Triple Top Chart Pattern Trading Strategy – Does It Work? (Backtest)
Last Updated on April 18, 2023
Chart patterns are very important to price action traders. They are tools for forecasting future price directions, and the triple top chart pattern is one of the most popular bearish patterns. Let’s take a look at the triple top chart pattern trading strategy.
The triple top chart pattern is a reversal pattern that predicts a potential change in the direction of the trend from an uptrend to a downtrend. It consists of three swing highs that end roughly around the same level and two intervening swing lows. The line connecting the two swing lows is called the neckline, the breakdown of which completes the pattern and indicates a potentially bearish move.
In this post, we answer some questions about the triple top chart pattern trading strategy and end the article with a backtest.
Introduction to the Triple Top Chart Pattern
The triple top chart pattern is a reversal pattern that predicts a potential change in the direction of the trend from an uptrend to a downtrend. It consists of three swing highs that end roughly around the same level and two intervening swing lows. Please see our graphics a bit further down.
As the swing highs end around the same level, that level is seen as a strong resistance level. The swing lows form a support line called the neckline. When the price breaks below the support level, the pattern is said to be completed, and a bearish trend ensures.
Recognizing the Triple Top Pattern
The Triple Top pattern forms after an established uptrend. It is characterized by three consecutive swing highs that end at approximately the same price level, with moderate to low volume on each peak.
The pattern is confirmed when the price breaks below the support level, which is formed by the low points between the peaks.
Triple top pattern graphics
Let’s look at how the triple top pattern might look like on a chart:
Normally, the pattern is far from as obvious as the one above. Both tops and bottoms could be at slightly different levels and unequal distance between the tops (and bottoms).
Analyzing the Triple Top Pattern
To analyze the Triple Top pattern, you look for three consecutive peaks at approximately the same price level, with moderate to low volume on each peak. Then, you wait for a break below the support level, which is formed by the low points between the peaks. This confirms the pattern. We believe most technical traders ignore the volume requirement.
You can use various technical indicators, such as moving averages and RSI, to determine if a downtrend is likely to occur and also look at the overall market conditions, as well as the fundamentals of the underlying stock or asset, to support your analysis.
Trading the Triple Top Pattern
To trade the Triple Top pattern, you have to wait for the pattern to be confirmed by a break below the support level. Then, you may place a market sell order or a limit sell order at the breakout level if the breakout candlestick is too long.
You might put a stop-loss order above the resistance level formed by the triple top to limit potential losses in case the trade doesn’t go as expected.
However, most backtest reveal that stop-losses make a strategy perform worse:
Advantages and Disadvantages of the Triple Top Pattern
The advantages include:
- The Triple Top pattern is a reasonably clear and easily recognizable reversal pattern
- It can signal the end of an uptrend and the potential start of a downtrend
- It can be used as a signal to enter a short position
- The profit target can easily be measured
The disadvantages include:
- The pattern may not always be reliable and may produce false signals
- Sometimes it’s not clearly recognizeable
- It requires confirmation by a break below the support level, which may not always occur
- The pattern may not always lead to a strong move in the opposite direction
- Traders need to pay attention to the overall market conditions and the fundamentals of the underlying stock or asset.
What Are the Benefits of Trading the Triple Top Pattern?
Here are some of the benefits of Trading the Triple Top pattern:
- The pattern is easy to recognize and trade
- It can be used to enter a short position
- The profit target is easy to estimate
- It can provide a good risk-to-reward ratio
- It can have a high win percentage and make you money
Triple Top Pattern Trading Strategies
Potential strategies for trading the Triple Top pattern:
- Breakout strategy: This involves placing a market sell order at the close of the breakout candlestick.
- Limit order strategy: This involves placing a limit sell order at the breakout level in expectation of a retest.
- Retest strategy: This strategy involves waiting for the price to retest the broken support level and looking for bearish signals before entering a short position.
- Risk management strategy: This strategy involves properly managing risk by using stop-loss orders, setting appropriate position sizes, and monitoring the overall market conditions.
How to Use the Triple Top Pattern to Maximize Profits
To maximize profits when using the Triple Top pattern, traders can:
- Wait for the pattern to be confirmed by a break below the support level
- Monitor the overall market conditions and fundamentals of the underlying stock or asset
- Use technical indicators and chart patterns to confirm the pattern and the likelihood of a downtrend
- Enter a short position and look for a substantial move in the opposite direction
- Use risk management techniques to protect profits and limit downside risk.
Identifying Breakouts After the Triple Top Pattern
To identify a breakout after the Triple Top pattern, traders should:
- Look for a clear close of the breakout candlestick below the support level
- Observe the volume; it should increase on the breakout to confirm its strength
- Use technical indicators such as RSI or MACD to confirm the momentum
(You might want to have a look at MACD trading strategy.)
What Factors to Consider When Trading the Triple Top Pattern
When trading the Triple Top pattern, traders should consider the following factors:
- Confirmation of the pattern by a clear break below the support level
- Volume on each peak; moderate to low volume is preferred
- Volume on breakout — high
- Overall market conditions and the fundamentals of the underlying stock or asset
- Technical indicators such as RSI, Moving Averages to confirm the momentum
- A proper risk management strategy, such as using stop loss, proper position size, and monitoring market conditions
- The pattern’s reliability in the specific market, as it may not always produce accurate signals.
How to Determine the Optimal Stop Loss When Trading the Triple Top Pattern
The optimal stop loss when trading the Triple Top pattern can be:
- above the highest point of the resistance level
- a percentage of the stock’s trading range or volatility
- based on a volatility indicator like ATR
Is the Triple Top Pattern Reversal Reliable?
