure in more retail buyers that would take their sell orders.
In essence, the retail traders are the weak bulls making the ineffective assaults at the peak level, while the institutional traders are patient bears waiting for the right time to start their offensive.
When those big boys are done distributing their long positions and taking short positions, they push the price below the neckline, thereby triggering a selling frenzy. What you get is a new downtrend.
There is one thing you should note though. As with every technical analysis method, the triple top pattern doesn’t work all the time.
Sometimes, the price can turn and head upwards after the pattern has completed. So, you should always use a protective stop whenever you are in a trade.
When the triple top chart pattern is likely to fail
Of course, the triple top pattern does fail on many occasions — no price action chart pattern works all the time.
But there are ways to know if a triple top pattern is more likely to fail than work. One of the most common ways is to check if the price structure in the higher timeframe is against the bearish reversal chart pattern.
A triple top in a lower timeframe when the higher timeframe is trending up is not likely to work well, because that would mean expecting a bearish signal in a lower timeframe to turn the uptrend in the higher timeframe — simply put, you are going against the main trend.
For instance, if you see a triple top pattern in the D1 timeframe but the W1 timeframe is strongly in an uptrend, you should expect the pattern to fail because it could actually be a consolidation on the W1 timeframe, which is a continuation chart pattern, and the uptrend would eventually resume.
In the EURUSD charts below, you can see a triple top pattern on the D1 chart. When you look at the W1 chart, you will notice that there’s a strong uptrend, and what appeared like a triple top chart pattern on the D1 was just a consolidation on the W1 chart. Moreover, the chart pattern formed right into the uptrend line.
When the triple top pattern has a higher chance of working
Now, let’s see when a triple top pattern is more likely to work. As you would expect, the pattern has a higher chance of working if the price structure in the higher timeframe aligns with the expected bearish reversal price move of the triple top pattern in the lower timeframe.
In this case, the higher timeframe should already be in a downtrend or the distribution phase of the market cycle where a downtrend is expected.
But that is not enough; the chart pattern in the lower timeframe should occur around a resistance level in the higher timeframe.
So, a pullback to a resistance level in a downtrend, which, of course, will appear like an uptrend in the lower timeframe, can create a high probability setup.
For example, assuming there is a downtrend in the D1 timeframe and the price pulls back to a resistance level, a triple top pattern on the H4 timeframe around that resistance level has a higher chance of success because many factors are aligned in the bearish direction:
- A bearish trend
- A resistance level
- A bearish reversal chart pattern
The GBPJPY D1 chart below shows a down-trending market with a pullback to a known resistance level. Notice that the price stalled around the resistance level.
When you step down to the H4 timeframe, you will notice that a triple top pattern formed against that resistance level, and the price started dropping again.
How to trade the triple top chart pattern
To be able to trade this chart pattern, you should be able to identify it on your chart. The pattern consists of three peaks and two troughs.
While the peaks may occur around the same price level, they don’t have to be at the exact same level.
In the same way, the swing lows can be at a similar horizontal level or form an inclined neckline.
There are four ways you can trade the triple top pattern, and each of them has a different risk management approach. They include:
- Shorting the third peak
- Trading the neckline breakdown (downward breakout)
- Shorting the first pullback
- Trading the retest of the breakout level
Shorting the third peak
We know that the pattern completes when the price breaks below the neckline, but if you are the aggressive type, you may try to short earlier — when the price is rejected at the peak the third time. While this may appear more risky, there are many reasons why it can and do work.
First, with two previous swings reversed at the peak level, there is already an established strong resistance at that level. So, there is a high chance that the price will reverse again at that level.
But you don’t just go short at that level; you need to make use of a trade trigger that tells you when to enter a trade. This will increase the odds of your trade.
One of the most effective trade triggers you can use at that level is a bearish reversal candlestick pattern, such as the bearish pin bar, engulfing bar, or inside bar.
So, when the third swing high forms and the price gets rejected at that peak level with a bearish reversal candlestick setup, you may go short at that point.
Another trigger — though rarer but probably more effective — is a false break above that top level.
It is often caused by the institutional traders to lure in buyers so that they can dump the last portion of their long positions and go short.
If the breaks above the resistance level during the third peak and later falls below the resistance level, it’s a good opportunity to go short.
When you are shorting the third peak, you place your stop loss above the highest point of the swing high.
It gives enough room for the trade to work, but if the pattern fails, it gets you out without losing too much.
For your take profit, there are many ways to manage the trade. One common way to do that is to have two profit targets — one before the support level and another at the classical target of the triple top pattern, which is estimated from the height of the pattern measured from the support level.
In the BRKR chart below, you can see that a bearish pin bar occurred at the third peak, showing price rejection at the resistance level.
Although the price advanced towards the resistance level the day after the bearish pin bar, it started dropping the next day. Notice the location of the stop loss and the TP1 and TP2. (TP = Take Profit or Profit Target)
Another way to manage the trade is to have your profit target at the usual level and take your stop loss to breakeven when the price advances to the neckline.
