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Sunday, August 16, 2009

TRIPLE TOP PATTERN – Part 1: Formation

Triple Top Pattern is a bearish reversal pattern that normally forms after an extended uptrend, which marks a shift in trend from bullish to bearish.

The Formation of Triple Top Pattern

Triple Top Pattern contains three consecutive, distinct & sharp peaks / tops at about the same price level, with moderate troughs in between the peaks, followed by a breakout through a support.
This pattern forms when the price is in an existing uptrend. It occurs when the price increases to a resistance level (forming the 1st peak), then decline (forming the 1st trough), and then return to the resistance level (forming the 2nd peak), then decline again (forming the 2nd trough), and then return to the resistance level again (forming the 3rd peak), before subsequently decline further.

Although the price peaks do not necessarily need to be exactly the same, but it should appear near the same price level.

The pattern is completed and confirmed when the price declines and closes below the lowest low of the two troughs, which serves as the key support level in this pattern. This lowest point is called the “Confirmation Point”.

This pattern occurs because the buyers attempt to push the price higher, but are not able to do so as they are facing resistance, which prevents the continuation of the uptrend. After three failed attempts, the buyers in the market exhausted and gave up, and the sellers begin to be more aggressive to take control of the market and drive the price lower, sending it down into a new downtrend.

To be continued to Part 2: Important Characteristics of Triple Top pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

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Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value