Triple top and triple bottom patterns, though infrequent, wield significant influence as they signify a trend reversal. These formations hold relevance in the realm of crypto trading, with a triple bottom potentially kickstarting a fresh bullish trend, while a bearish triple top could indicate an imminent correction. However, encountering a flawless triple top or bottom pattern where horizontal resistance and the neckline align perfectly is a rare occurrence. It is precisely this rarity that lends them their potency.
The process of identifying a triple pattern is straightforward, and once detected, it can serve as a valuable tool for technical analysis, enabling the formulation of a well-informed trading strategy. In this discussion, we shall delve into the intricacies of triple top and bottom patterns and elucidate how to construct a trading concept once these chart patterns come into view.
Understanding the Triple Bottom Pattern
The triple bottom pattern emerges as a distinctive chart pattern marking the conclusion of a downtrend. This bullish candlestick pattern is characterized by three unsuccessful endeavors to establish new lows near a similar price point. Confirmation of the pattern transpires when the price surges above the prevailing resistance.
The formation of the triple bottom pattern transpires subsequent to a period of declining prices. In the cryptocurrency market, a rebound initiates but falters to sustain an upward trajectory. Remarkably, each rebound that falls short is mirrored by an unsuccessful attempt to establish new lows, resulting in the market trading within a horizontal range. This cycle repeats until sellers exhaust their efforts, culminating in a third and robust market rebound that propels prices to break out upwards.
The appearance of this pattern often resembles the letter "W" as the pattern's lows cluster around the same price level. Some traders also liken it to a rectangle, and both interpretations are valid, as the triple bottom pattern is indicative of a bullish reversal setup.
Comprehending Bullish and Bearish Reversal Patterns
A bullish reversal pattern signifies a chart formation hinting at the transformation of a downtrend or correction into an uptrend. It comprises three fundamental components:
- Initial correction lower
- Formation of the reversal pattern
- Confirmation through a breakthrough to the upside
Examples of bullish reversal patterns encompass candlestick formations such as the hammer candlestick and the bullish engulfing pattern.
Conversely, a bearish reversal pattern, the antithesis of its bullish counterpart, also comprises three key segments, mirroring those of the bullish reversal:
- Uptrend rally
- Formation of the reversal pattern
- Confirmation via a breakdown to the downside
Bearish reversal patterns encompass formations like the bearish engulfing pattern and the rising wedge.
In addition to reversal patterns, there exist continuation patterns that do not entail a reversal but instead entail sideways trading prior to a breakout that perpetuates the original trend's direction. Consolidation patterns, such as flags, pennants, and the bear trap, are notable examples of continuation patterns.
Interpreting the Significance of the Triple Bottom Pattern
The triple bottom pattern stands as a bullish reversal indicator. In essence, when you identify the presence of triple bottom chart patterns, it implies an impending bullish resurgence that will ultimately breach the pattern's peak.
For long-term HODLers, this pattern's confirmation represents an additional opportunity to augment their bullish position. Simultaneously, traders seeking to take short positions may employ the triple bottom pattern as an exit signal.
The reliability of the triple bottom pattern hinges on the degree to which the actual pattern aligns with the idealized version. The closer the actual market pattern resembles the idealized one, the more dependable the results are likely to be.
Exploring the Triple Top Pattern
The triple top pattern manifests as a bearish chart formation characterized by a price repeatedly testing a high point three times, subsequently giving way to a descent and a breach of new lows. Diverging from the triple bottom, it materializes at the conclusion of an uptrend, suggesting the potential for a change in trend direction.
This chart pattern materializes following a prolonged rally. As the rally loses the backing of buyers and major players, sellers exert downward pressure on prices. Initially, the sellers lack the strength to instigate a new downtrend.
What follows is a dramatic showdown between bullish and bearish forces. With each minor correction met by another rally that falters near previous highs, a protracted battle ensues. Ultimately, the bullish momentum wanes, and the cryptocurrency market initiates its corrective phase, breaching the recently established support.
The triple top pattern assumes a resemblance to the letter "M," distinguished by three unsuccessful attempts at new highs positioned closely together, giving rise to three distinct peaks.
