Forex Triple Top and Inverted Triple Top Patterns

Are you familiar with the triple top and inverted triple top patterns that signal trend reversals in Forex trading? Also known as the head-and-shoulders top and bottom, these chart types, when timed well, offer high-profit opportunities. This article will help you understand these patterns to improve your trading.

Summary of This Article:

• The triple top pattern in Forex appears as a trend reversal pattern, resembling a mountain range with three peaks.
• The inverted triple top pattern appears as the market shifts from a downtrend to an uptrend, forming three valleys.
• Triple top rejection is when the trend attempts a temporary decline but lacks momentum to complete the reversal, continuing the previous uptrend.
• Inverted triple top rejection is a failed attempt at an uptrend that eventually continues the previous downtrend.

Unlike the triple top, the inverted triple top forms when a downtrend shifts to an uptrend. Although more common in stock trading, it can also be used in Forex. This pattern reflects market sentiment, signaling a possible trend reversal.

Characteristics of the Inverted Triple Top:

FX's Three Peaks and Reverse Three Peaks Chart Examples
Let’s take a look at past charts to understand how the Three Peaks and Reverse Three Peaks patterns work in real FX and cryptocurrency markets.

The chart above shows GBP/JPY on a 2-hour timeframe from August 2017.
After forming the first peak, a large lower wick appeared, followed by a new high, which left room for price movement both upward and downward.

However, when price reversed at the third peak, it created a strong Three Peaks pattern that traders became aware of, and in this case, after consolidating below the neckline, the price dropped significantly.

The chart above shows USD/JPY on a 1-hour timeframe from September 2021.
After a large lower wick was formed in the range-bound market at the left side of the chart, a bullish candlestick appeared, but then the price fell significantly, forcing the market to liquidate long positions.

In this Reverse Three Peaks pattern, the neckline formed as shown above, and as the market shifted from a downward bias to a strong upward movement, it absorbed the short positions, creating an upward trend that extended further.

We’ve explained the formation of the Three Peaks pattern and predicted chart movements. Now let’s focus on what kind of trades to execute when identifying the Three Peaks pattern in real FX trading. The following three points are key to focus on:
This explanation discusses a trend-following trading method using the Three Peaks pattern.

Trading Methods for the Three Peaks Pattern:

• Entry Point for the Three Peaks Pattern in FX
• Exit Point for the Three Peaks Pattern in FX
• Stop-Loss Point for the Three Peaks Pattern in FX

We’ve explained the formation of the Three Peaks pattern and predicted chart movements. Now let’s focus on what kind of trades to execute when identifying the Three Peaks pattern in real FX trading. The following three points are key to focus on:
This explanation discusses a trend-following trading method using the Three Peaks pattern.

In addition to this basic entry point, another method is to enter a short trade when the price breaks the neckline and then retraces to it. By anticipating the price to bounce back, you can enter the trade when the price returns to the neckline area.

This approach allows for lower risk compared to the first entry, but there is a risk of missing the entry opportunity if the price does not return. It is important to balance your trading style and use these two methods appropriately.

Also, when considering the risk-to-reward ratio of a trade, it is advisable to set the stop-loss distance based on the height of the central peak of the triple top. Specifically, if the height of the peak is small and the potential profit is limited, it is recommended to set the stop-loss order distance narrowly.

In FX trading, the basic trading methods for both the head-and-shoulders top and the inverse head-and-shoulders are the same.

Additionally, since trading strategies based on buying are more common in stock investments, the inverse head-and-shoulders is a chart pattern that is used more often than the head-and-shoulders top.

When trading with the inverse head-and-shoulders pattern, the key elements to be aware of are introduced through the following three points:

• Entry Points for the Inverse Head and Shoulders
• Exit Points for the Inverse Head and Shoulders
• Stop Loss Points for the Inverse Head and Shoulders

• Recommended Entry Point 1: This is the point above where the neckline is broken. Once the neckline is broken, it can be anticipated that the chart will undergo a trend reversal and move upward, so you can enter a long position (buy).
• Recommended Entry Point 2: This is the point where the price breaks through the neckline and then returns to the neckline. Since prices often return to the neckline after breaking through it, using this method can reduce the risk.

However, this second method comes with the risk of missing the entry point, so it's important to consider your own trading style when deciding on the entry point.

If you manage to enter successfully with an inverse head-and-shoulders pattern, it is safest to initially place a limit order at this profit target.

