Technical Analysis – Double and Triple Tops/Bottoms

A double or a triple top/bottom pattern is a reversal pattern. It means that the market is expected to decline (after a rising trend) or to rise (after a bearish trend) when these patterns form. Double and triple tops/bottoms are different in both the way they form and the way traders should interpret them. The fact that the market is hesitating at a specific level indicates the possible formation of a reversal. However, multiple tries at the same level is not a sign of a strong reversal pattern, but a sign of continuation. Most likely, a triangle is about to form, and the previous trend will resume after the triangle completes. For more about this, please check the previous article on the Trading Academy. Ascending and descending triangles are the result of multiple testing of the same resistance or support area.

What Makes Double and Triple Tops?

Between these two patterns, based on the logic explained above, a double top/bottom is a more powerful pattern than a triple one. Triple tops/bottoms have their reversal power, but they rarely survive.

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Double Tops/Bottoms

A double top has an M-shape, while a double bottom, of course, is shaped like a letter. They signify the market making two attempts at a specific level/area before a reversal takes place. Both double tops and bottoms have a neckline and a measured move. The neckline is a line that can be drawn at the lows (in the case of a double top) or the highs (in the case of a double bottom) made after the first part of the double top/bottom. The measured move is the distance from the highest point of the double top or the lowest point of the double bottom, projected from the neckline. The measured move is only an indication that the pattern is in place, though, and not a sign to close a trade after its confirmation. Because a double top/bottom falls into the category of reversal patterns, the completion of the measured move is only the start of the new trend. Depending on the timeframe the pattern appears in, the implications can be important.
double top - 1
The most famous double top that appeared on charts recently is the one the EUR/USD made on the monthly chart. At the start of the 2008 financial crisis, the EUR/USD showed a toppish formation, a reversal pattern, on the monthly chart. The chart above shows where the double top formed, and it took the pattern five candles to complete: that is, five months.
double top - 2
A zoom into the pattern reveals the letter M forming, and this is the clear sign that the reversal is happening. The next thing to look for is the measured move, and if that is completed, the pattern is confirmed. A confirmation puts the double top in place, and any retracement should be met with selling orders.
double top - 3
In this case, the double top was confirmed the moment the measured move was completed. As can be seen on the monthly chart posted earlier here, the retracement that followed represented just another opportunity to sell the pair. Everything discussed in this double top example is valid for the double bottom, only that the shape is a letter W, and the new trend is a bullish one. Again, double tops and bottoms are more powerful than triple ones.

Triple Tops/Bottoms

A triple top/bottom formation resembles a triangular formation. This is the very first thing that should come to mind on seeing the price trying three times to break a level and failing. When compared with the double top/bottom formation, a triple top rarely holds. Rarely doesn’t mean never though, and if it does hold, the reversal is meaningful.

Contrarian traders try to fade a triple top/bottom formation on the assumption that it is more likely for it to fail than to succeed. This is a good strategy to some extent, but an even better one would be to wait for the pattern to be confirmed, and only then to enter a trade. Confirmation, in this case, is similar to the case of a double top/bottom. The measured move should be projected from the trendline, and, upon completion, the pattern is assumed to be in place. The AUD/USD pair formed a triple bottom at the end of 2016/start of 2017, and the pattern was confirmed a few days later. Needless to say, the trend that started was an aggressive one, and conservative traders who waited for the pattern to be confirmed were rewarded handsomely.
double top - 4
A simple look at the pattern shows that, during its formation, a triangle as a continuation pattern can be drawn. Such a triangle is a descending one, but again, future price action needs to confirm it. Aggressive traders who open contrarian trades will look to fade the triple bottom and sell the move that follows the third bottom. However, if the measured move is travelled and the triple bottom confirmed, traders will close the short and reverse the trade, recovering the initial loss and making a small profit in the end. Double and triple tops/bottoms are a part of the classical technical analysis approach, the Western approach to charting the markets. They are so popular that every trading book in the world mentions them.

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