If there is one thing chart patterns are known for, it’s their uncanny ability to help technical analysts in their quest to maximize profits while minimizing risk. If there’s one thing they’re not known for; it’s their ability to come up with creative descriptors for their patterns. The triple tops and bottoms pattern is a perfect example of this lack of moniker-driven forethought. However, what the chart pattern lacks in name-based creativity, it more than makes up for in overall effectiveness.
The Patterns at a Glance
Triple tops and triple bottoms are both reversal patterns formed when a security tries to move past a key level of resistance or support that coincides with the direction of the prevailing trend. The pattern that is created is representative of the market’s attempt to shift a stock in a particular direction. After three failed attempts – which is where the peaks or bottoms come from – the investors behind the push punt and the opposing group takes over the stock. In the event of a triple top, the buyers give up, and the sellers take over. In the event of a triple bottom, the opposite is true. As such, the triple top is considered to be a bearish reversal pattern, whereas a triple bottom is considered to be a bullish one.
Triple Top Patterns
In the event of a triple top pattern, it is formed when an upward trending security tests a similar level of resistance three times without successfully breaking through the trendline. Every time it tests the resistance level, it drops to a similar degree of support. The pattern completes itself once the security falls through the support. When this happens, the price is then expected to move toward a downward trend.
The first step that ultimately gets the pattern rolling is the formation of a new high in an uptrend that is delayed due to selling pressure. This delay causes a level of resistance to form. The selling pressure then causes the price to drop until it finds a support level, which is created by buyers moving back into the stock. The buying causes the stock price to surge back up to the area of resistance the market it previously saw. When it gets to the level, the sellers take over and knock the stock back to its support level. This see-saw battle repeats itself for the third time but ends when the buyers throw in the towel against the security. This allows the sellers to rule the stock, and this causes a breakthrough past the support level. When this happens, the stock is expected to trend downward.
Triple Bottom Patterns
As one may guess, triple bottom patterns act as a mirror image of sorts about triple top patterns. The difference is that all of the metrics that define the triple top pattern are flipped. There is a give-and-take between a stock’s buyers and sellers that last three rounds, but in this case, the sellers are the ones that throw in the towel and the buyers take over the stock. This takeover allows the stock to break through the level of resistance and moves the trade to an upward trend.
The Difficulty of Spotting the Pattern
It may be easy to spot a triple top or triple bottom pattern after the fact. It can be tough to spot in the early stages of its formation. The reason for this is because it looks very similar to a double top pattern in its early stages. Because of this, the investor may end up reading the chart and plotting strategies around the chart incorrectly.
The one rule of thumb to help mitigate this error from an investor’s standpoint is to wait to enter the stock until after it most past the resistance level. If not, the stock could just end up being range-bound, where it could be stuck for quite a bit of time. In other words, patience is the key here.
What is the Purpose Behind These Patterns?
The big significance behind the triple top and triple bottom formations is that an established trend has landed on a major section of either support or resistance, which ultimately stops the trend’s capacity to move forward. This indicates that the pressure from either buying or selling – the very thing that’s propping up the trend in the first place – is starting to weaken. It also serves as a signal to the investor that the other side of the investment coin is starting to gain momentum.
In other words, both chart patterns signify a shift in the stock’s supply and demand as well as the balance between those that want to buy a stock and those that want to sell a stock. When the reversal signal is formed in a triple top chart, for instance, there’s a shift away from buyers trying to push the stock past the line of resistance to sellers intent on moving the stock downward. When the reversal signal is formed in a triple bottom chart, the shift pulls from the sellers that want to drive the stock past the line of support and favors buyers that want to push the stock to an upward trend.
Using Triple Top and Triple Bottom Patterns Wisely
As is the case with all chart patterns, triple top, and triple bottom patterns can be great ways to pick out potential trends, but they aren’t pure indicators of guaranteed gains. The market is not without its odd quirks, and these quirks can turn something that looks like a sure-fire moneymaker into a money pit that can catch not-so-savvy investors off-guard. Therefore, technical analysts that are intent on using triple top and triple bottom patterns as an investment tool would be wise to use them with this caution-fueled provision in mind.
With that being said, these dual patterns can provide a tremendous measure of insight for technical analysts as they seek to up the chances of turning a profit while simultaneously lowering the chances of risk. In other words, these charts and their predictive nature give investors the chance to invest their funds in a much wiser, more thoughtful manner.