Double tops and bottoms and triple tops and bottoms are part of the Western approach to technical analysis. First documented in the United States stock market more than a hundred years ago, they still prove to be effective in today’s currency market.
One thing forex investors must keep in mind is to be flexible when interpreting the two patterns. In other words, don’t look for an exact level where the market will fail and reverse, but for an area instead.
Double tops and bottoms in FX trading
The double tops and bottoms are among the most robust reversal patterns and resemble the letter M or W, respectively. They form more often than triple tops and bottoms and investors love them for this reason. The double top or bottom indicates hesitation; the price tried and failed twice in the same area. It is common for the double top to mark a significant reversal; the larger the timeframe, the larger the implication.
As can be seen in the GBP/USD daily chart above, the letter M is evident, signaling a double top formation at the 1.44 area. But a double top also has a measured move. To calculate it, investors mark the dip in the middle of the letter M and project the vertical distance from this point to the double top. This is the “measured move” and when the price reaches it, the reversal pattern is confirmed.
Triple tops and bottoms in the currency market
The likelihood of a triple top and bottom is reduced in the currency market, due to the trading algorithms that spot these patterns easily and push the market against them.
A triple top or bottom resembles an ascending or descending triangle. In fact, investors cannot be sure if the market is forming a triple top or bottom, or a continuation pattern (ascending or descending triangle). For this reason, the focus lies on the series of lower highs and higher lows characteristic in the formation of descending and ascending triangles. If the price breaks this series, the market will usually form a triple top or bottom.
Not all triple tops or bottoms look like ascending or descending triangles. Some are quite untidy patterns, like the one that formed on the recent EUR/USD attempt to break the 1.25 level. It hit the area no less than three times, and every time it only met sellers. Hence, in time the bears prevailed, making the triple top the start of a strong rejection. The price fell over one-thousand pips in less than a trading month from what turned out to be quite a powerful triple top formation.
When compared with the double top or bottom pattern, the triple pattern has no measured move. Because of the multiple failures, investors can also view triple tops or bottoms as just a temporary setback before the price overcomes the area.
There is a saying between investors: “triple tops and bottoms rarely hold.” Whether this is true or not, is irrelevant at this point. If triple tops and bottoms have the power to reverse a strong trend like the EUR/USD example above, then they are patterns certainly worth considering.
- The measured move of a double top or bottom confirms the pattern.
- Triple tops and bottoms have no measured moves.
- Ascending and descending triangles resemble triple tops and bottoms.
- Double tops and bottoms form more often than triple tops and bottoms.