Contents:Triple Tops and Triple Bottoms are widely used in the technical analysis to determine trading conditions when previous trends are getting exhausted and counter-trend price action is likely. These are also called reversal chart pattern reversal. The main idea is that at some point the bulls lose the momentum and cannot proceed with lifting a security price higher. After prices charted a triple top, the bears could take the market back under control. This formation is called bearish reversal. A mirrored scenario happens when the bears used to push prices lower but at some point, they could not break rates through a significant technical or psychological level. If a triple bottom occurred on the graph, binary options traders should expect a bullish reversal when call options will be in demand.
What is a triple top pattern?
A triple top pattern has three consecutive peaks charted after a sustainable uptrend, short-term and limited pullbacks between them and a support trendline of pullbacks. The best-case scenario is that all three peaks are equal or descending, however, it’s not necessary. Sometimes markets are getting stuck not below a certain horizontal price mark but in a resistance range. Highest rates in the triple top pattern can remind a head-and-shoulders formation or the double top pattern, and the trading approach is the same. The main requirement for the triple top is related to the bearish breakout of the support line, which confirms the execution of the reversal pattern.
Pattern used in technical analysis that's characterized by three equal lows followed by a breakout above the resistance level.
How does a triple top chart look like?
The screenshot below shows an example of how the triple top chart looks like:
What does the triple top pattern mean?
Let’s consider a step-by-step description of the price action inside the triple top. We’ll take the same example as shown on the screenshot above. Initially, the bulls keep supporting the exchange rate of the EUR/GBP cross rate and the currency pair is in a clear uptrend with higher highs and higher lows. This is an important condition as sometimes triple peak happen in sideways ranges, but what do they reverse actually? Right, nothing. So the reversal pattern must come after a strong trend.
Next, after peaking at some level (0.8367 in our case), the pair pulls back, charting the red candle with a higher low than the previous green one. The bulls are still strong and they continue the upside pressure, and EUR/GBP runs towards the second peak - top 2 - in three consecutive bars in the green. Here comes the second bearish two-days pullback with a higher close rate than the previous low. Meaning that the support line connecting two close rates of red candlesticks is ascending. The bulls do not give up and keep buying call options to lift the rate inside the resistance range with, reaching the top 3 levels as a result.
An important factor was that the highest rate of that candle remained inside the blue horizontal resistance range, and the close rate of top 3 was lower than the top 2. That means that despite strong buying pressure, the bulls cannot break the rate through the resistance range as the put-option buyers step in there with heavy-volume supply. Finally, the bulls give up and retreat, while the bears take the market under control. Binary options traders should have noticed that once the triple top breakout of the support trendline happened, the downtrend accelerated.
How to use triple top patterns in binary options trading?
The triple top breakout is the main condition to reverse the previous uptrend. So every trading decision on that fact. If it happens, then buying put options would be reasonable. If not, the pattern has to be ignored. Another crucial event for the patterns sustainability is a potential breakout of the upper resistance. For instance, three peaks are in place, but the price suddenly goes up and renews the highest top level. In this case, the trading cycle of buying put options must be stopped as the formation would be ruined. Here is the list of rules and conditions on how to use triple top patterns in binary options trading.
Conditions to start buying put options after the triple top pattern
- A strong uptrend was noticed before the triple top pattern occurred on the price chart;
- Aggressive traders could start buying put options after the third top was charted, even though the support line was not breached yet. If the price breaks through the support, traders should continue the trading cycle. If the breakout did not happen and the rate bounced back up, breaking the recent top, then the cycle must be stopped;
- Conservative traders should wait for the breakout confirmation by a close rate and start buying put options on the next candle’s open.
Examples of triple top patterns
Below are examples of how binary options traders can take advantage of the triple top formation, as well as what happens if the pattern is not confirmed by the price action.
Buying put options after the triple top breakout confirmed
The 4-hourly chart below has the triple top formation occurred after a sustainable uptrend. The sequence of close rates in the resistance range was ascending, and so was the sequence of higher lows during pullbacks. The breakout happened only after a 4-hourly bar closed below the trendline support. After the signal confirmed the bearish reversal, a trading cycle of buying put options brought 78% of deals in the money.
As an example:
Example of an unconfirmed triple top pattern
The chart below shows what happens with prices if the triple top pattern is not confirmed. The highlighted formation has signs of a triple top though. There is a sequence of peaks in the resistance range, and the horizontal support trendline is drawn. However, the bearish breakout of the support line never happened by the close rate despite several attempts. After the price action charted a new peak above the resistance range, the formation was crashed and the bearish reversal never happened.
