Rounding Top Pattern: The Ultimate Guide

Let's get into the rounding top pattern: the ultimate guide to knowing more about this trading pattern. Technical analysis describes rounding tops as price patterns.

A downward sloping curve occurs when daily price movements graph in the top direction. An extended upward trend may end in a rounding top pattern in technical analysis. Long-term price movement may be reversing with this price pattern.

Depending on the time left for completion, a top rounding pattern can develop over days, weeks, months, or even years. More extended time frames predict longer changes in trend. A rounding bottom is an opposite.

Knowing what a rounding top is

Inverse saucer patterns are similar to rounding top patterns. They occur in both directions, possibly alongside a double or triple top price pattern. A rounding top pattern is generally recognized when prices change from upwards to downwards. 

Short-selling can be a great way to capitalize on falling prices by taking profits and protecting themselves from an unfavorable market. By recognizing these changes, traders can take profits and protect themselves against lousy market moves.

Three main components make up the rounding top pattern:

1. A rounded shape in which prices rise, taper off, and then decline;

2. The volume pattern is inverted (high at each end of the pattern, low in the middle);

3. At the base of the pattern, there is a support price level.

A rounding top can be followed by observing volume, which is usually higher during downtrends and increases when the chart price increases. In an inverted "U" shape, a curved trend line follows peak highs in a rounding top. 

During this pattern, the security price will rise to a new peak and gradually drop from the resistance point to form the rounding top. When the price increases, volumes will usually be the highest, and they may also reach another high when the downtrend is beginning.

As a general rule, a rounding top will also indicate a bearish outlook for security in the future. 

In any case, investors should not follow rounding tops too closely as the price of the security may fall, and several rounding tops may follow in a double top or triple top pattern.

A rounded top pattern: how to recognize it?

In rounded tops, the top and the neckline have an uptrend. As a prerequisite to forming this pattern, the price must initially move upward. Then, after stabilizing for a prolonged period, the top becomes rounded. 

After falling below the neckline, it rounded up. The pattern is considered complete at this point. There is a time when rounding top patterns can be equivalent to double or triple top patterns. Hence, a change in trend is likely to occur here, which is essential to note. 

If the price falls below the neckline, traders may need to go short if they hold long positions.

Rounding top pattern illustration

The rounding top pattern's components

Three major components make up the rounded top pattern:

1. A rounded top shape indicates a trending upward, a tapering off, then a trending downward.

2. An inverted volume pattern is either end is elongated, and the middle is shorter.

3. Underneath the pattern is the neckline level, also called the support price level. Traders should closely observe volume each time they use rounding tops, which is usually higher as price patterns increase and decrease on a downward trend.

How can we interpret the rounding top?

Rounding top formations indicate a shift in power between buyers and sellers. Thus, if we think about what is occurring in the underlying order flow, we see that sellers initially control the price, drawing it down to the first lows on the left-hand side.

When buyers step in, however, the price rises, a new low is reached following this move higher, but the price is driven lower again due to selling pressure. But at this point, the round top is again driven higher by buyers driving the price up. 

Again, the price cannot form a new low due to selling pressure. However, it is a weaker pressure. Right now, we are at the point of the pattern where our higher lows are located. Therefore, we are at the end of the pattern.

Using rounding tops to predict prices

The rounded top pattern isn't a perfect forecasting tool for all technical chart patterns. However, technical charts indicate that traders are losing confidence in the stock market and may go ahead and sell off their shares in large volumes. 

However, that is not always the case. Price bounces back from the neckline (support) level after the pattern has been formed whenever the price fails to move in the downtrend direction.

Depending on which analyst you believe, the chances for the price to hit new highs increase if the price is above 30% of the distance of the neckline level. Until the current price pattern reaches the previous high, the price pattern is showing bullish signs.

Rounding top pattern: how to trade?

It is relatively simple to trade the rounding top chart pattern. Whenever you analyze price action, you need to look at a chart visually to see whether a pattern is apparent. We are easily able to determine what is of interest to us.

