Sentiment: Bearish
Direction: Reversal
What Is The Rounding Top Chart Pattern?
A Rounding Top pattern is a bearish reversal pattern, most commonly found at the top of a trend ahead of a reversal.
Rounded tops establish strong resistance by slowly grinding against it, creating a rounded pattern until price action reverses.
How To Identify The Rounding Top Pattern?
You can also identify rounded tops better on larger timeframes like the daily or weekly scale.
A strong bullish trend is stopped by resistance, forming the left part of the pattern. This is followed by a spread of the price action as it meanders around the resistance.
Finally, there’s more of an downward trend towards the end. The entire pattern forms a kind of inverted “U” shape.
What Is The Psychology Behind The Rounding Top Pattern?
The Rounding Top pattern, also known as a saucer top, is a bearish reversal chart pattern that signals the end of an uptrend and the beginning of a downtrend.
The pattern is characterized by a long-term increase in the price of an asset, followed by a gradual curve or “saucer shape” in the price that resembles an inverted bowl or a “U” shape.
The rounding top can take weeks or even months to form, and traders interpret the pattern as a sign of a shift in market sentiment from bullish to bearish.
The psychology behind the rounding top pattern is that the gradual curve in the price represents a period of distribution, where sellers are slowly entering the market and taking advantage of the buying pressure.
As the pattern continues to form, the sellers gain confidence, and the price begins to trend downwards.
Once the price breaks below the support level, it’s a signal that the uptrend has ended and a new downtrend has begun.
Traders may enter a short position once the price breaks below the support level, with a stop loss placed above the resistance level.
Encyclopedia of Chart Patterns (Wiley Trading)
21% OffHow To Trade The Rounding Top Pattern?
To trade the Rounding Top pattern, traders typically wait for the price to break below the support level with a strong volume surge.
The breakout should ideally occur on higher than average trading volume, as this confirms that there is significant selling pressure behind the move.
Traders may enter a short position once the price breaks below the support level, with a stop loss placed above the resistance level.
The profit target can be set based on the height of the rounding top, with the expectation that the price will move at least the same distance as the rounding top’s height in the direction of the breakout.
Alternatively, traders may wait for a pullback to the breakout level before entering a position.
This approach can provide a better risk-to-reward ratio, as the entry price is closer to the lower risk resistance level.
However, it may also result in missing out on some of the initial gains from the breakout. Ultimately, the best approach will depend on the trader’s risk tolerance, trading style, and market conditions.
It’s worth noting that the rounding top pattern can also result in a false breakout, where the price briefly breaks below the support level before reversing course.
Traders should be aware of this possibility. Also be sure to use technical indicators and other tools to confirm the validity of the breakout. Access these tools at TradingView.
Rounding Top Performance Expectations Explained
The trend in the right part of the “U” shape is expected to be more bearish when the neckline is broken.
To find potential targets, measure from neckline to the bottom of the “U” shape.
Project the measurement muliplied by 14% to the point of breakdown.
It’s worth noting that this target works best over longer timeframes.