While the triple top pattern bears some resemblance to the head and shoulders pattern, it diverges in the positioning of the three highs, which are in proximity to the preceding price level. In contrast, the head and shoulders pattern features a central peak surpassing the highs to its left and right.
Both the triple top and head and shoulders patterns yield similar outcomes, foreshadowing a break below support as a new downtrend materializes.
The triple top pattern proves valuable for bullish traders, serving as an early indicator of an impending substantial correction. This enables bullish traders to fine-tune their stop-loss positions, implement risk management strategies, or partially liquidate their holdings to secure profits.
Given its status as a bearish reversal chart pattern, bearish traders may employ the triple top as a signal to enter the cryptocurrency market as short sellers. This strategic move allows traders to capitalize on potential downward price movement.
Identifying Triple Top and Bottom Patterns on a Crypto Chart
Triple top patterns can materialize on various chart time frames but must emerge subsequent to an uptrend. To pinpoint a triple top, watch for a significant rally culminating in three unsuccessful attempts to achieve fresh highs.
Crucially, these three failed attempts to establish new highs should be clustered near the same price point. If they exhibit substantial price divergence, it likely indicates the formation of a different pattern distinct from the triple top.
Let's delve into a concrete example. In the 15-minute Bitcoin chart below, BTC experiences a rapid 9% rally, surging from $42,100 to $45,876 within minutes. This rapid ascent marks the inception of the uptrend and the commencement of the triple top pattern.
Subsequently, Bitcoin struggles to sustain further upward momentum and undergoes a correction to $42,130. An ensuing attempt to rally falls short at $45,800, characterized by a bearish harami candlestick pattern, and corrects to $44,628. This constitutes the second failed attempt to establish a new high.
Following a bottom at $44,628, a third rally effort ensues, reaching $45,694 before faltering and reversing direction downward.
Notably, these three failed attempts all reverse in proximity to the same price range, encompassing figures between $45,694 and $45,876. The disparities among these figures amount to a mere 0.4%.
Conversely, the anatomy of a triple bottom mirrors that of a triple top.
Illustrating the concept further with the Bitcoin daily chart time frame, three thwarted attempts at lower lows transpire between May and July 2021.
On April 14, 2021, Bitcoin embarks on a rapid and substantial correction, discovering its initial support at $29,800. This low represents the initial unsuccessful attempt to establish lower lows within the context of the triple bottom pattern.
Bitcoin subsequently rallies to $42,444, constituting the zenith of the triple bottom pattern. Subsequently, Bitcoin undergoes a decline to $28,726, marking the pattern's second low.
Following a brief rally, Bitcoin experiences another breakdown attempt that falters at $29,258. This final low culminates in the third and ultimate low of the triple bottom pattern. From this juncture, Bitcoin stages an aggressive rally, ultimately surging to fresh highs exceeding the pattern's pinnacle at $42,444.
What Occurs Following a Triple Bottom Pattern?
Once the three low points constituting a triple bottom pattern have taken shape, one can anticipate a bullish reversal that results in a breakout toward new price highs. To validate the breakout to the upside, the initial step is to pinpoint the high point of the triple bottom pattern.
A convenient approach to identifying the high point involves placing vertical lines at the first and third bottoms within the pattern. Subsequently, determine the highest price point (or peak) lying between these two vertical lines. In the provided chart, the highest price amid the three bottoms amounts to $42,396. This high point can be denoted with a horizontal line extending to the right.
A sustained breach above this elevated price level serves as a signal to bullish traders that the reversal is in progress, with the prospect of even higher prices on the horizon. While this confirmation isn't entirely infallible, it imparts a degree of reliability upon which traders can rely for executing trades with enhanced probability.
Additional corroborative factors can lend support to the case for a bullish breakout, such as a surge in volume during the upward movement or an expansion in the ranges of the bullish candlesticks.
It's worth noting that the presence of these conditions isn't an absolute prerequisite for a successful bullish breakout. Nevertheless, their existence further reinforces the likelihood of a continuation following the breakout.
