A triple-top reversal is generally viewed as a bearish chart formation that can help identify shorting opportunities. Typically, the triple top can uncover a reversal of a bullish trend, highlighting opportunities to go short on a breakout towards the downside.
As the name suggests, three peaks are created at around the same price level. Coming in the aftermath of a pronounced uptrend, the second peak tends to show that sellers are beginning to gain control, as an area of price resistance becomes more established.
Once the price fails to break through the same peak level on a third occasion, and subsequently retraces, there is even firmer evidence in place of strong price resistance at this level.
A horizontal line can be drawn through the points of the three peaks, representing the area of price resistance. Similarly, another line can be drawn across the bottom of the formation, using the lowest price points created by the price retraces within the triple top pattern.
A sharp down price movement may take place once the price breaks through the lower support level of the formation. A breakout below the lower support level should be accompanied by higher volumes.
Traders tend to implement sell orders just below the lower horizontal line of the triple-top pattern to take advantage of a sharp fall in the price.
Trading the triple top
As an example, suppose we are tracking the FTSE 100 index. In line with a recent bullish trend, we see the FTSE climb to a peak of 7,700 points. We subsequently see the price retrace relatively sharply over the next couple of weeks, bottoming at 6,900 points. However, the price then rallies quite sharply to hit 7,700 once again.
Following this, we see a retrace to 7,300 and some zigzagging but subsequently the index rises back to 7,700, creating the third peak at the same level in our triple-top pattern. The FTSE 100 then falls sharply, in a near vertical decline on higher trading volume.
We have initiated a sell order at 6,800 points, just below the 6,900 price level denoted by the lower support line of the formation. We exit the trade four days later, extremely pleased with the result, when the FTSE has met our profit target and is at 6,100 points.
The usual way to calculate a profit target for a triple top is to subtract the height of the pattern from the breakout price level.
In this case, the height of the pattern is: 7,700 – 6,900 = 800
Our profit target is therefore: 6,900 – 800 = 6,100.
As always, it’s important to implement a stop-loss order for the trade to guard against losing money on a false breakout.
We could choose to be conservative by putting on a stop loss just slightly above the breakout level, perhaps at 7,000. Alternatively, we could choose another point in the pattern, where we saw some consolidation, say at 7,300.
If we wanted to give ourselves more leeway, we could even set the stop-loss order at 7,700, which has been firmly established by the triple-top pattern as an area of formidable price resistance.