The head and shoulders pattern is a simple chart formation that looks like a baseline with three peaks. The middle peak is the highest, while the outside two are close in height.
The pattern is one of the most reliable trend reversal patterns that predict a bullish-to-bearish trend reversal. The head and shoulders pattern varies in degrees of accuracy and can indicate an upward trend is close to its end.
The triple top, on the other hand, is also a type of chart pattern. It’s used in technical analysis to determine the reversal in the movement of an asset’s price.
It’s made up of three peaks. The pattern occurs on all time frames and signals that lower prices are approaching as an asset is no longer rallying. Before a triple top is confirmed, it must occur after an uptrend.
What is unique about the head and shoulders pattern?
Traders spot a head and shoulders pattern when an asset’s price rises to a peak and declines subsequently to the base of the prior up-move. Then, the second price move goes above the former peak to form the nose and declines to its original base. The asset rises again to the level of the first peak and declines down to the bottom of the chart pattern.
In this chart pattern, the second peak forms the head, while the first and third peaks form the shoulders. The line that joins the first and second trough is called the neckline. When traders spot the head and shoulders pattern, they sell when the neckline breakdown occurs, with a stop loss directly above the neckline.
Traders usually measure the target with the total height of the pattern from the neckline to the top of the head. The price may go above the target, but traders should cut the position when they achieve the target.
The above illustration is showing how the heads and shoulders pattern works
What is unique about the triple top pattern?
The triple top is similar to the head and shoulders pattern. It occurs when the price of an asset creates three peaks at almost the same price levels. The pullbacks that take place between the peaks are the swing lows, while the area of the peaks is resistance.
Traders consider the triple top pattern complete when the price falls below the support after the third peak, and it continues in a downtrend. Unlike the previous pattern, the middle peak is almost equal to the other peaks instead of being higher.
Technically, the triple top indicates that price can’t penetrate the area of the peaks. It means that after multiple attempts, the asset couldn’t find many buyers within that price range. Therefore, when the price falls, it exerts pressure on traders who bought during the pattern to start selling.
When the price falls below the pattern support, experienced traders enter a sell position or exit long positions. When the price drops below a trend line, the pattern is complete, and traders can expect a further downtrend.
For more confirmation, traders watch out for heavy volume as the price falls through support. In other words, if volume picks up, it shows a strong interest in selling. If there’s no increase in volume, the pattern may fail.
Traders should note that a stop loss on short positions above the recent swing high within the pattern is essential in cases where the pattern doesn’t work.
The above illustration shows the uniqueness of the triple top pattern.
What’s the difference between the two patterns?
The middle peak of the head and shoulders pattern is significantly higher than the left and right peaks, while the middle peak of the triple top is nearly equal in price with the left and right peaks.
Also, the price target of the head and shoulders pattern is more potent than that of the triple tops.
The bottom line
The two chart patterns tell traders about the war waged between the bulls and the bear. As long as traders understand how to enter and exit trades with the patterns, they will make good profits.
However, traders have to be conscious of the fact that both patterns have limitations. Traders should use stop losses, other strategies, and indicators that will confirm the direction of the market if they wish to remain profitable.