Forex Tips: Trading the Double Top and Triple Top Reversal Chart Patterns.
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. These reversal patterns occur in the forex, futures, and stock markets, across all time frames.
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.
Identifying a 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 long positions and focus on taking short positions. The uptrend is now over and a downtrend is likely underway.
The pattern is considered complete 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 the retracements 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 chart shows two potential areas to place a stop, based on which entry is taken.
Double and triple tops also indicate 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 peak out at $50, and retraces to $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 pattern occurs, taking long positions may not be ideal for the time being, and more focus should be given to finding short entry positions.
There are also double and triple bottom chart patterns, which are upside-down versions of the above, and mark the end of a downtrend.