Forex Trading System-Triple Tops and Bottoms

OVERVIEW

Essentially triple tops and bottoms are extensions of the double top and bottom forma-tions in the previous chapter.

TRIPLE TOP PATTERN

The triple top pattern consists of three X columns and two O columns. (See Figure15.1.) The highest Xs in all X columns must be in the same row, thus forming a local(and temporary) line of resistance.

TRIPLE BOTTOM PATTERN

The inverse to the triple top pattern is the triple bottom, which has three O columns andtwo X columns. (See Figure 15.2.) The lowest Os in all columns must be in the samerow, forming a local line of support.

TRIPLE TOP SIGNALS

In the triple top pattern displayed in Figure 15.1, the stage is set for a potential buy orsell market entry signal. If the price can exceed the local line of resistance, then a buysignal is generated. (See Figure 15.3.)

However, if the price can decline below the lowest O in the previous columns of Os,
then a sell market entry signal is triggered. (See Figure 15.4.)

There is a third alternative in which the price does in fact decline but does not golower than the lowest O in the previous column of Os. (See Figure 15.5.) The patterndoes not generate an immediate signal. Note that with the latest price movement theoriginal triple top formation has now become a triple bottom pattern.

TRIPLE BOTTOM SIGNALS

If the price can extend below the local line of support in a triple bottom pattern, then asell signal is generated, as shown in Figure 15.6.

However, if the price can advance above the highest X in the previous columns ofXs, then a buy market entry signal is triggered. (See Figure 15.7.)

Analogous to the triple top pattern, there is a third alternative in which the price doesin fact advance but does not go higher than the highest X in the previous X column. (SeeFigure 15.8.) In the diagram, no immediate trading signals have been triggered. The latestprice movement has transformed the triple bottom pattern into a triple top formation.

FALSE SIGNALS

All traders are familiar with the concept of false signals, perhaps more intimately thanthey wish to admit. This undesirable phenomenon involves the following sequence ofevents: (1) a buy or sell signal is generated by some mechanical means, (2) the traderenters the market at the designated price level, and (3) a breakout in the opposite direc-tion occurs. False signals have also been labeled failures. Regardless of the nomencla-ture, they can be very disheartening and costly.

Although the effect of false signals can never be completely eliminated, their detri-mental impact can be significantly reduced by the use of confirming signals and theproper positioning of stop-loss limit orders.

SIGNAL PERCENTAGES

We will be using Figure 15.9 as the basis for our statistical calculations.
On the left is a triple top pattern and on the right is a triple bottom pattern. Both em-ploy a three-box reversal amount that will remain constant throughout this analysis.

The sample data is our 7,000,000+ quotesin our SQL database, which consists of the streaming tick closes for the calendar year of2002 in the EURUSD currency pair.Likelihood of a ReversalThe likelihood of a reversal in price direction after the basic triple top or triple bottompattern is as shown in Table 15.1.

The results in the table are not particularly impressive since it is a common beliefthat there is a 50:50 chance that the next price will go either up or down anyway. It is in-teresting, though, when we consider that a change in price direction must satisfy theminimum reversal amount of three boxes, while a single box is all that is necessary tocontinue the trend in the most recent column.Continuation PercentagesIn Table 15.2, the leftmost column lists the number of boxes required to continue the ex-isting trend in the current column in either of the two patterns in Figure 15.9. The num-bers in the top row indicate the box size for the reversal algorithm.

For example, assume a triple bottom pattern with a four-box reversal amount. Thelikelihood that the price movement will decline exactly two boxes is 23.05 percent (theintersection of the row labeled 2 and the column labeled 4). The probability that it willdecline two or more boxes is 39.07 percent (100 – 60.93).

The continuation percentages may look low since a buy or sell signal has alreadybeen generated with a minimum of one continuation box. However, it is not necessaryfor the price objective to occur in the same column in which the signal is generated.Two, four, or even six columns may occur before the price objective is reached.

OBSERVATIONS

The triple top and bottom patterns are two of the simplest price formations to identify.Traders should also calculate existing trend, support, and resistance lines as well asother factors before initiating a new trade based solely on these triple pattern signals