As a result, the uptrend continued:
What is a triple bottom pattern?
A triple bottom pattern appears after a sustainable downtrend and points to a possible bullish reversal.
The must-have conditions are as follows:
- Three consecutive bottoms have to come together forming a support range;
- Short-term and limited upside pullbacks have to divide three bottoms;
- A resistance trendline connects highs of pullbacks and it has to be descending or horizontal;
- The bullish reversal is confirmed when the breakout of the resistance trendline occurs by the close price of any green candlestick.
The triple bottom is similar to an inverted head-and-shoulders pattern or double bottom formation and the trading rules are similar. The main condition to enter the market is the bullish breakthrough of the resistance trendline.
How does a triple bottom chart look like?
The screenshot below shows an example of how the triple bottom chart looks like:
What does the triple bottom pattern mean?
The main idea is that the downtrend is getting exhausted, even though the bears have several attempts to continue the selling pressure. Three stages of the triple bottom formation describe the price action happening inside the pattern. After the downtrend bottomed out and charted the first low, a bullish rebound occurred. It was not long-lasted though, as the bears tried to maintain the dominance of put-options. As a result, another bottom was charted, lower than the first one. However, the support range (blue background) was strong enough to hold the rate from further decline, and a second rebound was noticed.
Finally, the third bearish attempt failed to keep the sequence of lower lows required for the bearish continuation, and the last bottom signalled that a bullish reversal is possible. The resistance trendline (green horizontal) was built by connecting the highest close rates of green candles during upswings. After the bulls managed to lift the rate above the resistance line, the bullish breakout occurred, signalling that the reversal is complete. As traders can see from the price chart above, the uptrend accelerated after that.
How to use triple bottom patterns in binary options trading?
The triple bottom pattern might happen during a sideways consolidation, but it would not mean a bullish reversal. Therefore, binary options traders should make sure that a sustainable downtrend was noticed before the triple bottom formation. Otherwise, it might be false or wrong. Another important factor is to keep an eye on the resistance trendline. If it’s ascending than the pattern would be doubtful in terms of the bullish counter-trend action. The horizontal line is affordable, but the best-case scenario is that the resistance has to reflect the previous downtrend and head south. Finally, the essential condition before opening deals is the triple bottom breakout confirmation. Here is the full list of conditions to buy call options.
If you like this strategy, you might also be interested in this Darvas box Strategy
Conditions to start buying call options after the triple bottom pattern
- A visible downtrend was registered before the triple bottom pattern appeared on the price chart;
- Aggressive traders could start buying call options after the third bottom was charted, even though the resistance line was not breached yet. If the price breaks through the resistance, then traders should continue the trading cycle. If the breakout did not happen and the rate bounced back down, renewing the recent bottom, then the cycle must be stopped;
- Conservative traders should wait for the breakout confirmation by a close rate and start buying call options on the next candle’s open.
Examples of triple bottom patterns
Here are several examples of correct usage of the triple bottom pattern in binary options trading, as well as what happens when the breakout confirmation is absent.
Buying call options for WTI crude oil on bullish reversal after the triple bottom
The 4-hourly chart below highlights the correct application of the reversal pattern. The downtrend is obvious, the sequence of the local bottoms is here, pullbacks are not deep, the resistance trendline is horizontal. After the confirmation came and close rate breached the resistance trendline, call options were dominant in the oil market, according to the price action.
All of this action displayed on the screenshot:
Example of an unconfirmed triple bottom pattern
The hourly chart below has almost all signs of a triple bottom pattern. Three lows are consecutive, while bullish pullbacks divide them. But what is wrong with this formation? The main problem is that there is no chance to build resistance trendline correctly. The green horizontal line on the chart has just one touchpoint with the highest rate in the range, so it cannot be considered as a trendline. What’s more, there was no attempt to test it from below, the bulls were too weak in this price action, so they did not have even a chance.
Such formations must be ignored as they are nothing but a fake triple bottom:
The difference between the triple top and triple bottom patterns
The difference is on the context and the shape of the formations. The triple top pattern must come after an uptrend and it points to a bearish reversal if all of the conditions met. The triple bottom is the mirrored reflection of the triple top, and the context is also the opposite. Triple bottom reverses the previous downtrend if all rules and confirmations are in place.