Triple Top Candlestick Pattern Trading Strategy

As a trader, knowing how to read the price charts and interpret candlestick patterns is essential for success. You can gain valuable insights into potential market movements, allowing you to improve your trading outcomes and profitability. The triple top candlestick pattern is one of the most powerful chart patterns currently known to traders and offers reliable information on the prevailing market sentiment.

Now, before we head out to examine the triple top pattern and understand its significance, it is important to note that spotting it on the candlestick charts can be tricky due to the complexity of the pattern. However, with the right charting tool, such as the one offered by Samco Securities, you can significantly improve your ability to spot candlestick patterns. On the Samco Trading App, you get access to TradingView charts for all kinds of assets ranging from stocks to indices. Additionally, the charts can be customised in terms of appearance and time frame per your requirements.

To use TradingView charts on the Samco Trading App to the fullest extent, you need to be able to understand the candlestick patterns. Here is everything you need to know about this triple pattern, its key features, significance, and how to trade it.

Triple Top Candlestick Pattern: An Overview 

The triple top candlestick pattern usually forms during an ongoing uptrend and indicates a potential bearish reversal. As the name implies, the pattern consists of three consecutive, yet distinct tops or peaks at around the same price level. The formation of the triple top candle pattern suggests that buyers have been unsuccessful at breaking through a particular resistance level in three different instances. It could also mean the weakening of the uptrend and that a potential trend reversal is on the horizon.

Features of the Triple Top Candlestick Pattern 

The triple top candlestick pattern has a unique appearance. Understanding the key features of this chart pattern can help you accurately identify it, which is crucial for success. 

• Three Distinct Peaks

The triple top candlestick consists of three peaks that reach approximately the same price level. The highs of the peak form a clear horizontal resistance line where the price is rejected multiple times.   

• Troughs Between Peaks

Between each peak of the triple candlestick pattern, there is a trough or valley. These troughs represent minor pullbacks or retracements caused by the influx of sellers in the market. Like the peaks, the troughs also typically form at approximately the same price levels. The lowest points of these valleys form a clear horizontal support line where the price bounces back after testing the level. 

Significance of the Triple Top Candlestick Pattern

Understanding the significance of the triple top candlestick pattern is crucial for incorporating it effectively into your trading strategy. Here is an overview of the significance of this particular chart pattern.

• Reversal Indicator

As you have already seen, the triple top candlestick pattern is a powerful reversal pattern. When it occurs during an uptrend, it strongly signals a shift from a bullish trend to a bearish trend. You can use this information to enter into short positions or exit existing long positions.

• Resistance Confirmation

The presence of a triple pattern on the candlestick charts confirms the presence of a strong resistance level since the price has been rejected thrice. This particular insight can be valuable for setting price targets and stop-loss levels when trading.

• Market Psychology Insight

The triple top is a useful indicator of the prevailing market sentiment. The repeated formation of peaks and troughs during an uptrend shows the buyers’ attempts to break through the resistance level, ultimately culminating with the sellers gaining the upper hand.

• Risk Management Tool

One of the highlights of the triple top pattern is its clear structure. This enables you to set well-defined entry, stop-loss, and target levels, all of which are crucial for profitability and effective risk management.

How to Trade the Triple Top Candlestick Pattern? 

Now that you understand the triple top pattern and its significance, let us look at how you can effectively trade it.

• Entry Point

Most traders enter into a short position immediately after the formation of the third peak. However, this is not the ideal point of entry because if the trend reversal fails to materialise and the uptrend continues, the short position could incur significant losses. 

Instead, the ideal point of entry for a short position is after the breakout point. The breakout point for the triple top candle pattern is the horizontal support formed by the troughs between the three peaks. Once the price breaks out of the support level and forms a strong bearish candle, you may consider initiating a short position to capitalise on the fall in the price.

That being said, remember to confirm the breakout with volume. A significant increase in volume during the breakout enhances the credibility of the signal by suggesting strong selling pressure.

If you fail to take advantage of the initial breakout, you can wait until the price rises to the support level (which now acts as a resistance) before entering a short position. 

• Stop-Loss Point

Knowing where to set the stop-loss point can help you manage risk and protect your position from incurring heavy losses. The ideal stop-loss point is just above the highest point of the three peaks. Setting a stop-loss at this level gives room for minor price fluctuations while simultaneously protecting your trading capital.

On the other hand, if you are a more conservative investor, you could set the stop-loss just above the third peak of the triple top candle pattern. Alternatively, you may also set a percentage-based stop-loss based on the asset’s volatility level and risk tolerance.

• Exit Point

Exiting the trade at the right point is crucial for success. To determine the ideal exit point, measure the price difference from the top of the pattern down to the horizontal support level formed by the troughs between the peaks. Then, project the price difference downward from the breakout point to get a potential price target.

Alternatively, you can set the next major support level below the breakout point as a potential exit point. Implementing a trailing stop is also a good way to manage your exit. A trailing stop ensures that the exit point moves along with the price decline, allowing you to capture more of the downtrend while simultaneously protecting your profits.

Note: Remember to constantly monitor the market for signs of bullish reversal. The appearance of a bullish reversal candlestick pattern or other technical indicators indicating trend reversals could be a sign of a weakening downtrend. In such cases, consider exiting the short position to avoid getting trapped in a losing position.

Conclusion

The triple top candlestick pattern is a powerful chart pattern that can help you identify bearish trend reversals. However, it is important to note that although the pattern is a strong reversal indicator, it is not entirely foolproof. The markets may continue with the uptrend despite the appearance of the pattern.

Therefore, it is advisable to use other technical indicators in conjunction with the triple top to increase the effectiveness of the pattern’s trading signals. Also, remember to implement strict risk management measures to protect your position from incurring losses due to unexpected adverse price movements.