How to Trade Double Tops and Triple Tops (and Bottoms)
Double Tops and Triple Tops are reversal chart patterns, indicating a change in trend direction is potentially underway. These patterns signal that an uptrend is likely over and a downtrend is now underway. Double Bottoms and Triple Bottoms occur at market bottoms, signaling a downtrend is likely over and an uptrend is now underway.
Double tops, triple tops, double bottoms, and triple bottom chart patterns occur in all markets and on all time frames. Here’s what these chart patterns look like, how to interpret them, and ultimately how to trade them.
How to Trade Double Tops and Triple Tops
A double top is created when the price is trending higher, stalls and pulls back, rallies back the last high (or close to it) and then falls again. This creates two price peaks at a very similar price level, hence being called a double top. A double top is “complete,” indicating the uptrend is over, when the price falls below the pullback low between the two peaks. For more on how trends work and unfold, see Trading Impulsive and Corrective Waves.
A triple top is the same, except the pattern is: peak, pullback, peak, pullback, peak, drop. All the peaks occur at similar price levels. The triple top chart pattern is complete—and indicates a downtrend is underway—when the price drops below the prior pullback lows. The following chart shows what it looks like.
How to Trade a Double or Triple Top Chart Pattern
Double and triple tops can be used for both trading analytical purposes. I personally use them mostly for analytical purposes. They do show a potential reversal is occurring, but for trading purposes, the reward:risk on the chart patterns isn’t always that great. Therefore, I do watch for this pattern, but typically use it more for getting a picture of where the price is likely heading, which then helps confirm or reject trade signals I am be getting from other strategies. That said, you may opt to trade these patterns if you wish. Here are some potential ways to do so.
Entry, Stop Loss, and Target
For the double or triple top, enter a short trade when the price falls below the lowest pullback low, or the latest pullback low in the case of a triple top. Place a stop loss just above a recent swing high. Ideally, this stop loss should not be the top of the pattern, as there is often a swing high that occurred prior to entry but that isn’t the top of the pattern.
If there is no swing high below the very top of the pattern, because the price fell so quickly like it did in the Double Top shown above, then drop down to a lower time frame chart and find a swing high (below the top of the pattern) on that lower time frame. Place your stop loss above that swing high on the lower time frame. If trading a daily chart, drop to the 4-hour chart to find a swing high. If you don’t see anything there, look at an hourly chart. If you still don’t see any relevant swing highs, then don’t trade the pattern, but you can still use it for analysis purposes (you know the price is likely in a downtrend now, which helps confirm or reject other trade signals you may get from other strategies). This can be done on other time frames well. If you can’t find a swing high below the top of the pattern, drop down to the next lower time frame and try to spot one there.
To attain a target, subtract the high point of the pattern from the lowest pullback low to get “the height” of the pattern. Then subtract this height from the breakout price (pullback low); this gives you your target.
If a stop loss is placed near the top of the pattern, the reward:risk ends up being 1:1 because our stop loss and target are both based on the entire height of the pattern. The reward:risk on any trade should be more favorable than 1:1, and ideally much more favorable. This is why we want that stop loss below the top of the pattern.
With a triple top, use the highest peak and lowest pullback to get the full height of the pattern. Alternatively, you can use the latest low and high to get the height of the pattern, and then subtract this from the breakout point. These two options are shown in the chart below.
Targets provide us with an estimate of where the price could go for reward:risk purposes, but are not meant to indicate that the price will fall that far or that it will stop falling at our target. Targets are just an estimate.
Trading a triple top is very similar to trading a head and shoulders chart pattern.
How to Trade Double Bottoms and Triple Bottoms
Flip double and triple tops upside down and you get double bottoms and triple bottoms. With these bottoming patterns, entry signals occur when the price rallies above the pullback high (double bottom), or moves above the latest pullback high in a triple bottom.
A stop loss is placed below a swing low within the pattern, and the stop loss should be above the low of the pattern. If you don’t see a swing low within the pattern (that is above the very low of the pattern), then drop down to next time frame to see if you see one there. If you still don’t see a swing low you can use to put your stop loss below, then don’t trade the pattern. But, you can still use it for analytical purposes as the pattern is still telling you the likely direction of the price over the next while.