Fibonacci retracement

Fibonacci retracement levels could be applied. Technical analysis would be incomplete without this tool.

Fibonacci retracement levels indicate potential stalls or reversals in technical analysis. 23.6%, 38.2%, and 50% are common ratios. These can occur at various points between the high and low of a security's price movement and provide a prediction of future price movement.

Fibonacci retracements in finance are technical analysis methods used to identify support and resistance levels. It takes its name from the Fibonacci sequence, which provides price levels at which market retracements usually begin before a trend continues.

Buy stop and sell stop

Identifying the pattern allows you to buy the asset at its lowest point and hold it until reaching the resistance level. The lower point of the pattern is an excellent spot to place a sell-stop trade to hedge this trade.

Consequently, the bullish view will invalidate due to initiating a sell trade.

The rounding bottom pattern can also trade by using another strategy. You could place a buy stop above the resistance level after exiting at the resistance level. If you do this, you will bet on the price continuing its current trend.

Get profits

Some traders use a measurement formula to place a take-profit on a trade. A measurement formula is built by determining the distance between the resistance and the lowest side of the trend. 

The take-profit position is placed at the same distance. This approach is practical, but it is not always effective.

Repeat and break

A break-and-retest strategy can also use to trade the rounding bottom. A pullback can follow a bullish breakout pattern.

Trading rounded top patterns: advantages and disadvantages

The rounded top pattern has many advantages and disadvantages, as with any technical analysis.

Trading rounded top patterns has several advantages:

• Trading decisions have been significantly aided through the use of this pattern.

• It is easy for a novice trader to understand the rounding top pattern.

• This pattern can be very profitable when the market behaves as forecasted and the pattern takes a successful turn.

Trading rounded top patterns has its disadvantages:

• It may take an excessively long period for this pattern to emerge

• It can be not easy to pinpoint the breaking point for this pattern

• There are many closely related patterns to this one, such as Cup and Handle

The importance of using a stop loss cannot be overstated. Until a pattern breaks out successfully, its success cannot be guaranteed. 

In trading, false breakouts are also possible. This will include the stop loss, which will safeguard any significant losses when price movements against your forecast.

A correlation between the rounded bottom and rounded top chart patterns 

Both Rounding Bottoms and Rounding Tops work the same way in principle. These patterns are based on the same underlying theory and market psychology. 

The two patterns are inverse in shape and can be incorporated into a trading strategy to help you make informed decisions. As a trader, your utmost primary goal is to determine the point at which the existing trend will end or revert.   

The Rounding Bottom and Rounding Top patterns appear at the end of an extended price trend. The market will move sideways during that period. An asset's price does not move in any direction during such a movement. 

In this case, the price will revert to its original direction following the reversal of its direction. 

Both patterns can also be measured by the difference between a limit reached price and the change in trend point. Therefore, in determining our trade entry, a stop-loss target, and take-profit target, we will use our entry and stop-loss levels. 

Additionally, the time taken for each pattern to develop is about the same. Technical analysis tools are used for identifying these patterns as well.

How can rounding top patterns be made more reliable?

Few patterns are as reliable as a rounding top pattern, with a failure rate of only 9 to 12%. Unfortunately, trading with this pattern is not accessible by any means. There are two main reasons for this:

This chart pattern is similar in shape to others. However, it isn't easy to confirm when the pattern is being developed.

Even if you are sure of the pattern, figure out precisely when reversals and breakouts occur.

The rounding top pattern has two strategies with which traders can maximize profits by increasing their credibility.

An agile trading strategy is imperative, as you must alter your strategy when your chart pattern goes wrong rapidly. 

It would help if you used your trading strategy to profit from any of the likely patterns in development while there is no clear signal for the formation of the new trend.

To integrate other technical analysis patterns and indicators into your trading strategy, you must have a way of determining where to enter and exit trades to use them effectively. In turn, you are more likely to achieve success.

