Rounding top is a technical analysis price pattern. It can be characterised by daily price movements, particularly the tops, which form a downward sloping curve when graphed.
A rounding top may occur near the end of a protracted rising trend, according to technical analysis of price data, and this price pattern may imply a reversal in long-term price movement.
What Is a Rounding Top and How Does It Work?
The rounded top pattern can take days, weeks, months, or even years to develop, with longer time frames to completion projecting lengthier trend changes. A rounded bottom might be used to contrast it.
Recognizing a Rounding Top
An inverse saucer design is comparable to a rounding top pattern. It’s very similar to, and can happen at the same time as, a double or triple top pricing pattern.
The primary goal of spotting the rounded top pattern is to foresee a big shift in trend from upward to downward moving pricing.
Traders can take profits and protect themselves from buying into an adverse market by recognising this type of change, or they can strategize to profit from decreasing prices by short-selling.
The three primary components of the rounded top pattern are:
- A spherical shape in which prices rise, fall, and rise again;
- A design with inverted volume (high on either end, lower in the centre);
- The price level of support identified at the bottom of the pattern.
When trading a rounded top, traders should keep an eye on volume, which is typically larger when the monitored price rises and falls in a downtrend.
A curving trend line following peak highs generates an inverted “U” shape in a rounding top.
The price of the asset will rise to a new high in this pattern, then fall steadily from a resistance level to create the rounded top.
When the price is rising, volumes are normally at their maximum, and during the selloff phase, they may reach a new high.
A rounded top, in general, denotes a pessimistic future view for the security. However, investors should exercise caution when following a rounding top because the security’s price may find support, resulting in a double or triple top pattern.
A Rounding Top as an Example
In this case, the price of Goldman Sachs (GS) reached a high in the start of 2011 and then began to decline from there.
Two rounded top patterns with contemporaneous peaks are noted in this example, one of which (blue lines) has a shorter duration than the other (black lines)
After a Rounding Top, Price Prediction
The rounded top pattern, like many technical chart patterns, is not a perfect predictor. It’s a technical pattern that suggests investors’ commitment to hold the stock is eroding, and they may start dumping shares in bigger quantities.
This isn’t always the case. When a negative trend fails to materialise after the pattern has been displayed, the price has been seen to rebound from the support level and begin retracing higher prices.
Some analysts believe that if the price rises more than thirty percent of the distance from the support level before falling back to support, the chances of new highs are raised.
Until it hits the previous high, the price pattern is indicating a bullish prognosis.
The Double Top and Its Relationship
If a rounding top series chart does not result in a reversal, it may start to return to previous highs.
If it meets resistance again at those highs, a double top is likely to emerge. A security’s price will show two successive upside-down U-shaped patterns in a double top pattern.
In these instances, investors aren’t fully pessimistic and expect the security’s price will remain high.
Because purchasers have now attempted twice and failed to see their expectations for higher prices realised, a double top of this type, the combination of two rounded tops, is likely an extremely bearish indicator.
When investors oppose a negative trend, this pattern builds, and when they no longer resist and begin to escape the pattern, they may do so quickly.
This pattern, similar to a rounded top, usually signals the end of a bullish trend.
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