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A triple top is a pattern in an analysis chart of a stock's market price over time. It involves a stock peaking and dropping three times in succession. Some analysts believe the triple top pattern is commonly followed by a sharp decline in a stock. On this basis, the analysts will attempt to use the pattern to judge the best time to buy or sell a stock.
The triple top is shown on simple stock market charts that plot a stock's price against time. The pattern is similarly simply and consists of three peaks of a roughly similar level, followed by a noticeable decline. The final decline will go much lower than the low-point between each of the peaks.
To be considered a true triple top, the pattern must spark a reversal of a wider trend. That is to say that the price will have been rising overall before the three peak pattern. It will then change direction and begin declining. One explanation of the pattern is that it is the natural fluctuation as a stock reaches its natural high. This pattern is also arguably caused by two conflicting effects on a stock's price: the reaction of traders to daily price movements, and the underlying fundamental value of a stock based on the company's earnings.
In theory, an investor spotting a triple top will have a decent idea of how the stock price is likely to move. For example, "knowing" the stock is likely to decline can make it a good time to sell existing stock, or even become involved in shorting stock, where the trader makes money if the stock price drops. A trader might even be able to look at the low-point between the first and seconds peaks and have a better idea when to buy the stock between the second and third peaks. In reality, there is a major limitation — it's often difficult to be certain that a stock price is following such a pattern until it is too late to attempt to take advantage.
There are several variants on the triple top. One is known as a head and shoulders. This also has three peaks, but the middle peak is higher than the other two, thus resembling a head on two shoulders. Analysts generally believe the reasons behind for the triple top and the head and shoulders are similar enough that they can be treated in the same way for tracking and decision purposes.
The contrasting trend is the triple bottom. This involves three dips to a low point, followed by recoveries. Analysts often believe this pattern indicates a stock that has been in a wider decline is about to reverse and grow steadily. One notable difference is that the triple bottom tends to play out over a longer period. If both patterns are shown on charts using the same timescale, the triple bottom will be shaped more like bowls compared with the mountain top shape of a triple top.
I have seen it go both ways. I have seen many stocks decline after making a triple top, but I have also seen an ascending triple top breakout! This is great if you have decided to go long, but not so great otherwise.
Triple tops are just another indicator that you can use to look at stocks with more of an objective view point. Using just one indicator to base your trades on is usually not a very good idea over time.
The triple top stock chart pattern is one of my favorite ones to watch. I use stock charting software that alerts me to stocks that have made a recent triple top. More times than not, the stock has declined after a short period of time. Of course there are always those times that I am wrong, so always proceed with caution.
I also take into consideration the current news and earnings data and don't rely just on the chart pattern. Reading charts and researching current company data can really help you make informed decisions when it comes to trading.
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