Triple top reversals are technical trading patterns that can potentially indicate bearish reversals. Known for establishing their “W” shape before reversing, triple top reversals can take between 3 and 6 months to fully develop.
Looking at the chart below, you can see the three tops leading up to the big trend reversal:
Backtesting for Triple Top Reversals
By backtesting for prior trends, you might be able to spot a triple top pattern. Looking for historical triple top patterns, you are provided with a trading indicator of how the financial instrument performs and reacts in this particular market condition. Using this historical market data, you can get an idea of what velocity, retracement and length/time of price movement performance to expect from the financial instrument.
Trading the Triple Top Channel
After the below conditions are met, a potential trade can be made based on the premise of a continuing trading channel occurring:
- A substantial increase in trading volume occurs before the first top formed
- The first two tops formed at relatively close price levels
- The first bottom formed after the first top, but before the second top
After the second top forms in the channel, a potential trade could be made by selling short the financial instrument. A sell stop could be set on your automated trading software at the level of the first bottom in the channel.
Trading the Reversal
A large increase in trading volume is one signal that a triple top reversal may be starting. Once the increase occurs, you can then begin noting where price retracements in relation to where the large increase in volume occurred. After three reasonably equal tops and two reasonably equal bottoms occur in a channel, a potentially trade could be to short the financial instrument after the third top occurs.
It is important to note that executing a trade based on a triple top pattern is purely speculative and trading contains substantial risk.