Trading the support break
The triple top pattern is considered complete only when the price breaks below the support level, also known as the neckline, which can either be horizontal or inclined.
A break below the support level is the classical indication to enter a short position with the pattern.
To increase the chances of a successful outcome, you may want to trade only a breakdown that occurs after a buildup at the support level.
While some simply trade the breakdown of the support level, others look for supporting factors to align with the trade direction.
One popular indicator that is used for this purpose is the MACD. You may want to see the MACD line below the signal line and even below the zero level when the price breaks the neckline.
A more important thing to consider is the volume, especially if you are trading exchange-traded assets, such as stocks, futures, and commodities.
You want to see an increase in volume when the price breaks below the support level. The increase in volume is an indication that there is a strong selling interest. If the breakdown occurs without a rise in volume, the pattern may likely fail.
For the stop loss, you can place it some pips above the highs of the buildup — this offers a better reward/risk ratio but may be more risky.
Alternatively, you may place your stop loss a few pips above the resistance level. While this may not offer a good reward/risk ratio, your trade is probably safer.
To estimate your profit target, measure the height of the chart pattern from the breakout level, and project it to the downside.
This is just an estimate; the price may go far beyond it or may not even reach there. So, you should manage your trade accordingly.
The gold chart below shows the breakdown of the support level after a triple top formation.
Notice that the MACD line also broke below the zero level. Note that the price stalled for some time but later descended beyond the profit target.
Trading the first pullback
If you missed the trade when the price broke below the support level, you may still have a chance to enter a trade.
One way to do that is to short the first pullback that occurs after the breakdown, which often looks like a bear flag or pennant pattern.
However, this a very risky way of entering the trade, as the pullback may continue up to or even beyond the breakout level.
With this approach, you enter a trade when the price starts falling again after the pullback.
You can place your stop loss above the high of the pullback. Your profit target should be at the usual estimated target, so you need to consider if the profit potential is worth the risk before making the trade.
In the chart below, you can see a complex triple top pattern. After the price broke below the support level, the first pullback formed a bearish pennant, and the price started dropping again.
Trading the retest of the breakout level
Another method of entering the trade after the breakdown of the support level is to wait for the price to come and retest the breakout level.
This doesn’t happen all the time, so you may actually miss the trade entirely. However, when it occurs, it is a good second chance.
When a pullback gets to the breakout level, the level, which previously acted as a support level, becomes a resistance level, and there is a great chance that the price will turn downwards at that level.
But you don’t just enter a trade once the price gets there. You need to see the price reaction at that level before deciding whether to trade or not.
An obvious price rejection at the retest of the breakout level — as indicated by a bearish reversal candlestick pattern, such as bearish inside bar, pin bar, or engulfing bar — is a good signal to go short.
In this case, you can put your stop loss above the high of the pullback, as it offers a good reward/risk ratio.
Your profit target can still be at the usual place — an estimate of the height of the triple top pattern projected downwards from the breakout level.
In the gold chart below, you can see that a bearish pin bar formed when the price retested the breakout level.
That was a good indication to go short if you had missed the neckline breakdown. Note the position of the stop loss.
Common mistakes to avoid when trading triple top pattern
There are many mistakes traders make when trading this price action chart pattern, which can lead to a lot of losing trades or trading with unfavorable risk/reward ratio. It’s good we discuss them so that you can avoid them. Here are the two most common ones:
Fear of missing out on the move
There are times when the breakdown occurs with a long candlestick that it wouldn’t make sense to enter a trade at the close of the breakout candlestick.
While some people may go ahead and trade it because they are afraid of missing out on the move, it’s better to wait for the price to pull back or even retest the breakout level.
It makes no sense to chase the price lower since you can’t find a good place to put your stop loss without it being abnormally larger than your expected reward.
In addition, the further the price drops with that speed, the more likely there will be a swift pullback — dead cat bounce.
In this USDCAD chart, you can see that the breakout candlestick was too long. Chasing the trade and entering the trade at that point because you don’t want to miss the move would make it difficult to place a reasonable stop loss.
Notice that the price later pulled back to retest the breakout level, presenting a beautiful trade setup. Can you see the inside bar pattern that formed at that breakout level that now acts as a resistance level?
Selling into a support in the higher timeframe
As we stated earlier, it is better to have the market structure in the higher timeframe in your favor.
If the pattern occurs right into the support level in a higher timeframe, it’s best to avoid trading it because the chances of failing are quite high.
In the EURUSD chart below, you can see a blue uptrend line which, of course, acted as a rising support level. The triple top chart pattern completed right into the rising support level.
Final words
The triple top pattern is an effective bearish reversal chart pattern that may signal the end of an uptrend and the beginning of a downtrend.
It is a classical example of the distributive phase of the market cycle and often corresponds with a time when institutional traders are getting bearish while retail traders are getting exuberantly bullish.
There are many ways to trade the pattern; study them and apply the ones that suit your trading style.