Forex Trend Reversal: Triple Top and Triple Bottom Patterns

It is worth remembering that the major trend reversal patterns are:

The head-and-shoulders and the inverted head-and-shoulders
The double top and the double bottom
The triple top and the triple bottom

This article considers the last pair - the triple top and the triple bottom formations.

Triple Top Trend Reversal Pattern

The triple top chart pattern represents a combination of the head-and-shoulders and the double-top trend reversal formations. As a result, the same characteristics as well as possible drawbacks and signals are possessed by the triple top as observed in the double top and head-and-shoulders.
The triple top formation consists of three tops that have almost the same altitude and depicts the following currency price movement:

The first step is the creation of a new peak in the uptrend movement of the price which faces resistance and causes the price to fall to a level of support.
Another rise of the price to the level of resistance follows, and then another fall to the support level.
The price rises for a third time only to fall again, this time through the level of support.

The three peaks are connected by a line (the support line) and a line parallel to it (the resistance line) is drawn.

Just as with the other major trend reversal patterns large market volume should accompany the price movement when it breaks below the support level.
A triple top is considered to be a variation of the head and shoulders top. Often the only thing that differentiates a triple top from a head and shoulders top is the fact that the three peaks that make up the triple top are more or less at the same level. The head and shoulders top displays a higher peak - the "head" - between the two shoulders.

According to experts including Murphy, making a distinction between these two patterns is largely academic because they both imply the same thing. They are both "reversal" patterns of an upward trend in a stock. The triple top marks an uptrend in the process of becoming a downtrend.

What does a triple top look like?
As shown below, the triple top pattern is comprised of three sharp peaks, all at the same level. A triple top occurs when prices are in an uptrend. Prices rise to a resistance level, retreat, return to the resistance level again, retreat, and finally, return to that resistance level for a third time before declining. In a classic triple top, the decline following the third peak marks the beginning of a downtrend.

While the three peaks should be sharp and distinct, the lows of the pattern can appear as rounded valleys. The pattern is complete when prices decline below the lowest low in the formation. The lowest low is also called the "confirmation point."

Bulkowski advises that this pattern can have many variations. He continues, however, to advise that an investor should ensure that the three peaks are well separated and not part of a congestion pattern. "Each top should be part of its own minor high, a distinct peak that towers about the surrounding price landscape."

Elaine Yager, Director of Technical Analysis at Investec Ernst and Company in New York and a member of Recognia's Board of Advisors suggests they should be noticeably distinct peaks and they do not have to be precisely at the same level.

Why is this pattern important?
Like the head and shoulders top which it resembles so closely, the triple top is considered by experts to be a reliable pattern. According to Schabacker, there is a good explanation for placing reliance on this pattern. The pattern illustrates three successive attempts to break through a resistance level. Price cannot move above a certain point, despite three tries. "Each failure adds weight to the indications of reversal," explains Schabacker.

Is volume important in a triple top?
Generally, volume in a triple top tends to be downward as the pattern forms. Murphy advises that volume should be lighter on each rally peak. Volume then picks up as prices fall under the confirmation point and break into the new downward trend.

Both Bulkowski and Schabacker place less significance on the downward progression of volume. While both agree that investors should see relatively high volume on the first peak, they also agree that volume on the other peaks can be confused and irregular.

Volume should be higher on the peaks than at the lows. Bulkowski's statistics suggest that an investor should see a volume burst at the time of breakout and during the few days following the decline in price below the confirmation point.

What are the details that I should pay attention to in the triple top?

1. Duration of the Pattern

This pattern can take upwards of several months to form. According to Bulkowski, average formation time is approximately four months. In addition, experts, including Schabacker and Murphy, agree that the longer the pattern takes to form, the greater the significance of the price move once breakout occurs. The three highs do not need to be equally spaced from one another.

2. Need for an Uptrend

The triple top is a reversal pattern marking the transition period between an uptrend and a downtrend in prices. It is crucial to the existence of this pattern that it begin with an uptrend of stock prices.

