Double Tops And Triple Tops

Double top

Triple Top

Head and Shoulders

A double top is a scenario where the price reaches a high twice before falling significantly from then. The price is unable to break above the previous high. This is interpreted as a sign of weakness. Often times, the second high or peak is lower than the previous peak. This is a major sign that the price of the security will fall significantly.

A triple top has 3 peaks, with each peak lower than the prior peak, and unable to break above the previous peak. There is significant price weakness as in the case in a double top. The price of the security falls thereafter.

Read: Head and shoulders and Reverse head and shoulders

Nasdaq Composite

Source: Yahoo Finance

The image above is a real life example of a full formation of a double top.

How option traders can take advantage of double or triple tops?

Option traders can prepare to initiate bearish positions to profit on significant price movements to the downside. The trade should be executed when the trend is broken after a double or triple top has occurred and, the price of the security makes a clean break below the most recent significant bottom.

The options trader can also exit the long position he has held onto when the trendline is broken or when there is a price break to the downside below the most recent significant bottom.

To understand when a trend is breached, one should study what trends are.