However, if there is strong momentum in the upward trend and it seems like the price will exceed this target, it is advisable to take profit on half of your position and carry the remainder forward to the price range that is being watched on the chart.

The head and shoulders and inverse head and shoulders patterns are commonly used methods for identifying trend reversals. However, just because these patterns appear does not mean that a trend will necessarily reverse.

Below, we will explain the negation (false signal) of the head and shoulders and inverse head and shoulders patterns.

• Negation of the Head and Shoulders
• Negation of the Inverse Head and Shoulders

① What is the Negation of the Head and Shoulders?
The negation of the head and shoulders pattern refers to a situation where, after forming a head and shoulders top, the trend temporarily declines but fails to gain enough momentum, allowing the previous uptrend to continue.

When a head and shoulders pattern forms, there is an expectation for significant price movement, and traders tend to use high leverage. However, if the head and shoulders pattern is negated, it results in a position that is betting against the uptrend (selling), which could lead to substantial losses.

When trading based on the head and shoulders pattern, it is important to observe the pattern on multiple timeframes and ensure that proper stop-loss measures are in place.

② What is the Negation of the Inverse Head and Shoulders?
The negation of the inverse head and shoulders pattern refers to a situation where, after forming an inverse head and shoulders bottom, the trend temporarily rises but fails to gain sufficient momentum, allowing the previous downtrend to continue.

When an inverse head and shoulders pattern forms, traders tend to expect significant price movement and use high leverage. However, if the inverse head and shoulders pattern is negated, it results in a position that is betting against the downtrend (buying), which could lead to substantial losses.

When trading based on the inverse head and shoulders pattern, it is important to observe the pattern on multiple timeframes and ensure that proper stop-loss measures are in place.

Below are key points to help you identify the negation (false signal) of the head and shoulders pattern.

1. Sign 1 of Head and Shoulders Negation: The support level should not be broken.
2. Sign 2 of Head and Shoulders Negation: The trend on higher timeframes is an uptrend.

Sign 2 of Head and Shoulders Negation: The trend on higher timeframes is an uptrend.

Even if the pattern looks like a Head and Shoulders top on a short timeframe, on higher timeframes, it may just be a temporary adjustment within an ongoing uptrend.

Just because a Head and Shoulders pattern appears on one timeframe doesn't necessarily mean a trend reversal will occur. It is important to confirm the pattern on multiple timeframes.

If the Head and Shoulders pattern appears on higher timeframes, it can be considered somewhat reliable, but patterns on short timeframes like 5-minute or 15-minute charts are less reliable and may quickly be negated (false signal).

Whenever you spot a Head and Shoulders pattern on the chart, always make sure to analyze the trend on higher timeframes.

Below, we will explain the key points for identifying the negation (false signal) of the Inverse Head and Shoulders pattern.

Sign 1 of Inverse Head and Shoulders Negation: The previous highs should not be broken.
Even if the chart initially looks like an Inverse Head and Shoulders pattern, a detailed analysis might reveal it to be a false signal.

While the chart may resemble an Inverse Head and Shoulders pattern, if the lows are gradually rising and the right shoulder is sloping downward, it suggests that selling pressure is increasing. In this case, the chart that appears to be an Inverse Head and Shoulders may actually represent a correction phase within a downtrend, so caution is required.

Sign 2 of Inverse Head and Shoulders Negation: The trend on higher timeframes is a downtrend.
Even if the pattern appears to form a bottom on a short timeframe, on higher timeframes, it might simply be a temporary correction within an ongoing downtrend.

The appearance of an Inverse Head and Shoulders on one timeframe doesn't guarantee a trend reversal; it's essential to confirm the pattern across multiple timeframes.

If an Inverse Head and Shoulders appears on higher timeframes, it can be considered relatively reliable, but patterns on short timeframes like 5-minute or 15-minute charts are less reliable and may quickly be negated (false signal).

Whenever you spot an Inverse Head and Shoulders pattern on the chart, always make sure to analyze the trend on higher timeframes.

Let’s look at how Head and Shoulders and Inverse Head and Shoulders patterns function in real Forex and cryptocurrency markets by referring to past charts.

A "false signal" refers to when a chart moves in one direction, then retraces slightly.

In particular, when trading trends with patterns like the Head and Shoulders or Inverse Head and Shoulders, aiming for a large profit margin, improper placement of stop-loss orders can lead to repeated losses due to false signals.

Even if the price movement aligns with the expected direction, false signals can still cause you to be stopped out, preventing you from making profits. Here are four key points to avoid getting caught by false signals.