What is the ideal place to trade the pattern?

Due to the nature of the structure, traders should usually trade it after the price has run up to resistance (selling pressure). Alternatively, it can also be helpful in corrections during bearish trends. 

Profit target in rounding top-bottom pattern

When the price breaks through the neckline and order close beneath it, it's time to sell, with a sell order entered into the market. However, there is a major reduction in the functionality of this pattern when the price goes over this mark. Therefore, exit the market now.

In a rounding top pattern, the top-level corresponds to the neckline level, corresponding to the take profit level. Lastly, the take profit target will be positioned at an equal distance from the breakout point as step one.

Trading rounding tops and bottoms: things to consider

Since the patterns of rounding tops and bottoms can only see with the naked eye, they are the most attractive feature of trading rounding tops and bottoms. The pattern cannot be plotted automatically. 

If you are a technical trader, you must learn to identify patterns and pick trades. Therefore, it would help if you practiced identifying patterns and picking trades. The examples used above can be printed and kept as a handy guide so you can compare any potential chart formation against it. 

The following guidelines should be all kept in mind when identifying rounded top chart patterns:

Combining rounding tops and bottoms with other technical elements

One of the primary points to note about the patterns is that they can combine with other types of technical analysis to enhance the likelihood of success. 

Although placing a trade based on an identified pattern is legitimate, traders can also incorporate trend lines with support, resistance, and specific technical indicators. You can strengthen your trading conviction by combining technical elements.

Pay attention to the pattern's location.

This setup isn't guaranteed to succeed, as with any technical formation. Technical analysts and traders are responsible for analyzing the markets and determining the most appropriate conditions to place trades.

Trade locations vary in their suitability for taking a trade. Therefore, you will become more proficient at identifying patterns and trading them as you spend time practicing in the specific markets you have a preference for.

Finally, it is worth considering the advantages of trading rounding tops and bottoms instead of other price structures and patterns.

The shallower, the better

You might notice that both examples used here for rounding tops and bottoms have relatively shallow price structures. Even the gentle smile shape of the rounding bottom is more akin to a "U." 

As we look at what is happening in the underlying order flow to create these patterns, we find it a war happening around a specific price point where power is shifting. When a rounding pattern forms, the sellers get the power. But in the rounding bottom pattern, the entire power is in the buyer's hands.

These patterns comprise many peaks and valleys due to this shift in sentiment. However, a gentle pattern indicates that a proper power shift has occurred between supply and demand. Consequently, the market is more likely to work. 

Price action is too erratic and unfavorable for placing a trade if the patterns are not shallow and the moves are much bigger (more volatile).

Related questions- FAQs

What is the method for determining the rounding bottom pattern?

A rounding bottom is a chart pattern found in technical analysis that forms the shape of a "U" when prices move in a particular direction. For example, we find round bottoms at the end of an extended downward trend whenever long-term price movements reverse.

Are rounding tops bullish or bearish?

A rounding top generally indicates that the security will have a bearish future. However, in a triple top or double top pattern, rounding tops can then be followed by several rounding tops causing support for the security's price to occur.

How do you draw a rounded bottom pattern in Zerodha?

An excellent way to determine whether you have it right is to draw the line at the top of the trend before the breakout and then at the top of the bullish trend following the breakout. A rounding bottom pattern's size is determined by the distance between its lowest point and the neckline.

A rounded bottom - how do you trade it?

It can do so by drawing a line across the top of the bullish and bearish trends. Afterward, it would help to take the distance between the lowest point on the pattern and the neckline. You will need this distance to determine how large the rounding bottom pattern will be.

Bottom line

Chart patterns such as the rounding top determine when an ongoing trend will end. It allows traders to identify early trading opportunities in the new trend area.

When trading these patterns, you make the most money when you trade breakouts corresponding to a new trend. Therefore, even though it may appear easy to trade this pattern, you need to be patient. The development of these patterns can sometimes take some time.