One of the most common patterns used in trading is the double and triple top and bottom pattern. These trading patterns are quite easy to spot in a chart, and the results bring about significant price actions that greatly improve trading decisions. However, while they’re easy to spot in a chart, one should be well versed in the criteria and requirements for one pattern to be considered a double or triple top and bottom pattern. In this article, you’ll be given detailed info about the double and triple top and bottom pattern, how you can find it in a chart, and how you can make full use of them in trading.
What are Double or Triple top and bottom patterns?
The double or triple top and bottom pattern look similar to the head and shoulders pattern which is discussed in our other article. The tops come with peaks along with a neckline which serves as a line for breakouts. The major difference between this pattern with the head and shoulders pattern is that the peaks at the top or at the bottom are touching a single trend line. Also, the tops, as well as the bottoms, almost have a similar height which is opposed to the head and shoulders pattern where the head has more height.
This pattern signals a trend reversal and is often associated with a major trend reversal if there is a considerable range covered by the pattern. A double or triple top is a bearish pattern that signals an imminent price, drop while a double or triple bottom is a bullish pattern that gives a sign for prices to go up or rise.
This trading pattern is prominent in markets having significant price movements for a week at least. Just like the head and shoulders pattern, this pattern also shows up during consolidation after a price rally. This pattern can be an effective signal for trend reversal provided it is plotted properly using certain criteria and requirements.
So what are these criteria and requirements to find a double or triple top and bottom pattern?
How to find a Double or Triple top and bottom on a chart
If finding a head and shoulders pattern on a chart is easy for you then you’ll also find the double or triple top or bottom pattern easy to track down in a chart.
First of all, a double or triple top pattern can only be found in an uptrend market – hence its name. The overall look of this pattern is like the letter “M” for the double top pattern, and for the triple top pattern just add an extra peak. It stands on top of an uptrend market having two peaks for the double top and three peaks for the triple top. The peaks should have an average height with each other and should be touching a common resistance trend line. A neckline is formed by drawing a line from the lows of the peaks. As soon as the price breaches or breaks the neckline, the pattern will be confirmed and a breakout is to be expected.
On the other hand, a double or triple bottom pattern lies below a downtrend market but can also be found on short downtrend reversals. It shows in the form of a letter “W” for the double bottom pattern and an additional leg for the triple bottom pattern. It is the counterpart of the double or triple top pattern where the lowest lows should touch a common support trend line. The neckline is drawn by connecting a line from the peaks from its lowest lows – the middle peaks where the price bounces from its lowest lows to the other lowest low. As soon as price breaks the established neckline, a trend reversal to a bullish market is expected.
While both top and bottom patterns can take a while longer to form at the end of a trend, it is also possible that these patterns would form at a shorter range depending on market volume. Markets in consolidation usually have a lesser volume which makes the formation of a double or triple top and bottoms longer. In relation to volume, breakouts happen when there is a sudden surge in volume. So as an important indicator for when the pattern begins and ends in a breakout, be extra mindful of the volume movement.
How to implement the double or triple top and bottom in trading
Now that you have a good idea of how to find a double or triple top and bottom on a chart, you are now ready to trade – but that’s as far as the basics go. If you want to realize the effectiveness of the pattern and also to reduce risks in case of a failed pattern formation, you need to bear in mind a few more considerations.
The first consideration is to know your market. As soon as you’ve seen a possible double or triple top and bottom formation, you should first get yourself familiar with the specific market. Check its history as well as previous patterns that might help you decide if a pattern double or triple top and bottom pattern formation is possible. Also, markets are susceptible to habits along with practices for every season – it is also important to note these events when evaluating a chart for patterns.
Although these patterns are used most of the time, the results may not always be guaranteed – there are also chances for a failed breakout. In cases when there is a failed breakout or when the price moves the other way than what is expected, it would be best to establish cut loss levels. Cut loss levels enable you to reduce risks of losses in case of a failed breakout. Ideally, a 5% cut loss would be recommended to put the damage to a minimum during reversal of expected trend or pattern, however, you can also alter this amount depending on your risk capacity.
It is also good to consider the use of indicators for retracement levels to determine the average peaks, bottoms, as well as neckline. One popular indicator used to determine retracement levels is the Fibonacci retracement tool. It allows you to plot levels in the graph where possible retracements are imminent. Another helpful indicator to verify patterns is the RSI. The RSI allows you to check whether a stock is already overbought which means a possible price drop is imminent or oversold which means a rise in price is possible.
Also, you may want to reinforce your technical analysis with sound fundamental analysis. Fundamental analysis is as important as looking for patterns in a chart and it serves as an excellent backup for your decisions when trading. Sound knowledge of what the company is doing, their objectives and goals, as well as their issues can greatly help any trader determine the best step to take in trading.
Confidence is also an essential factor involved in trading. Without confidence, you may end up with half-hearted decisions that may lead to catastrophic losses. The only way that you gain enough confidence when trading is to practice and develop the skills necessary to attain positive results. With the valuable knowledge about the double or triple top and bottom pattern provided in this article, you are no longer a newbie trader and you have now equipped yourself with what you need – now it’s time to put it into practice on eToro!
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