What Occurs Following a Triple Top Pattern?
Once the three high points characterizing a triple top pattern have materialized, one should anticipate a bearish reversal. The confirmation of the bearish reversal chart pattern occurs when the price descends below the low point of the triple top.
To confidently identify the low point of the triple top pattern, it is advisable to mark a vertical line at the high points (1 and 3 in the illustration below). Subsequently, identify the lowest price exhibited on the chart between these two vertical lines. Mark a horizontal line at the determined lowest price point and ensure that this line extends to the right. This low point of the triple top will serve as the price level where the pattern and its downward breakout into a new correction can be confirmed.
In the Bitcoin chart depicted above, following the rejection at these three highs, the leading cryptocurrency embarks on a more pronounced downtrend. This pattern is substantiated upon witnessing a new low beneath the low of the triple top pattern. The lowest price situated between the three peaks amounts to $42,130.
Failure to breach below the low point of the triple top pattern implies that the triple top remains unconfirmed. Non-confirmation of a downward breakout suggests the emergence of an alternative pattern, and it is advisable to refrain from engaging in short selling under such circumstances.
How to Execute Trades Using the Triple Bottom Pattern
Once the three extreme price points forming the pattern are identified, confirming and executing trades based on the pattern becomes relatively straightforward.
Let's take the example of Ethereum (ETH) during the summer of 2021 when it was undergoing a corrective phase to consolidate previous gains. By examining the daily chart, one can effortlessly pinpoint three low points occurring near the same price level.
These low points are as follows: $1,728, $1,697, and $1,716, with the differences between them amounting to less than 2% of their respective previous prices.
Now, it's time to establish the entry point for the triple bottom pattern. To do this, confirmation is required. Confirmation of the triple bottom pattern transpires when the price breaks above the pattern's high point.
To identify the pattern's high point, mark the first and third bottoms using vertical lines. Next, locate the highest price point situated between these two vertical lines and denote it with a horizontal line. In the ETH chart above, the pattern's high point resides at $2,912.
Given that the triple bottom represents a bullish reversal pattern, the recommended approach is to initiate a long position at the breakout point, which in this case is $2,912.
To limit potential losses on the trade, a stop-loss order is utilized and placed below the entry point. A prudent stop-loss level can be positioned at the lowest point within the triple bottom pattern, which, in the context of this ETH triple bottom pattern, amounts to $1,697.
Upon a confirmed breakout to the upside, the market typically covers the same distance from the high point to the low point of the triple bottom pattern.
The length of the triple bottom pattern measures $1,215 ($2,912 high minus $1,697 low equals $1,215).
By adding $1,215 to the breakout price of $2,912, an initial target level is established at $4,127.
Consequently, the stop loss is positioned at $1,697, while the take profit level is set at $4,127.
Cons of Triple Top and Bottom Patterns
While confirmed triple top and bottom patterns can provide reliable signals, they are not infallible, and traders should be aware of their limitations.
One challenge that inexperienced traders may encounter is impatience. Novice traders might observe three failures occurring near the same price level and prematurely enter a position based on the assumption that the pattern is in play. However, this hasty decision often leads to unconfirmed patterns, increasing the risk of failed trades and losses.
Moreover, the direction of a trend often correlates with trading volume. Breakouts with low trading volume are more likely to fail, whereas breakouts accompanied by increased volume tend to be more robust and indicative of follow-through to the target.
Lastly, it's essential to recognize that smaller cryptocurrencies, in contrast to major ones like Bitcoin and Ether, exhibit lower liquidity. Consequently, smaller tokens are more prone to experiencing breakouts that do not follow through, primarily due to their limited market size.
Given these limitations, it is crucial for traders to incorporate stop-loss orders in their trading strategy for every trade to safeguard their account from significant losses should the market move against their positions.
The triple top pattern serves as a bearish reversal signal that can forewarn traders of an impending correction, while the triple bottom pattern may indicate the initiation of a new bullish trend. However, traders should exercise caution and await confirmation when employing these patterns in trading larger market cap cryptocurrencies due to their inherent limitations.