HOW TO TRADE TRIPLE TOP CHART PATTERN

How to trade triple top chart pattern
Infographic - How to trade triple top chart pattern

Entry: after breaking the pattern's lower border at point (6), either with an entry after the breakout, or after a possible retest of the lower border.

Take profit: identified by measuring the vertical distance between the pattern's upper and lower borders, that measurement is then applied from the breakout rate (6)

Stop loss: the pattern's lower border, which is identified by the point with the lower rate out of points (2) and (4)

TRIPLE TOP PRICE ACTION

This chart pattern starts forming with bulls already in control of the exchange rate's uptrend. Bears make a stand at a certain rate that will be tested exactly three times, before they are finally able to reverse direction, and the exchange rate starts a downtrend.

Let's break down the pattern formation!

In an uptrend, price action finds the first resistance (1), which will be the horizontal resistance for the rest of the pattern formation.

Price action reverses direction from the first resistance (1) and goes downwards till it finds the first support (2)

Price action reverses direction from the first support (2) and goes upwards, till it finds the second resistance (3), which will be around the same rate of the first resistance (1)

Price action reverses direction from the second resistance (3) and goes downwards, till it finds the second support (4), which can be higher or lower than the first support (2)

Price action reverses direction from the second support (4) and goes upwards, till it finds the third resistance (5), which will be around the same rate of the first resistance (1) and the second resistance (3)

The pattern is completed when price action reverses direction from the third resistance (5) and goes downwards till it breaks the pattern's lower border at point (6)

NOTES ON TRIPLE TOP

Direction

Reversal

Type

Bearish

Occurrence

Medium

Common term

All

Pip distance of the trend prior to the pattern formation should be noticeably longer than the pattern formation itself.

After the breakout, retesting the pattern's lower border, which was a resistance that turned to support, is highly possible.

Volume is usually high when reversing from the second (3) and third (5) resistances, as well as when breaking the pattern's lower border.

This pattern is commonly found on all time frames.

TRIPLE TOP REWARD:RISK

R:R depends on the (lower border-entry rate) distance, compared to (upper border-lower border) distance.

Always remember that the stop loss level explained above is absolute, the actual stop loss rate for your trade setup should be a bit beyond those levels to give the trade setup some room to breathe, and of course, calculations for position size and R:R should be done with respect to that rate.

TRIPLE TOP REAL TRADE

Triple top real trading example
Forex chart - Triple top real trading example, as found on the D1 chart of GBP/USD using XM's MT4 platform

PRE-BREAKOUT CALCULATIONS

Since a triple top chart pattern can be spotted after the reversal from point (5), you can save yourself precious time by doing the following set of calculations before the breakout, since they don't rely on the trade's entry rate.

Note: identifying the pattern's upper border rate is subjective since the rates of points (1), (2), and (3) won't be exactly the same. We prefer choosing the point with the lower rate to keep the pattern compact, which in this trade is point (3)

  • Pattern length (point (3) rate - point (2) rate)
    • (1.63048 - 1.58271) * 10000 = 477.7 pips
  • Take profit rate (breakout rate - pattern length)
    • 1.58271 - (477.7 / 10000) = 1.53494
  • Stop loss rate (breakout rate + 25% of pattern length)
    • 1.58271 + ((25 * 477.7 / 100) / 10000) = 1.59465

TRADE SETUP

Choosing when to enter the trade after the pattern's lower border breakout is always left to your best judgement. In this trade, we chose to enter the market at the closing rate of the candle that broke the pattern's lower border, which was a fairly long bearish candle that closed on a rate beyond the pattern's lower border rate. This bearish candle could have played out to be a fakout and price could have bounced back up, waiting for another bearish candle to confirm the breakout was also a viable option.

  • Trade entry rate
    • At the closing rate of the candle that broke the pattern's lower border at point (6): 1.57878
  • Take profit in pips (entry rate - take profit rate)
    • (1.57878 - 1.53494) * 10000 = 438.4 pips
  • Stop loss in pips (stop loss rate - entry rate)
    • (1.59465 - 1.57878) * 10000 = 158.7 pips
  • Stop loss R:R (take profit in pips / stop loss in pips)
    • 438.4 / 158.7 = 2.762

Currency pair

GBP/USD

Timeframe

D1

Breakout

24-Jan-2013

Platform

MT4

Broker

XM