3. Decisive Breakout

Investors are advised to wait for prices to make a definitive
break below the confirmation point of a triple top pattern. If prices do not fall below the confirmation point after the third peak is reached, the pattern is not a triple top. In a bull market, for example, it is common to see three highs which look like the beginning of a well-formed triple top. If prices, however, do not fall below the confirmation point, they can just as easily pull away from the highs established by the three peaks and then continue on in the upward trend.

4. Volume

As discussed, it is typical to see
volume diminish as the pattern progresses. This should change, however, when breakout occurs. A valid breakout should be accompanied by a burst in volume. Certain experts are less concerned by seeing a steadily diminishing trend in volume as the pattern progresses through its three highs. Schabacker comments that the volume picture can often be confused and irregular. All agree, however, that an investor will want to see a definite increase in volume at the time of the break through the confirmation point.

5. Rally after Breakout

Yager notes that a high percentage
of triple tops have rallies back to the point of the breakdown more often than not.

How can I trade this pattern?
Begin by calculating the target price - the minimum expected price move. The triple top is measured in a way similar to that for the head and shoulders top.Calculate the height of the pattern by subtracting the lowest low from the highest high in the formation. Then, subtract the height from the lowest low. In other words, an investor can expect the price to move downwards at least the distance from the breakout point less the height of the pattern.

For example, assume the lowest low of the triple top is 170 and the highest high is 220. The height of the pattern equals 50 (220 - 170 = 50). The minimum target price is 120 (170 - 50 = 120).
Bulkowski calculates that the measure rule is not completely reliable for the triple top, estimating that nearly 50% of all triple tops will fall short of their minimum target price.

Edwards and Magee warn that true triple tops are few and far between. So, it makes sense to be cautious when assessing what might initially look like a developing triple top.
According to Edwards and Magee, an investor should never "jump the gun" with a triple top. If the triple top is not completed by breaking through the confirmation point, experts advise caution. The pattern can fail to complete and just as easily recommence an upwards trend. However, Edwards and Magee also explain that if the pattern has been confirmed by a valid breakout, then the pattern seldom fails.

"Stick to the breakout rule," they advise, "and you will be safe."

Rallies are common with triple tops. An investor can trade that return move to his or her advantage. According to Bulkowski, if an investor misses the breakout, there's still time to place or add to a short position when prices resume their rally towards the former breakdown level. In this case it would have been 170.

Are there variations in the pattern that I should know about?

1. Hybrid Variation

There is a hybrid variation that appears to be a cross between a double and triple top. The middle peak is slightly lower than the left and right peaks. This is still a valid reversal pattern.

2. Fourth Peak

It is possible for the pattern to display a fourth peak before reversal occurs.

Triple Bottom Trend Reversal Pattern

A combination of the inverted head-and-shoulders and the double bot
tom reversal formations gives the triple bottom, which is a mirror image of the triple top pattern. Again, this means that the same characteristics, potential drawbacks, signals, as well as trader's point of view can be referred to the triple bottom chart pattern.

A triple bottom pattern displays three distinct minor lows at approximately the same price level. The triple bottom is considered to be a variation of the head and shoulders bottom. Like that pattern, the triple bottom is a reversal pattern.

The only thing which differentiates a triple bottom from a head and shoulders bottom is the lack of a "head" between the two shoulders. The triple bottom illustrates a downtrend in the process of becoming an uptrend. It is, therefore, vital to the validity of the pattern that it commence with prices moving in a downtrend.

Elaine Yager, Director of Technical Analysis at Investec Ernst and Company in New York and a member of Recognia's Board of Advisors goes further to say that this pattern must commence with prices moving in a major downtrend - one that has lasted for one year or more.

What does a triple bottom look like?
As illustrated below, the triple bottom patte
rn is composed of three sharp lows, all at about the same price level. Prices fall to a support level, rise, fall to that support level again, rise, and finally fall, returning to the support level for a third time before beginning an upward climb. In the classic triple bottom, the upward movement in the price marks the beginning of an uptrend.

