What is Rounding Top?

Have you ever lost your mother in the fair and panicked? You leave her hands and the next moment you are lost amongst the crowd of people without any clue. In terms of the stock market, technical analysis plays the role of your mother. Holding their hands will keep you safe from being lost in the stock market and maximize your profit.

Technical analysis is based on a belief that history tends to repeat itself. It provides future insights into stock based on its historical data. With proper comprehension, it guides you on when to enter and exit the market. It gives early signals of a trend reversal.

Technical analysis presents the data of stock prices and volume in an infographic format through charts and candlesticks. Rounding top is one of such chart patterns. This pattern is mainly aimed at identifying the possibility of an existing trend. Additionally, it aids in identifying early trading opportunities.

The Rounding Top pattern?

The The rounding top pattern is also popularly known as the Inverse Saucer. This name is given based on the fact that this pattern takes an inverse shape of a ‘Saucer’ i.e. Rounding bottom pattern. This pattern gives a signal of Reversal. It catches the end of an extended upward trend and indicates the beginning of a potential downtrend.

This pattern resembles the double top or triple top price pattern. In the very initial phase of the rounding top pattern, the price of stock continues to increase. This uptrend phase is created because the stock has enough demand. Traders are willing to pay for its market price. When the stock price continues to rise, buyers gradually start losing their interest. The price reaches its top and then gradually begins falling. This price decline gives more traders the clue to sell. This gives birth to a downtrend. These price movements create a rounded shape or Inverse ‘U’.

The rounding top pattern can last for days, weeks, months, or years with longer time frames. Usually, volumes traded are highest at the phase when the price is increasing and may increase more during the downtrend. Generally, this pattern is an indication of a bearish future for the assets traded.

Example of a Rounding Top

Let’s consider ABC company’s stock is trading at Rs. 500. The traders are interested in buying this stock. As the demand increases, the price starts moving upward. With increased demand, buyers then begin to lose interest. The price reaches to its highest peak i.e. Rs. 580.

At this point, there are no more buyers interested in buying this stock. Traders start selling it. The price stabilized for the time and then reached Rs. 520. With this, more traders with the fear of price getting more declined started selling it. In the end, the price reached Rs. 480 and continued declining further.

When this price is charted, the pattern will take a rounding shape. This inverted ‘U’ will confirm the rounding top pattern.

How to identify a rounded top pattern?

The rounded top pattern can be better identified using technical indicators. This is a chart pattern that can be recognised from the shape it forms.

To identify this pattern, traders need to observe the trend. If the price goes upward, then reaches a point and starts decreasing gradually, it indicates the occurrence of the rounding top pattern. When the price movements are charted, this pattern forms the Inverted ‘U’ shape.

To be concise, the rounding top pattern is formed when the price of security increases to a new high, then moves horizontally and finally, decreases from a resistance level. Thus, it takes the shape of a rounding top.

If identified correctly, this rounding top pattern can safeguard traders from buying from a potentially unfavourable market. Furthermore, it helps traders to gain huge profits. Though, for the successful execution of this pattern, you need to be patient. The reason is this pattern might take a long time to develop.