Double and Triple Tops aretechnical analysis chart patterns. When the pattern has fully formed it means the prior uptrend is over, and a downtrend is likely underway. This is why double and triple tops are called reversal patterns. These reversal patternsoccur inthe forex, futures and stockmarkets, across all time frames.
Key Takeaways
- A double top occurs when the price rallies to a high point, falls, climbs to a similar high point again, and falls again.
- A triple top tries and fails to push past that high point one more time for three total "tops."
- Double and triple tops are bearish patterns, so they work best for exiting long positions or entering short positions.
- Traders can use the size of the initial pullback from the top as a guide for setting profit targets.
Identifying a Double Top
A double top occurs when the price reaches a high point, retraces, rallies back to a similar high point, and then declines again.
The low point of the retracement between the two peaks is marked with a horizontal line. This line, when extended out to the right, is useful for trading and analyzing the double topping market.
Identifyinga Triple Top
A triple top occurs when the price peaks, retraces, rallies to a similar peak, retraces, rallies to a similar high again then declines again.
In this case, there are three price peaks, all in a similar price area, as well as two retracements. Connect the two retracement lows with a trendline and extend the line out to the right. This line will be useful for trading and analysis purposes.
Trading Double and Triple Tops
Both the double top and triple top are toppings patterns, so when the pattern "completes" consider exiting longpositions and focus on taking short positions. The uptrend is now over and a downtrend is likely underway.
The pattern is consideredcomplete when the price drops below the retracement low on a double top or below both retracement lows on a triple top.
The attached chart shows a triple top. Notice the three peaks and the two retracements lows. The two retracement lows are marked by horizontal red lines.
The traditional approach for trading this pattern is to enter short (sell) when the price drops below the retracement low(s). Sometimes theretracements will be at a similar price area, but many times they won't be. When the retracement lows are at different levels, this will provide different potential entry points, as shown on the attached chart.
If you draw a trendline between the two retracement lows on a triple top pattern, when the price drops below that trendline it can also be used as an entry point. This is only useful if the second retracement is a bit higher than the first. If the second retracement low is way above the low of the first, or below the first, the trendline will be awkwardly angled and thus not useful.
Once a short trade is initiated at any of the available entry points, place a stop loss order. The stop loss goes above a recent swing high in price. The attached chartshows two potential areas to place a stop, based on which entry is taken.
Double and triple tops also give an indication of how far the price could drop once the pattern completes. Take the height of the pattern (high peak minus low retracement) and subtract that height from the breakout point (completion point) of the pattern. For example, if a double top peaks out at$50, and retracesto $48, the pattern is $2 high. Subtract $2 from $48 to get a target price of $46. These targets can be used for analysis purposes, or to assess the potential risk/reward of a trade.
Double and Triple Tops - Final Word
The best patterns to trade are the ones where your potential reward, based on the profit target, is at least twice as much as your risk (the difference between the entry point and stop). Since double and triple tops are traded in various ways, using different entry points (which could lead to variation in the projected target) and stops, traders need to assess which patterns are worth trading and which aren't. Overall though, when this patternoccurs, taking long positions may not be ideal for the time being, and more focus should be given to finding short entrypositions.
There are also double and triple bottom chart patterns, which are upside down versions of the above, and mark the end of a downtrend.
FAQs
Following are several statistics about the double top: – In 75% of cases, there will be a bearish reversal. – In 71% of cases, the target of the pattern is reached once the neckline is broken. – In 61% of cases, a pullback will occur.
What is the trade action resulting from a triple top and double top? ›
Double and Triple Tops are technical analysis chart patterns. When the pattern has fully formed it means the prior uptrend is over, and a downtrend is likely underway. This is why double and triple tops are called reversal patterns.
What is the most powerful pattern in trading? ›
It is important to know which type of chart pattern does what in the market.
- 2.1 Head and Shoulders. ...
- 2.2 Double Top. ...
- 2.3 Double Bottom. ...
- 2.4 Ascending Triangle.
- 2.5 Descending Triangle. ...