1. The shape of the Head and Shoulders or Inverse Head and Shoulders is distorted.
2. Pay attention when there is a sudden surge in volume.
3. Don’t place stop-loss orders too close to the neckline.
4. Wait for confirmation on the timeframe before entering.

1. The Shape of the Head and Shoulders or Inverse Head and Shoulders is Distorted
For the Head and Shoulders or Inverse Head and Shoulders patterns to work, the smaller peaks and valleys (the first, second, and third ones) each have a specific meaning. If the pattern is distorted, the trend reversal may not happen as expected.

A common pattern mistaken for a Head and Shoulders involves the first two peaks forming nicely, but the third peak failing to form correctly. Trading based on such a distorted pattern can result in capital loss.

In Forex, whether it’s a Head and Shoulders or Inverse Head and Shoulders pattern, once a price level is broken, it often returns to the original level, a phenomenon known as a false signal. Traders should be cautious about placing stop-loss orders too tightly, as this can lead to gradual capital erosion.

To avoid being caught in a false signal, it’s important to set stricter entry conditions and a looser stop-loss order.

Thus, when trading Head and Shoulders or Inverse Head and Shoulders patterns, it’s important to determine whether the line has been broken by the body or just the wick. As shown in the diagram, if a confirmed candlestick body has broken through the line, it is more likely that the next timeframe will also break the line, making it less likely to fall into a false signal.

In FX trading, targeting head and shoulders (H&S) and inverse head and shoulders (IH&S) chart patterns can offer significant profit potential. However, to avoid reducing your funds through repeated stop-losses, it’s essential to take the following four precautions into account when trading:

Precautions When Targeting H&S and IH&S Patterns:

1. Check for Economic Indicators and Major News Events.
2. Identify the Validity of the Neckline (Formation or Rejection).
3. Assess Whether the Current Market Is a Trend or Range.
4. Determine Whether the Market Is Operating at High or Low Price Levels.

1. Check for Economic Indicators and Major News Events
Head and shoulders and inverse head and shoulders are chart patterns traded based on technical analysis. However, when there are major economic reports or news events, the chart can be influenced by these external factors, which might render technical analysis less effective. It’s crucial to monitor not only the economic indicators of the country you’re trading in but also those from major economies like the U.S., as they can affect currencies from geographically distant countries. Always keep an eye on highly anticipated indicators, such as U.S. employment data, to avoid being caught off guard.

2. Identify the Validity of the Neckline (Formation or Rejection)
The slope of the neckline also helps in evaluating head and shoulders patterns. The neckline can appear as a horizontal line or an inclined line. When the neckline slopes downward, it’s called a "descending type," while an upward slope is called a "ascending type."

• In a descending neckline, a downward move is anticipated, which creates a favorable environment for a trend reversal toward the head and shoulders pattern.
• In an ascending neckline, an upward move is more likely, making it a more suitable environment for the inverse head and shoulders pattern.

These factors should be considered in evaluating the head and shoulders and inverse head and shoulders patterns for more accurate trades.

3. Assess Whether the Current Market Is a Trend or Range
The purpose of trading based on head and shoulders and inverse head and shoulders patterns is to capitalize on trend reversals, which can offer large profits. As such, it’s important that the market is already in a trending phase before the formation of these patterns.

While head and shoulders patterns can appear in a ranging market, they tend to lack significant movement. Therefore, it's advisable to avoid entering trades based on these patterns in such conditions.

4. Determine Whether the Market Is Operating at High or Low Price Levels
It’s also crucial to consider whether the market is currently in the high or low price zone over the past month, six months, or year.

• If the head and shoulders pattern forms at a high price level, a larger drop is expected when the trend reverses.
• If the inverse head and shoulders pattern forms at a low price level, a significant rise in price can be anticipated.

However, when the market is near a high or low price range, fundamental factors may often be at play, so it’s best to combine both technical and fundamental analysis for better market evaluation.

Head and shoulders and inverse head and shoulders are chart patterns that signal trend reversals. By effectively utilizing these patterns, you can significantly increase your profits. Incorporate the entry, exit, and stop-loss points discussed in this article into your trades for better results.

Additionally, combining chart pattern analysis with trend and fundamental analysis will help improve your win rate. By continuously analyzing the charts with these factors in mind, you can develop your own trading style and master the use of head and shoulders and inverse head and shoulders patterns, which will undoubtedly lead to more trading opportunities.