The Triple Top pattern is considered a reliable reversal pattern, but it is not always 100% accurate. No pattern or strategy ever gives a 100% track-record.
You should always confirm the pattern by a clear break below the support level and use technical indicators and chart patterns to support your analysis of the reversal. Also, consider the overall market conditions and the fundamentals of the underlying stock or asset.
What Timeframes Work Best with the Triple Top Pattern?
The Triple Top pattern can appear on any timeframe, but it tends to be more reliable when identified on higher timeframes such as 4-hourly, daily, and weekly. This is because the pattern requires multiple highs to form and this takes more time to occur on higher timeframes, and those timeframes provide a more accurate picture of the trend and market conditions.
How to Implement the Triple Top Pattern in Your Trading Plan
To implement the Triple Top pattern in your trading plan, you should:
- learn to identify the pattern and its characteristics
- create a strategy to use technical indicators to confirm the trend
- use a proper risk management strategy, such as using stop loss and proper position sizing
- regularly evaluate and adjust your trading strategy based on your performance and market conditions
What Are the Risks Associated with Trading the Triple Top Pattern?
The risks associated with trading the Triple Top pattern include:
- False signals, as there can be false breakouts. All techinal patterns are prone to false signals
- Limited move in the opposite direction, as the pattern may not always lead to a strong move in the opposite direction
- Overconfidence in the projected profit target and overleveraging
- Ignoring overall market conditions, as the pattern may not be reliable in certain market conditions
- Poor risk management plan
What Indicators Can Help Predict a Triple Top Pattern?
Indicators that can help predict a Triple Top pattern include:
- Moving averages, as they can help identify the trend and potential trend reversal
- Relative Strength Index (RSI), which can help identify overbought or oversold conditions
- Volume, as it can help confirm the validity of the pattern and the strength of the move
- Bollinger Bands, as they can help identify potential trend reversal by measuring volatility
- MACD, as it can help identify momentum shifts and potential trend reversal
How to Implement the Triple Top Pattern with Technical Analysis
To implement the Triple Top pattern with technical analysis, traders can:
- Monitor their charts to identify the formation of the Triple Top pattern
- Use technical indicators such as Moving Averages, RSI, and MACD to confirm the pattern and the likelihood of a trend reversal
- Use volume analysis to confirm the validity of the pattern and the strength of the move
- Use trend analysis to identify the overall market trend and potential trend reversal
How to Use the Triple Top Pattern with Fundamental Analysis
To use the Triple Top pattern with fundamental analysis, traders can:
- Learn how to easily identify the formation of the Triple Top pattern
- Use fundamental analysis to assess the overall market conditions and the fundamentals of the underlying stock or asset, such as the company’s financial health, management, and industry trends
- Use technical indicators, such as Moving Averages, RSI, and MACD, to confirm the momentum of the price and the likelihood of a trend reversal
- Use trend analysis to identify the overall market trend and potential trend reversal
- Use risk management techniques such as stop-loss orders and proper position sizing to protect your capital
Triple top pattern is a short strategy
If you are trading stocks, you probably know that short is a lot more difficult to trade than long. You are fighting the long-term trend.
If you are operating in the forex market short might not be so bad because all currency pairs don’t have any in-built short or long bias, perhaps the only exception in countries where inflation is consistently higher than the other leg of the pair.
We have vovered short strategies in other articles:
- Pros And Cons Of Short Selling – Why Is It Difficult?
- Short Selling Trading Strategies – Is It Possible To Make Money With Shorting Systems?
- Short Squeeze Trading Strategy — What Is It? (Example)
Triple Top Pattern backtest – does it work?
It’s pretty demanding to make a triple top pattern trading strategy backtest with strict trading rules and settings because of all the rules required. It’s possible, of course, but we believe some already published stuff is good enough.
Instead of a quantified backtest with defined trading rules, we rely on data from Thomas Bulkowski’s book from the late 90s called The Encyclopedia of Chart Patterns. His book is not based on strict quantified rules or data driven backtests, but rather on visual confirmation.
Nevertheless, we believe his findings are a decent approximation of the usefulness of thepattern. He made some pretty good statistics to find the performance metrics of the pattern.
Bulkowski, an engineer, sat down and went through technical formations for 500 stocks over five years. This gave a total database of 2 500 years, although there are sources of error as all the stocks are from the same time period. He registered over 15 000 technical formations.
Bulkowski’s triple top pattern strategy is summarized in the table below:
|#Formations among 500 stocks from 1991 to 1996||122|
|Reversal or consolidation||25 consolidations, 97 reversals|
|#False signals||18 (15%)|
|Average fall of successful formations||21%|
|Most likely rise||10%|
|#Formations that reached the target||49 (47%)|
|The average length of the formation||110 days|
The statistics for the triple bottom pattern strategy indicates it’s a lot less frequent than the double top chart pattern strategy (a short strategy). This is to be expected.
Alo keep in mind that a long strategy is “always” better than a short strategy in the stock market because of the tailwind from inflation and increased productivity. We have covered how you can take advantage of this in an article called night trading strategies.
We linked to other articles that touch upon the same
- Head and shoulders trading strategy (backtest and example)
- Cup And Handle Pattern (backtest and example)
- Double Bottom Chart Pattern Strategy (How To Trade It – Backtest)
- Double Top Chart Pattern Strategy — What Is It? (Backtest)
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The triple top chart pattern is a reversal chart pattern used by price action traders to spot short-selling opportunities in the market. To effectively trade the pattern, you will need to create a triple top chart pattern trading strategy. Statistics indicate the pattern is pretty rare.