To get the target for the trade, calculate the distance between the low and high of the pullback(s) and then add that distance to the top of the pattern. This gives you a target for the trade. With a triple top, I tend to use the latest swing highs and lows for calculating the height of the pattern. I then add this amount to the breakout that I used for the trade.
For more on trading chart patterns and other forex trading strategies, check out my Forex Strategies Guide for Day and Swing Traders eBook.
Angled Trendline Breakouts
Like with the head and shoulders pattern, a trendline can be drawn along the two pullback highs and lows of a triple bottom or top. This trendline can also be used as an entry point. If the trendline method provides a more favorable entry point than entering at the previous swing high/low (method discussed above), then consider using the trendline method. If the trendline will result in entering at a worse price, then use the swing high/low entry.
Stop loss goes in the same place as discussed above. Add the height of the pattern to your entry point, just as you did before.
You may notice that depending on how you enter the pattern, and how you determine the height, a few different people could end up trading the pattern in different ways, all with different entries and profit targets. That’s okay. Remember, targets are just guidelines. As you gain experience trading, you can fine-tune your methods if you noticed that you are consistently leaving a lot of money on the table, or if the price often isn’t reaching your target.
Watch for False Breakouts
If a pattern forms, then breakouts, but then quickly fails to move in the expected direction, it could be a false breakout and the price may well head quickly in the opposite direction. I notice these a lot in the forex, stock, and futures market. Since the pattern is so well known, experienced traders know that a lot of amateurs will get duped into trading the pattern breakout. If the price then quickly reverses, all these amateurs lose money and it goes directly into the coffers of the pros.
The chart below shows a double top that failed. The price broke below the pullback low but then quickly rallied to a new high. Not too long later, another double top formed, and this one resulted in a successful downside breakout.
If the price drops below the prior low(s) in a double or triple top situation, but then quickly starts rallying again, I will buy as soon as I see this happening and place a stop loss below the recent low. I then place a target below the prior highs, but still in the upper portion of the pattern.
If there is a double or triple top bottom situation, and the price breaks to the upside but then quickly starts dropping back into the pattern, I will typically go short as soon as I see that happening. Place a stop loss above recent above the high, and place a target in the lower portion of the pattern but above the recent lows.
Trading false breakouts require quick reflexes and a lot of discretion. My general rule of thumb is this: if something rather obvious happens (like a breakout) that should push the price in a particular direction, but then the price doesn’t go in that direction, the price is probably going to head hard the other way.
In order to trade a false breakout, though, I need to see other evidence to suggest that I want to take a trade in that direction. For example, maybe there was a huge uptrend and then a small triple top pattern formed. If the price breaks out of the bottom of the pattern, but then quickly reverses to the upside, I am happy to buy because the long-term uptrend may be re-emerging. But, if the uptrend was weak before the pattern, or the triple top pattern is nearly as big as the prior uptrending move before the pattern started, then I am less inclined to take that trade. In this latter case, there is less evidence to convince me of taking that long trade after the potential false breakout. For more on this, see Price Action Trading: Velocity and Magnitude.
The Final Word on Trading Double Tops/Bottoms
Practice spotting these patterns, and testing out the strategy and your implementation of it, in a demo account. “Knowing” something and being able to act on it in real-time are completely different things. Practice and prepare yourself. As you are practicing, look at what the price action was doing when the price breaks out and continues in that direction. Then look at the patterns that produce false breakouts. Do you notice any differences between the patterns that produce false breakouts and the ones that legitimately breakout? Consider ways to take advantage of the tendencies you see.
Many double and triple tops/bottoms aren’t worth trading. They simply don’t provide a good enough reward:risk. That said, these patterns can still be used for analytical insight. If the price breaks out of the bottom of the pattern, it is probably trending lower for the next while. This is worthwhile information to have, but I prefer taking actual trades using trading setups that typically provide higher win-rates and larger rewards for the risk. These include trend trades and front-running.
By Cory Mitchell, CMT