Triple tops and bottoms

Price patterns are visible as identifiable sequences of price bars shown on technical analysis charts. These patterns can be used to study past price movements and predict future movements for a particular trading instrument. Readers should already be familiar with trend lines, continuation price patterns, and reversal price patterns.

In this article, we'll look at how to interpret patterns once they've been identified, and look at the rare but powerful triple top and triple bottom patterns.

Duration

The duration of a price pattern is an important factor in interpreting the pattern and predicting future price movements. Price patterns can appear on any chart period, from a fast 144-tick chart to 60-minute, daily, weekly or yearly charts. However, the significance of a pattern is often directly related to its size and depth.

Patterns that occur over a longer period of time tend to be more reliable, with larger moves occurring when price moves outside the pattern. Thus, a pattern developing on a daily chart is expected to result in a larger move than the same pattern seen on an intraday chart, such as a minute chart. Likewise, a pattern forming on the monthly chart is likely to result in a larger price movement than the same pattern on the daily chart.

Price patterns occur when investors or traders become accustomed to buying and selling at certain levels, and hence the price fluctuates between these levels, creating patterns such as flags, pennants and the like. When price finally breaks out of the price pattern, it can signal a significant change in sentiment. The longer the duration, the harder buyers will have to push to break above the resistance area (and the harder sellers will have to push to break below the support area), resulting in a larger move once price does break in either direction. . Figure 1 shows the pennant price pattern formed on the weekly chart of Alphabet Inc. (GOOG). Once the price continued to move in the established direction, the upward movement became significant.

Volatility

Likewise, the degree of price fluctuation within a price model can be useful in analyzing the validity of a price model, as well as in predicting the size of a possible price breakout. Volatility is a measurement of price changes over time. Large price swings indicate increased volatility, a condition that can be interpreted as more active fighting between bears who are trying to push prices down and bulls who are trying to push prices up. Patterns that exhibit a higher degree of volatility are likely to result in larger price movements once price breaks out of the pattern.

Larger price movements within the pattern may indicate that the opposing forces – bulls and bears – are engaged in a serious battle rather than a light fight. The higher the volatility of the price pattern, the more anticipation is created, resulting in a larger, possibly explosive, price move when the price breaks through a support or resistance level.

Volume

Volume is another factor when interpreting price patterns. Volume refers to the number of units of a particular trading instrument changing hands during a certain period of time. Typically, the volume of a trading instrument is displayed as a histogram or a series of vertical lines appearing below the price chart. Volume is most useful when it is measured relative to its recent past. Changes in buying and selling volume that occur can be compared to recent activity and analyzed: any volume activity that deviates from the norm may indicate an upcoming price change.

If price breaks above or below an area of ​​resistance or support, respectively, and is accompanied by a sudden increase in investor and trader interest represented by volume, the resulting move is likely to be significant. An increase in volume can confirm the validity of a price breakout. On the other hand, a breakout without a noticeable increase in volume is much more likely to fail because there is no enthusiasm to support the move, especially if the move is upward.

Guidelines for interpreting patterns

Three general steps help technical analysts interpret price patterns:

1. To identify: The first step in successfully interpreting price patterns is identifying valid patterns in real time. Patterns are often easy to spot in historical data, but they become more difficult to spot as they are being generated. Traders and investors can practice identifying patterns in historical data by paying close attention to the method used to draw trend lines. Trend lines can be drawn using highs, lows, closing prices, or other data points in each price bar.
2. Evaluate: Once a pattern is identified, it can be evaluated. Traders and investors may consider the duration of the pattern, the accompanying volume, and the volatility of price movements within the price pattern. Evaluating them can give a better idea of ​​the validity of the pricing model.
3. Forecast: Once the model is defined and estimated, traders and investors can use this information to form forecasts or predict future price movements. Naturally, price patterns do not always match, and identifying them does not guarantee that any specific price action will occur. However, market participants may monitor activities that likely happen, allowing them to quickly respond to changing market conditions.

Triple tops and bottoms

Triple tops and bottoms are a continuation of double tops and bottoms. If double tops and bottoms resemble the letters “M” or “W”, then triple tops and bottoms resemble the cursive “M” or “W”: three presses up (in a triple top) or three presses down (for a triple bottom). These price patterns represent multiple failed attempts to break through an area of ​​support or resistance. In a triple top, price makes three attempts to break above the established resistance area, fails, and retreats. A triple bottom, on the other hand, occurs when the price makes three attempts to break through a support level, fails, and bounces back up.

The formation of a triple top is a bearish pattern because it interrupts an uptrend and causes the trend to change to a downtrend. Its formation occurs as follows:

• Prices move higher and higher and eventually reach a resistance level, falling back to the support area.
• The price tries to test the resistance levels again, but fails and returns to the support level.
• The price once again unsuccessfully tries to break through the resistance, falls back and overcomes the support level.

This price action is a duel between buyers and sellers; buyers try to raise prices higher, and sellers try to lower prices. Each test of resistance is usually accompanied by a decrease in volume until the price falls through a support level with increased participation and corresponding volume. When three attempts to break through a set resistance level fail, buyers typically become exhausted, sellers take over, and the price falls, causing a trend reversal.

On the other hand, a triple bottom is bullish in nature as the pattern breaks the downtrend and causes the trend to reverse to the upside. The triple bottom price pattern is characterized by three unsuccessful attempts to push the price through the support area. Each subsequent attempt is usually accompanied by a decrease in volume until the price finally makes a final attempt to push down, but fails and returns to pass the resistance level. Like the triple top, this pattern indicates a struggle between buyers and sellers. In this case, it is the sellers who get tired, giving way to buyers who can reverse the prevailing trend and win with the uptrend. Figure 2 shows the triple bottom that once formed on the daily chart of McGraw Hill stock.

A triple top or bottom means that an established trend is weakening while the other side is gaining strength. Both represent a shift in pressure: with a triple top there is a shift from buyers to sellers; a triple bottom indicates a transition from sellers to buyers. These templates provide a visual representation of the changing of the guard, so to speak, when power switches hands.

Bottom line

Price patterns occur in any chart period, be it fast tick charts used by scalpers or yearly charts used by investors. Each pattern represents a struggle between buyers and sellers, resulting in a continuation of the prevailing trend or a reversal, depending on the outcome. Technical analysts can use price models to evaluate past and current market activity, as well as predict future price action to make trading and investment decisions.