How to Trade The Triple Top
14:13, 27 September 2023
Welcome to Part 5 of our 7-part Power Patterns series. In this series, we'll be equipping you with the skills to trade some of the most indicative price patterns which occur on any timeframe in every market.
This week’s pattern, the Triple Top is a reversal signal that applies just as well to lower timeframe day trading as it does to higher timeframe swing trading.
We’ll teach you:
- What makes for the perfect Triple Top.
- The indicator which best complements this pattern.
- An entry technique that can help to optimise your potential risk / reward.
I. Understanding the Triple Top:
Here’s the key characteristics that make for a perfect Triple Top reversal pattern:
Uptrend in Progress: The Triple Top reversal pattern usually forms after an extended period of rising prices, indicating that buyers have been in control for some time.
Three Peaks: As the name suggests, this pattern consists of three peaks or highs that are roughly equal in height. These peaks are separated by minor retracements or consolidations but should occur at approximately the same price level.
Neckline: The line connecting the lows between the three peaks is called the "neckline." The neckline can act as a level to watch for confirmation of the pattern. However, when trading this pattern on lower timeframes you may not have the luxury of a picture perfect upward sloping neckline.
The Triple Top:
II. Using the RSI for Triple Top Confirmation:
Using negative divergence on the Relative Strength Index (RSI) indicator can be a valuable confirmation tool for a Triple Top reversal pattern because it provides additional evidence of weakening bullish momentum.
Negative divergence on the RSI occurs when the RSI indicator forms lower highs while the price forms equal or higher highs. In other words, there is a disconnect between price action and RSI momentum.
This divergence suggests that the strength of the bullish momentum is waning, even though the price continues to make new highs.
Using the additional confirmation of RSI divergence strengthens the case for a potential trend reversal, as it suggests that not only is the price encountering resistance but also that the underlying momentum is weakening.
At this point it's worth noting that whilst the Triple Top has the alliteration, the Triple Bottom is just as effective.
Eagle-eyed readers may have already noticed that the EUR/USD chart we’ve used also contains a Triple Bottom reversal pattern at the bottom left of the chart. RSI divergence can also be applied to the Triple Bottom.
Tiple Bottom, Triple Top and RSI Divergence:
III. How to Trade the Triple Top:
There are two approaches to trading the Triple Top reversal pattern, standard and aggressive, depending on your trading experience and willingness to anticipate the pattern forming:
METHOD 1: Standard Entry
Enter on Break of Neckline: Being patient enough to wait for a break and close below the neckline is crucial because it will ensure that you’re not selling into a bullish ascending triangle pattern. Traders can then choose to enter on a break below the low of the candle which closed below the neckline.
Stop-Loss Placement: A stop loss should be placed at a level that is both above the neckline and above the candle which broke and closed below the neckline.
Price Targets: A simple and effective target for the Triple Top reversal pattern is to set a target which is twice the distance of your stop (2R).
Triple Top standard entry:
METHOD 2: Aggressive Entry
Enter on Third Peak: This method requires anticipating the third peak forming. Once two peaks have formed, traders can enter on the first down candle which forms after the third test of resistance.
Stop-Loss Placement: A key benefit of the aggressive approach is the ability to place your stop loss above the three peak highs whilst still achieving favourable levels of risk-to-reward.
Price Targets: The 2R target method is still effective for this approach. Traders should be wary of how the market responds to the neckline. Traders may also want to take partial profits as the trade progresses.
Triple Top Aggressive Entry:
V. Managing Risks and Pitfalls:
Risk Management: The Triple Top is a counter-trend pattern so it is essential that traders implement proper risk management techniques, such as position sizing, checking the economic calendar, and diversifying your trading portfolio.
Additional Analysis: Don't rely solely on the Triple Top pattern for trading decisions. Supplement your analysis with fundamental factors and market sentiment to gain a comprehensive view of the market.