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How can I spot reversal trade setups using the triple top pattern?

How can I spot reversal trade setups using the triple top pattern?
Asked by
Walter Peters time-icon1 week ago
1 Answer Answer Question

Justin Freeman
Answered time-icon1 week ago

The triple top pattern usually indicates that the existing bullish trend is over and that a bearish trend is about to begin. It is called a reversal pattern because it usually marks the point at which an uptrend reverses and becomes a downtrend. A triple top is typically formed when price rallies, hits a resistance level (top) and falls back, then rallies again, hits the same resistance level and drops before embarking on a third rally to the same peak and dropping to complete the third top. A triple top is very similar to a double top, with the only difference being that a double top only has two peaks.

 

How to trade the triple top

The triple top is said to be complete when the price hits the third peak and drops below the previous two lows, indicating that a downtrend is now in full force. This means that it is time to exit any long trades that you had running on the affected instrument and consider entering into short trades. However, many traders may not have the patience to wait for the third peak (top) to be completed before making their moves as they may prefer to make their moves much earlier. In such cases, it is prudent to consider trading the double top pattern, especially when it comes to exiting long trades.

Chart 1: Triple top pattern on USD/CHF 1-hr chart

The triple top pattern is indicated by the three red arrows shown above.

The advantage of exiting long trades when the double top pattern is almost complete is that you are likely to keep most of your profits. However, entering into short trades once the double top pattern is complete may lead to you booking significant drawdowns if the pattern changes and a third top starts forming. This is because your short trade taken at the bottom of the second retracement will become negative as price rises to hit the third top. In this case, you might actually have a losing trade if your initial stop loss placement was below the recent highs, which is why you should always place your stop-loss order at a safe distance.

Chart 2: The triple top pattern on the EUR/USD 1-hour chart

The above chart is an example of a triple top pattern that formed on the EUR/USD currency pair’s 1-hour chart at the time of writing. As you can see, nothing in trading is perfect; the first top actually spiked above the resistance level before quickly falling back and heading lower. The second top also spiked past the first resistance level but did not go as high as the first spike, which shows that the bullish momentum was weakening. The third touch did not even get to the first resistance level, indicating that the bears were winning the battle for control of the currency pair’s price. The resulting retracement was proof that the bears had now taken full control of the currency pair’s price and were intent on pushing it much lower.

 

How to trade the triple top setup shown above

The first step in trading the above pattern is to zoom out and get the wider context behind the current price setup.

Chart 2: Zoomed-out EUR/USD 1-hour chart

The zoomed-out image above shows us the triple top pattern was forming at a prior support level that had turned into resistance once price broke below the level. This chart gives us a good background on which to base our analysis because it gives us confidence that price is likely to keep falling if the resistance level holds, and this is exactly what happens.

This is a technique used by all professional traders. You should always consider the overall price context when trading any particular pattern to estimate the likelihood that the pattern will actually hold.

There are two ways to trade the above pattern, depending on whether you are an aggressive trader or a conservative one. An aggressive trader would have entered into the above trade on the second red (bearish candle) based on the fact that price could not even reach the prior high before the bears took full control.

A conservative trader would have waited for the full pattern to play out and would have entered the trade at the prior lows.

 

The bottom line

The key to successfully trading the triple top pattern is to look at the bigger picture and avoid trading the pattern in isolation so you can minimise the number of losing trades you enter into based on the pattern.

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