One of the basic reversal price patterns is 3 peak model and 3 bottoms model. Although not appearing frequently on the price chart like the double top and double bottom models, every time they appear, the probability of price reversal is higher than the above models, even just behind the model. Head and shoulders picture. In this article, fx24.net will introduce the most complete way three peak model and Three-bottomed model.
What is the Triple Top model?
Three-peak model is shaped like 3 adjacent mountains, with equal peaks. Alternating between vertices with 2 temporary troughs. Horizontal lines connecting 3 vertices together form a resistance line. The horizontal line connecting the two bottoms temporarily forms a neckline, which is also a support line. The 3-peak pattern is at the end of an uptrend. It is often a sign of a trend reversal from up to down.
Only after the price has formed three peaks and moved down past the neckline will the 3-peak pattern be confirmed. Back then, the old neckline, which had served as a support line, now became a resistance line.
However, it is not enough for an experienced technical analyst. Because after the price break out of the neckline break, it often comes back to test. Only after the price has successfully tested and went down did the model actually begin to form, and then the probability that the price will reverse is very high.
What is the Triple Bottom model?
Perhaps after learning about it three peak model then talking about Three-bottomed model will be a bit redundant! Because they are one. The three-bottled model is just the opposite of the three-top model. But not really. This is more evident for forex investors, because in forex trading is bidirectional, buying and selling is only relative. However, this case applied to the stock market is not much different.
Here I just note that the triple bottom pattern is usually at the end of a downtrend. It is a sign that prices are about to reverse from down to up. And all identities are identical to the three-peak model.
As mentioned above, this model is just the opposite of the other model. So all happenings, how to trade …. for a three-bottled model is the same as a three-vertex model. So from here on, I am referring to the three vertex model. Everything for the three bottoms pattern is just the opposite.
Psychological movements when forming a 3-peak model and a 3-bottom pattern
Initially the price was in an uptrend. In an uptrend, the higher highs are higher than the previous highs.
The first peak (Top 1) is formed the same way as the previous peaks. The same is true for the temporary bottom adjustment between the two peaks. As prices continue to move up in the old trend, meeting the first peak (which is also the resistance level) it is not strong enough to overcome and must turn down. This signal shows that investor sentiment has hesitated. The reason behind it may be due to a negative information in the market, or simply because the price has risen too high, now is the time to sell investors to profit.
After forming the first peak (Top 1), the price continues to form the Top 2, then the Top 3. This shows a clear hesitation. When the price falls through the neck line, the negative sentiment covers. Besides, it is also heavily influenced by investors who follow the technical analysis school. They found the triple price model was confirmed and started selling each other. The resonance of negative sentiment along with technical analysis caused the price to reverse strongly.
Note when analyzing the 3 peak model and the 3 bottom model
The following notes are for the three peak model. The same pattern applies for the three bottoms.
- During the formation of a three-peak price model with decreasing volume, the probability of price reversal is very high.
- If at the last peak, even though the price overcomes the resistance line, but shortly after forming a Pin bar and going down, it has a high probability of confirming the three-peak pattern.
- If price only forms two peaks and then goes down to break the neckline then it becomes a two-peak pattern.
- If, after forming at least two peaks, the price does not break out of the neckline, but breaks through the resistance to go up, then it becomes a rectangular price model.
- If the three peak pattern has a middle peak higher than the other two vertices, it becomes a head and shoulders pattern. I mention this because actual price models are often not really clear for you to identify. Sometimes the vertices are only approximately equal but not completely equal. It is then at the boundary between one model and the other. It is important that you understand the nature of the models to which to apply.
Method of dealing with a three-top model and a three-bottom pattern
As mentioned above, this model is just the opposite of the other model. Therefore, this section only deals with the trading method with 3 vertices. For 3-bottoming model just do the opposite.
As you know, this is a trend reversal pattern from up to down. So when the three-peak pattern is formed, we must have sold it for sure. But the question is how effective is the selling strategy?
Trading strategy with 3-peak model and 3-bottom model on the stock market
When this model appears, if you do not hold stocks, it is best to stand outside the market.
In case you are holding stocks whose price chart appears a three-peak pattern, you should consider selling.
- As soon as the third peak forms, you should consider reducing that percentage of stock ownership.
- After having formed a third peak and the price went down past the neckline, you should consider further reducing the stock rate.
- After the price has passed the neckline and returned to test successfully, you should consider selling that stock.
The above suggestions are only for those who are short term investors or surfing. However, for long-term stock investors, once you have analyzed and determined that this is a good stock, you have available cash for long-term investment, you only need to reduce the ownership rate. stock down, wait for it to come down and buy again.
Trading strategy for the three-top model and the three-bottom pattern on the forex market
The advantage of the forex market compared to the stock market is that you can buy first and sell later, or sell first to buy later. So even if you do not hold goods in the account, when the 3-peak model appears, it will create an opportunity to sell down. The problem is how to sell the strategy most effectively?
- As soon as the third peak forms, you should consider a small sell order. At this time, the pattern has not formed yet, the probability of trend reversal is not high so you should only sell a small order. And do not forget to set the stop loss command above the top. When placing a sell order at this point you are most profitable because you sell at a bargain price. And if unfortunately the price does not reverse but go up, you will not suffer a lot of losses.
- When prices break out going down through the neckline, a three-peak pattern has formed. At this time, the probability of price reversal going down is very high, you place a second small sell order. And don't forget to set the stop loss between the neckline and the top.
- After the price has broken through the neckline and returned to the test. If the test price is successful and going down, you can now place a big order. Because after the test is successful, the probability is high that the trend will reverse. And do not forget to place a stop loss order between the neckline and the top.
3 peak price model and 3 bottom price model in reality
Real-world models are often not always clear for you to identify. The important thing is your trading experience as well as your analytical capabilities. Here I will put up some real-world two-peaked models for you to see more:
Figure below: A three-peaked pattern with an oblique neckline
Figure below: The three vertices are not equal. The third peak is lower than the previous two peaks. Although the middle peak is slightly higher than the other two peaks, it is not yet called the head and shoulders model.
Figure below: The model has many sub vertices, forming 3 “groups of vertices”
Figure below: 3-peak model with lower peak than the previous peak
Figure below: The 3-bottoms model has a higher bottom than the previous bottom. After the price breaks the neckline it goes up and then comes back to test. However, it does not test at the neckline, but a bit below the neckline before going up.
Figure below: The three-bottomed model has a lower bottom than the previous bottom
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Author: Pham Khuong
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