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What is the profit potential when trading the double and triple top patterns?

What is the profit potential when trading the double and triple top patterns?
Asked by
Martha Schulz time-icon2 weeks ago
1 Answer Answer Question

Steve Walters
Answered time-icon2 weeks ago

Double and triple top patterns are extremely popular among traders, and we have already covered how to trade these popular patterns. Now, we’re going to focus on examining the profit potential presented by the patterns.

Those who are familiar with the two patterns know that the profit potential for each pattern is usually equal to the height of the pattern, but we’ll look at ways to improve your profit potential when trading such patterns.

 

Trading the triple top pattern

The key to trading the triple top pattern is to wait for the pattern to be completed before entering into the trade to confirm that the pattern has been formed. Therefore, you have to wait for the entire pattern to be completed; in other words, you must wait for the full three touches and reversals before getting into the trade, as illustrated in the chart below.

Chart 1: Trading the triple top pattern

The chart above shows the common way of trading a triple top pattern where you wait for the complete pattern to form before entering into a reversal trade. However, aggressive traders may find it very difficult to wait for hours or days until the complete pattern is formed. Therefore, such traders are likely to seek other ways of profiting from the setup as they wait for the pattern to play out fully.

 

Treating the pattern as a range

Most traders are familiar with trading strategies that allow them to exploit trading ranges, given that some assets may be stuck in a range for months. The best way to trade a range is to take trades at the top and bottom of the range. In this case, because we are expecting a double or triple top to form, traders should focus on taking short trades that could easily turn into a larger move while avoiding any long trades.

Chart 2: The triple top pattern on the USD/JPY daily chart

The above chart is a perfect example of how a triple top can form a sideways range that stays in place for a long time. The USD/JPY daily chart above shows how a triple top formed even as the price remained stuck in a range for more than five months. Aggressive traders would have had multiple opportunities to profit from the setup at the tops and bottoms because this was a well-defined and sustained pattern.

The sideways range seen above covered a length of more than 500 pips, and traders would have made significant profits by entering into short trades at the tops as they waited for the pattern to be completed.

 

Invalidated triple top patterns

Always use a stop-loss order when placing your trades. In some cases, the pattern that you are hoping to profit from may end up being invalidated, and you might sustain serious losses if you do not have a stop-loss order. The chart below shows an example of an invalidated double/triple top pattern on Nike’s stock chart.

Chart 3: Invalidated triple top pattern on NIKE daily chart

The Nike chart above shows how the double/triple top pattern was invalidated on 25th September after the sports apparel company released its earnings report, causing its shares to rally. The pattern was intact before the earnings announcement, and traders who shorted the stock expecting it to fall after the earnings announcement suffered losses.

You should always pay attention to important market events such as earnings announcements or fundamental releases such as non-farm payrolls numbers in the currency markets when placing your trades.

Remember to always place your stop-loss order at a point where your trade idea would be invalidated if the price reached that point. Do not hold on to losing trades in the hope that they will reverse and head in your preferred direction.

 

The bottom line

The double and triple top patterns offer excellent trade setups but have limited profit potential since traders have to wait for the pattern to form before entering into reversal trades. However, aggressive traders could choose to take trades at the tops as these levels also act as resistance levels, but they have to be careful not to be trapped in losing trades after the pattern is invalidated.

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