The easily identifiable double-top and head-and-shoulders chart formations are well known patterns for trying to predict trend reversals. Another reversal pattern that shows similar characteristics is the triple-top, triple-bottom formation.
This formation can be understood as a variation on double tops and head and shoulders that presents some of the same telltale signals as those other patterns. Whereas double tops and double bottoms make familiar M and W formations on charts, triple top and triple bottoms will form an extension of those patterns, adding a third price peak or trough before showing a definitive price breakout and trend reversal.
The Triple Top: Descent From The Peaks
Quite often, traders can expect the end of an upward price trend if they spot a double top on the chart. It will appear at the finalisation of an upward price trajectory, where price reaches a point of resistance at the first peak of the formation on the chart.
From there, it can fall back to a level of support that is considered the midpoint of the pattern, and then move to a second peak where a point of market "exhaustion" occurs. At this point, buyers frequently lose conviction about the continuation of bullish conditions, and price often moves on a downward trajectory to break through the previous level of support.
However, there are times when range-bound conditions may momentarily prevail and price rebounds upward for a third try at breaking the previous level of resistance. If this also fails to occur, traders could conclude that they are witnessing a triple top that may prefigure a strong movement downward. Once the price drops to the level of the support line established by the lowest point of the trough in the middle of the pattern, traders will have confirmation that the pattern has been completed. They would then can anticipate a breakout in a downward direction.
Unlike the head and shoulders pattern, which also shows three peaks, the peaks in a triple top will all be roughly the same size. Also, there will not be a larger peak in the middle of the pattern.
The Triple Bottom: Preparing To Climb
The triple bottom is a mirror image of a triple top that can appear at the finalisation of a downward price trend. When a triple bottom forms, price falls to a level of support at the first trough of the pattern on the chart. From there, it will rise back to a level of resistance to form the first peak in the pattern.
After the formation of a second trough, traders would typically expect price to break out on an upward trend. However, the price may peak and extend to a third trough before making a definitive movement upward. If the price rises to the level of resistance established by the highest point of the peaks in the formation, traders will have confirmation that the pattern has been completed. They would then look for a breakout to higher levels.
Multi Top And Bottom Patterns
An extension of triple top and triple bottom formations to so-called multi-top and multi-bottom formations is also possible. While triple tops and bottoms are considered rarer than double tops and bottoms, multi-tops are rarer still.
Identifying And Trading Triple Tops And Bottoms
Repetitions of tops and bottoms are often used to spot trend reversals, but traders will want to use complementary tools to verify that the pattern they're seeing is giving them a signal they can trade on. These can include momentum oscillators and volume signals.
To determine whether a double top may transform into a triple top, analysts can draw a line through the levels of resistance and support extending to the right of the chart. If the price fails to break above the line of resistance at a third peak, traders can expect to see a strong downward movement. They will also have confirmation of a subsequent downtrend once the price falls below the level of support for a third time.
Entering a Short Trade After a Triple Top
Following the formation of a triple top, traders can enter a short trade after the third test of resistance, setting a stop a few pips above that level as a protection against an unexpected reversal. A profit target can be set below support at a distance equal to the height of the triple top pattern.
Trading A Triple Bottom
The procedure for identifying a triple bottom is similar to the procedure for a triple top. Once a double bottom pattern has formed, traders can draw lines extending to the right from the levels of resistance and support established by the initial peaks and troughs of the formation. If price fails to fall below the level of support indicated by the initial troughs in the pattern, traders will have a signal that it is likely to move upward, and will have confirmation of the trend once it moves upward to surpass the line of resistance.
Going Long Following A Triple Bottom
Following the formation of a triple bottom, traders can enter a long trade after the third test of support, setting a stop a few pips below that level as a protection against an unexpected reversal. A profit target can be set below or above resistance at a distance equal to the height of the triple bottom pattern.
The Importance Of Monitoring Volume
As with other reversal patterns, monitoring trading volume will be an important aid to determining the finalisation of a trend and the start of a new one. Traders can and should look for cues found in a decline in volume near the final peaks and troughs of triple top and triple bottom formations to gain confirmation as to whether a price breakout will be likely to ensue. An increase in volume after the conclusion of a price reversal will be confirmation that a new trend has taken hold.
Triple tops and bottoms, like double tops and head and shoulders patterns, are used as indicators that a price trend reversal is at hand. If a reversal doesn't materialise following the appearance of a double top or double bottom, traders will usually see an increasing likelihood that it will occur following the formation of the subsequent peak or trough on the chart.
As with other patterns, traders can be aided by using complementary analysis methods, particularly attention to trading volume, to confirm that the pattern is pointing to a new trend and different price range.
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Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…