Hello friends and welcome to this podcast by Angel Broking. But before we talk stocks and markets, let me tell you about a recent incident. Ravi was driving in his car back to home one day, and he was really happy.
He had made good returns on his short term investments, and was turning up the volume, when his car hit the speed breakers. One shock . . . then another shock . . and then another!
Ravi reached home, and found some ice cubes to soothe his neck.
Have you ever landed a triple speed bump when driving?
While some speed across the single-hill speed breakers, the triple tops are sure to get cars screeching and coming to a halting slowdown!
The triple top pattern may not hit your car, but it can predict the slowdown of a stock whose price is speeding upwards.
Triple top pattern is really simple to understand. All you need to spot, for a triple top pattern, is similar to the cross section of a triple speed-breaker on roads. Simple right?
Now, let's jump into the finer details.
Essentially, the triple top pattern can happen in any time frame. Since it predicts that the prices are likely to go downwards, it also follows that a triple top pattern shows after an uptrend.
All it consists of, are three peaks and these peaks occur at almost the same level.
Take note of this, because a slightly more significant difference in the heights of peaks can represent a closely related pattern called the head and shoulders pattern.
In the head and shoulders pattern, the middle peak is higher than the peaks at the sides.
At the same time, the peaks on the sides are almost at the same level, just like most of our shoulders. Investors trade the head and shoulders pattern almost in the same way as the triple top pattern.
So the point to be noted here, is that the triple top pattern indicates a strong resistance at the peaks. Let’s see what actually goes on in the price chart.
When a security’s price reaches a peak and swings downward, the price is actually facing resistance. Hence, a triple top pattern simply indicates that despite all the support near the swing lows, the resistance is high enough to drive the price further downward.
When the pullback happens, the security’s price is driven lower and forms swing lows between these peaks. After the third peak is touched, if the price continues to fall down, then the pattern is said to have been completed. Another way to read the triple top is to say that despite the pushback from the region of support,k the security’s price fails to penetrate the peaks.
That’s why, if the last peak formed is slightly higher than the middle one, then the pattern formed is not considered a very reliable one. It is said that the bulls are still putting up a fightback.
Although the triple top pattern is a reliable one, no pattern works by the text all the time.
That’s why, if you are trading or creating a short position for yourself on the basis of the triple top pattern, always remember to set a reasonable stop loss.
Traders generally set their stop loss for short positions at the latest peak, in case the price does climb above the resistance levels.
And if you are new to trading, always remember this : you should always play your short position safely, because you can lose an infinite amount of money through a bad short sell.
Therefore, a bad short position can be worse than investing in a failing company. Anyway, let’s move on to the most exciting part: what to remember when you spot a triple top pattern?
Number one. The three peaks are rarely at the same level. Now, if the last peak is slightly lower than the second one, it means that the chances of a downtrend following after completion of pattern is considerable. On the other hand, if the last peak makes it beyond resistance, it might push beyond the resistance too. That’s why, don't rely on the latter case.
Number 2. Before buying yourself a short position, it is a good idea to wait for the prices to drive slightly below the breakout - which is simply the line that connects the three troughs of the triple top. This helps you avoid a false signal.
And lastly, number 3. If you had occupied a long position, then it is probably a good idea to give up when the price moves beyond the support levels.
The opposite of the triple top is the triple bottom pattern. While the triple top indicates a following downtrend, the triple bottom indicates an upcoming uptrend. But let’s discuss that some other day.
Patterns can help you form simple yet nuanced visual maps of various complexities that arise in the stock market.
That’s why, you should keep doing your research - because placing trades with certainty requires knowledge of the market’s intricacies. To expand your knowledge further, check out our podcasts or log on to www.angelbroking.com to learn more.