What is a rounding top chart pattern, breakout and how to trade it

A Rounding Top pattern candlestick shows the possibility of ending the uptrend. This Candlestick pattern is smooth and curved, resembling an upside-down bowl. This implies that selling pressure is increasing, causing the price to level off. Traders watch this pattern closely, as a price drop below a key level could mean a downtrend is beginning. In this article, we will explore the rounded top chart pattern in detail.

What is a Rounding Top Candlestick Pattern?

A rounding top is a technical analysis pattern that forms a downward curve due to daily price movements. It usually appears after the end of a long upward trend and indicates a potential long-run price. This pattern can take days or even years to develop, signaling a major change in the trend. It’s the opposite of a rounding bottom, which suggests a price increase.

Some Important features of the Rounded Top Pattern are:

• A curved pattern where prices increase, level off, and then decrease.

• A volume trend that is high at both ends but lower in the middle.

• The support level is shown at the bottom of the pattern.

Know about the Rising Wedge Pattern - Meaning and Trading the Rising Wedge.

Rounding Top vs. Double Top

If a rounding top pattern chart doesn't lead to a trend reversal, the price might go back to previous highs. If it faces resistance again at that level, it is likely to form a double-top pattern, which looks like two consecutive upside-down U-shapes. In these scenarios, investors don't expect the price to drop and still believe that the security price could stay high.

A double top with two rounding tops is usually a bearish sign because buyers have tried twice but failed to achieve higher prices. This pattern forms when investors resist a downtrend, but once they stop resisting and begin to exit the pattern, the price might drop quickly. Generally, like a rounding top, this pattern will indicate the end of an upward trend.

Formation of the Rounding Top Pattern

A rounding top pattern, also called an inverted rounding bottom, shows a possible trend reversal. It usually forms after a long-term uptrend. Here are its key features:

• Curved shape - After a long rise in the price, the pattern made a smooth rounded curve at the top, resembling an upside-down bowl. This indicates the buying interest and selling pressure might be increasing.
• Lower volume - Trading volume tends to decrease, showing that buyers are less confident.
• Resistance point - At the highest part of the curve, the price struggles to rise higher.
• Confirmation - The pattern is confirmed when the price falls below the support level, signaling a possible downtrend.

How to Trade Using the Rounding Top Pattern?

Trading a rounding top pattern is simple and clear. Unlike bullish patterns, it shows a good opportunity to sell. Here’s how you can trade by the use of the rounding top candlestick pattern:

Market Entry - Sell when the price falls below the bottom of the pattern. First, identify the pattern, draw a support line, and place your sell order below this line.

Stop loss - Set your stop loss slightly above the highest point of the pattern to minimize risk.

Profit Target - Set your profit target based on measuring the pattern. The higher pattern means a big potential profit.

Disclaimer:

• The information is based on our understanding of the stock's historical performance.
• Stock market predictions are unpredictable and can change, so expert advice is strongly recommended before investing.
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