A triple top is a pattern on a stock chart where the stock spikes and drops three times in a row, followed by a sharp decline. Analysts use this pattern to judge the best time to buy or sell a stock, but it is often difficult to be sure until it is too late. The triple bottom is the opposite pattern, indicating a stock is about to reverse and grow steadily.
A triple top is a pattern on a chart analyzing a stock’s market price over time. This is a stock spike and drop three times in a row. Some analysts believe that the triple top pattern is commonly followed by a sharp decline in a stock. On this basis, analysts will try to use the pattern to judge the best time to buy or sell a stock.
The triple top is shown on simple stock market charts that plot the price of a stock against time. The pattern is similarly simple, consisting of three peaks of roughly the same level, followed by a notable decline. The final decline will be much lower than the low point between each of the peaks.
To be considered a true triple top, the pattern must cause a reversal of a broader trend. In other words, the price will have increased in general before the pattern of the three peaks. It will then change direction and begin to decline. One explanation of the pattern is that it is the natural fluctuation when a stock reaches its natural high. This pattern could also be due to two contradictory effects on a stock’s price: the reaction of traders to daily price movements, and the underlying fundamental value of a stock based on the company’s earnings.
In theory, an investor seeing a triple top will have a decent idea of how the stock price is likely to move. For example, “knowing” that the stock is likely to decline may be a good time to sell existing shares, or even get involved in shorting stocks, where the trader makes money if the stock price falls. A trader could even 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 reality, there is one important limitation: it is often difficult to be sure that a stock price follows that pattern until it is too late to try to take advantage of it.
There are several variants on the triple top. One is known as head and shoulders. This too has three peaks, but the middle peak is taller than the other two, thus resembling a head on two shoulders. Analysts generally believe that the reasons behind the triple top and head and shoulders are similar enough that they can be treated the same for tracking and decision purposes.
The contrasting trend is the triple bottom. This involves three dips at a low point, followed by recoveries. Analysts often believe that this pattern indicates that a stock that has been in a broader decline is about to reverse and grow steadily. One notable difference is that the triple bottom tends to develop over a longer period. If both patterns are displayed on charts using the same time scale, the triple bottom will have a more bowl-like shape compared to the mountaintop shape of a triple top.
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