Investors should note that the three lows tend to be sharp. When prices hit the first low, sellers become scarce, believing prices have fallen too low. If a seller does agree to sell, buyers are quick to buy at a good price. Prices then bounce back up. The support level is established and the next two lows also are sharp and quick. Bulkowski points out that the sharp lows are often only one-day spikes.
While the three lows should be sharp and distinct, the highs of the pattern can appear to be rounded. The pattern is complete when prices rise about the highest high in the formation. The highest high is called the "confirmation point."

This pattern, the experts warn, can be easily confused with other similar patterns. For example, if the center low is lower than the other two, the pattern may be a head and shoulders bottom. Also, if the three bottoms are successively higher or lower than one another, the pattern may be a triangle formation.

Because the pattern is easy to confuse, an investor should look for three sharp lows which are well separated and not part of a larger congestion pattern. In addition, between the lows, the highs should be fairly rounded in shape, although it is not absolutely necessary to the validity of the pattern. If the pattern fails to move up and break through the confirmation point after reaching the third low, the pattern is not a valid triple bottom.

Why is this pattern important?
Like the head and shoulders bottom which it so closely resembles, the triple bottom is considered to be a reliable pattern. Bulkowski estimates the failure rate to be a low 4%, assuming that an investor waits for the upside breakout through the confirmation point.

Is volume important in a triple bottom?

Generally, volume in a triple bottom tends to trend downward as the pattern forms. Volume tends to be lighter on each successive low. Volume then picks up as prices rise above the confirmation point and break into the new upward trend.

An investor should not dismiss a triple bottom if volume does not display this pattern. The pattern can take several months to form and, during that time, volume can be irregular and unpredictable. Volume should be higher at the lows than on the days leading to the lows.

What are the details that I should pay attention to in the triple bottom?

1. Duration of the Pattern

The average formation takes approximately four months to develop. The triple bottom is one of the longer patterns to develop. Schabacker and Murphy agree, however, that the longer the pattern takes to form, the greater the significance of the price move once breakout occurs.

2. Need for a Downtrend
The triple bottom is a reversal pattern. This means it is essential to the validity of the pattern that it begin with a downward trend in a stock's price. As Yager noted above, some experts believe the downtrend must be a major one.

3. Decisive Breakout

Because a triple bottom can be confused with many other patterns as it is developing, experts advise that investors wait for a valid breakout through the confirmation point before deciding whether the pattern is a true triple bottom. Bulkowski reinforces this message, stating that true triple bottoms are quite rare and waiting for a valid breakout is essential before determining whether the pattern is a triple bottom.

4. Volume

5. Pullback after Breakout

It is very common in the triple bottom to see a pullback after the breakout. Bulkowski estimates that 70% of triple bottoms will throw back to the breakout price.

How can I trade this pattern?
Begin by calculating the target price - the minimum expected price move. The triple bottom is measure in a way similar to that for the head and shoulders bottom.
Calculate the height of the pattern by subtracting the lowest low from the highest high in the formation. Then, add the height to the highest high. In other words, an investor can expect the price to move upwards at least the distance from the breakout point plus the height of the pattern.

For example, assume the lowest low of the triple bottom is 200 and the highest high is 240. The height of the pattern is 40 (240 - 200 = 40). The minimum target price is 280 (240 + 40 = 280).
Experts agree that triple bottoms are not that common. Edwards and Magee, for example, stress the necessity for waiting for a valid breakout through the confirmation point.However, this is a reliable pattern if the pattern has been confirmed by a valid breakout.

Pullbacks are common with triple bottoms. Investors can use this to their favor advises Bulkowski. If prices return to the confirmation point quickly after the breakout (within two weeks but no more than a month), Bulkowski suggests that the time to jump in is once the prices have turned around again and headed back up.

Investors looking for a valid triple bottom should be wary of a pattern that shows a lot of white space as it is developing. The pattern should display a fairly regular progression among the three, well-separated lows. Yager suggests that the symmetry of this pattern is something that should catch your eye.
source : http://www.recognia.com