A triple top is a pattern in a stock’s market price chart where the stock peaks and declines three times in a row, often followed by a steep drop. This pattern is used by analysts to judge the best time to buy or sell a stock. The triple top must trigger a larger trend reversal, and there are variations such as the head and shoulders and the opposite trend, the triple bottom. The latter indicates a stock that has been in a broader decline is about to reverse and steadily rise.
A triple top is a pattern in an analysis chart of a stock’s market price over time. This is a stock peak and decline three times in a row. Some analysts believe that the triple top pattern is commonly followed by a steep drop in a stock. Based on this, analysts will try to use the model to judge the best time to buy or sell a stock.
The triple top is shown on simple stock market charts that plot a stock’s price over time. The pattern is equally simple and consists of three peaks of roughly similar level, followed by a notable decline. The final decline will go much lower than the lowest point between each of the peaks.
To be considered a true triple top, the pattern must trigger a larger trend reversal. That is, the price will have risen overall before the three peak pattern. Then it will change direction and start decreasing. One explanation for the pattern is that it is the natural fluctuation when a stock reaches its natural high. This pattern is also likely caused by two conflicting effects on a stock’s price: traders’ reaction to daily price movements and a stock’s underlying fundamental value based on company earnings.
In theory, an investor who spots a triple top will have a good idea of how the stock price will move. For example, “knowing” that the stock might fall can be a good time to sell existing stocks, or even get involved in short stocks, where the trader makes money if the stock price falls. A trader may even be able to look at the low point between the first and second peaks and get a better idea of when to buy the stock between the second and third peaks. In fact, there’s one major limitation: it’s often difficult to be certain that a stock’s price is following such a pattern until it’s too late to try to take advantage of it.
There are several variations on the triple top. One is known as a head and shoulders. This one also has three peaks, but the middle peak is higher than the other two, thus resembling a head on two shoulders. Analysts generally believe that the reasons behind the triple top and the head and shoulders are similar enough that they can be treated equally for monitoring and decision purposes.
The opposite trend is the triple bottom. This results in three dips to the low point, followed by recoveries. Analysts often believe this pattern indicates that a stock that has been in a broader decline is about to reverse and steadily rise. One notable difference is that triple bottoms tend to develop over a longer period. If both models are shown on the charts using the same time scale, the triple bottom will be shaped more like bowls than the mountain top shape of a triple bottom.
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