Rounding Top Pattern

A Rounding Top pattern of candlestick indicates the possible end of an uptrend. The top of this chart or candlestick pattern is quite smooth and curved, resembling a round bowl turned upside down. This implies that selling in the stock is increasing, causing the price to flatten out. Traders watch for the price to drop below a certain point, which could mean a downtrend is beginning. In this article, we will talk about the rounded top chart pattern in detail.

What is a Rounding Top Candlestick Pattern?

A rounding top is a pattern in technical analysis that shows a downward curve formed by daily price movements. It usually appears at the end of a long upward trend and suggests that prices might start to go down in the long run. This pattern can take a long time to form, sometimes days or even years, and signals a major change in the trend. It’s the opposite of a rounding bottom, which points to prices going up.

The key features of a Rounded Top Pattern are:

• A curved shape where prices rise, level off, and then decline.

• A volume pattern that peaks at both ends but dips in the middle.

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

Formation of Rounding Top Pattern 

A rounding top pattern, or inverted rounding bottom, signals a potential trend reversal. It typically forms after a long-term uptrend. Some of its highlights are as follows: 

• Curved Shape: After a long rise in price, the pattern forms a smooth, rounded curve at the top, like an upside-down bowl. This shows that buying interest is fading and that selling pressure might be increasing.
• Lower Volume: Trading volume usually drops when this pattern shows up, meaning buyers are less confident.
• Resistance Point: At the highest part of the curve, there’s a resistance point where the price struggles to rise higher.
• Confirmation: The pattern is confirmed when the price drops below the support level, suggesting a possible downward trend.

What does Rounding Top Chart Pattern indicate to the Investors?

When investors see the Rounding Top pattern of candlesticks, they expect prices to switch from going up to going down. The pattern forms when a security’s price rises to a new high and then slowly drops from a resistance level. Trading volume is usually highest when prices are rising and may peak again during a drop. 

Noticing this pattern helps traders take profits, avoid buying in a falling market, or plan to make money from the price drop by short-selling. It often suggests that a stock might decline in the future.

How to Trade Using the Rounding Top Pattern?

Trading a rounding top pattern is easy and straightforward. It signals a good time to sell, unlike bullish patterns. Here’s how to trade using the rounding top candlestick pattern:

• Market Entry: Sell when the price drops below the bottom of the pattern. First, find the pattern, draw the support line, and then place your sell order below this line.

• Stop Loss: Set your stop loss above the highest point in the pattern to limit your risk.
• Profit Target: Set your profit target based on the height of the pattern. The higher the pattern, the bigger the potential profit.

Advantages and Disadvantages of Rounding Top Pattern

Like other chart patterns, the rounding top has its own set of advantages and disadvantages which are listed in the table below.