Triple Top: A Trend Reversal Pattern
In-Depth Analysis of the Triple Top Pattern
1. Mechanics and Definition of the Triple Top
1.1. What is the Triple Top Pattern?
The pattern consists of three approximately equal-height peaks separated by two troughs. The classic development scenario is as follows:
First Peak
It is formed during a sustained upward trend.
Second Peak
After a correction, the price returns to the level of the first peak but does not surpass it, forming the second peak.
Third Peak
A new correction follows to the neckline level, after which the price rises for the third time, forming the third peak.
Neckline Break
The breakout of the neckline—a horizontal support level drawn through the lows between the peaks—confirms the end of the bullish momentum.
1.2. Conditions for Formation
The intervals between peaks should consist of at least 10-15 candles (daily or shorter timeframes), reflecting well-defined accumulation and distribution of positions.
The neckline runs through two local minima and serves as a key threshold: breaking below it is a signal to short.
A decrease in volume at each new peak indicates weakening bullish momentum. A contrasting increase in volume upon breaking the neckline enhances the reliability of the signal.
2. Visual Identification and Levels
2.1. Drawing the Neckline
Horizontal Neckline: If the local minima are aligned, a straight horizontal line is drawn through their closes.
Angled Neckline: If the troughs are shifted, a slight angle is applied; however, strong deviations should be avoided to prevent false signals.
2.2. Measuring the Target Move
The target drop is calculated as the difference between the peaks and the neckline level. For instance, peaks at 150 ₽ and a neckline at 130 ₽ provide a range of 20 ₽, indicating a target of 110 ₽ upon breakout.
3. Pattern Confirmation with Volume and Indicators
3.1. Volume Analysis
Volume at each new peak decreases.
Upon breaking the neckline, the volume should exceed the average over the past 20 periods, indicating institutional selling.
3.2. Indicators RSI and MACD
RSI: Divergence when the second and third peaks form with lower RSI values indicates weak demand.
MACD: A histogram below zero and a cross of the signal line from top to bottom confirm bearish momentum.
3.3. Multi-timeframe Confirmation
Verifying the signal on daily and hourly (or 15-minute) charts reduces the number of false breakouts and boosts confidence in a reversal.
4. Trading Strategies and Risk Management
4.1. Entering a Short Position
Main signal: Closing of a candle below the neckline with above-average volume.
Aggressive option: Enter on the retest of the neckline after the breakout, if volume remains low on the bounce.
4.2. Setting Stop Loss and Take Profit
Stop Loss: 3-5 points above the third peak.
Take Profit: At the target level calculated based on the pattern height; partial position is closed at 50% of the target.
4.3. Trailing Stop and Averaging
The trailing stop is moved behind the neckline or subsequent local highs.
Averaging is only performed when confidence in the trend strength is high; otherwise, risk increases.
5. Psychology and Filtering False Breakouts
5.1. Psychology Behind Triple Peaks Formation
The crowd repeatedly buys as the price returns to previous highs, mistakenly expecting a continuation of growth. Experienced traders utilize this effect to accumulate short positions.
5.2. False Breakouts
False breakout: A neckline breakout with below-average volume is often reversed back into the range.
Filters: Require volume >120% of the average, closing of the subsequent candle below the neckline, and confirmation from indicators.
5.3. Discipline and Trading Journal
Maintaining a trading journal that documents reasons for entry/exit, levels, and results allows for the identification of patterns and refinement of strategy.
6. Practical Cases
6.1. Gazprom Stocks, Summer 2023
Three peaks at 250 ₽ formed with a neckline at 230 ₽. The breakout was accompanied by volume +200% of the average, with the price dropping to 210 ₽, yielding an 8% profit in a week.
6.2. EUR/USD Pair, Autumn 2022
Triple Top at the level of 1.0200 with a neckline at 1.0000. The neckline breakout and RSI divergence predicted a drop to 0.9800, confirmed within two trading sessions.
6.3. NASDAQ Index, Spring 2021
A triple top at 14,000 points with a neckline at 13,500 points signaled a short position, after which the index fell to 12,800 points, yielding over 4% profit.
7. Conclusion and Recommendations
The "Triple Top" pattern is a reliable tool for reversing an upward trend, provided there is strict confirmation through volume, indicators, and across multiple timeframes. Systematic application of the model, adherence to risk management, and psychological discipline make it an effective means in a trader's arsenal.