- 2.6 Wedges. ...
- 2.7 Symmetrical Triangle. ...
- 2.8 Cup and Handle.
They happen at the top of bullish uptrends when the price can't break above the two previous resistance levels. How Accurate Is Triple Top Pattern? The triple top pattern is a reliable reversal pattern but not 100%. There will often be fake outs, and prices will break out and go bullish.
What is the most accurate pattern? ›
Head and Shoulders Pattern: The head and shoulders pattern is considered one of the most reliable chart patterns and is used to identify possible trend reversals.
How do you profit on a double top pattern? ›
A double top is a chart pattern that signals the end of an uptrend. Therefore, when the market forms a double top, close out long positions (buy) before prices fall. You can also take a short position (sell) to profit from the market's decline. The double top pattern can be a profitable price action pattern.
When to trade double top? ›
A double top is always formed after an uptrend; you need to check the prior trend before trading. The next step is to check the two tops and their size before trading. Always enter the market in the short position when the breakout price is either from the neckline or support level.
What is the logic behind the double top pattern? ›
The double-top pattern is interpreted by traders and analysts as a bearish indicator. It implies that the upward trend has slowed down and that a price decrease is more likely. The break of the neckline, a horizontal line formed between the lows of the troughs, is frequently used by traders to confirm the pattern.
Is a triple top pattern bullish or bearish? ›
A triple top formation is a bearish pattern since the pattern interrupts an uptrend and results in a trend change to the downside.
What is the most successful day trading pattern? ›
The best chart patterns for day trading include the triangle, flag, pennant, wedge, and bullish hammer chart patterns. How to find patterns in day trading? To identify chart patterns within the day, it is recommended to use timeframes up to one hour.
One of the ways beginners can implement the most profitable trading strategies effectively is by embracing the buy-and-hold strategy. This involves researching companies with solid fundamentals and stable earnings, then holding their stocks for a long time without being swayed by short-term market fluctuations.
What is the number one rule of trading? ›
Rule 1: Always Use a Trading Plan
A decent trading plan will assist you with avoiding making passionate decisions without giving it much thought. The advantages of a trading plan include Easier trading: all the planning has been done forthright, so you can trade according to your pre-set boundaries.
What is the most reliable reversal pattern? ›
1. Head and Shoulders. The Head and Shoulders pattern is a classic reversal pattern that often signals the end of an uptrend. It consists of three peaks, with the middle peak (the "head") being the highest and the two adjacent peaks (the "shoulders") being lower.
What is the most accurate reversal pattern? ›
Head and shoulders patterns are usually formed at the end of an uptrend with a reversal aspect, hence, can work as one the best trend reversal patterns for traders. This pattern is formed with three highs during an uptrend or three lows during a downtrend that forms a left shoulder, right shoulder, and head.
What is the triple top reversal pattern? ›
Triple Top Pattern is a bearish reversal pattern that forms after an extended uptrend. It signifies a potential shift in market sentiment from bullish to bearish. The pattern consists of three consecutive peaks at approximately the same price level, with two minor pullbacks in between.
Is double top accurate? ›
It is a reliable reversal pattern to analyse the movements of various assets like stocks, indices, commodities, or currencies. Compatibility with other technical tools: When combined with other technical tools, the double top can provide accurate and reliable trend reversal signals.
Is a double top pattern good or bad? ›
Double Top/Double Bottom: A double top or bottom is a very powerful chart pattern. It tells us, that the market was not able to break the support or resistance zone. It also tells us, that supply or demand was big enough to drive price away from the zone.
Can double top fail? ›
Disadvantages of Double Top:
If the price momentarily develops two peaks before continuing to rise, a failed double top pattern might arise. Traders should move cautiously in light of the breach of the neckline and other encouraging indicators. Finding a double top pattern could entail some subjectivity.
What to expect after a double top pattern? ›
What happens after a double top appears in the chart? A double top signals the start of a strong downtrend. After the formation of the second top, the price begins to decline, while the breakout of the neckline indicates an increase in the downward movement.
