The rounding top pattern is a technical analysis chart pattern used to identify potential bearish reversals in the financial market. Rounding top forms at the end of a prolonged uptrend and follows three stages, the initial uptrend, the consolidation or transition, and the downtrend.
The rounding top pattern begins with an initial uptrend where prices rise gradually until a peak is formed, followed by a consolidation period where prices move sideways, and volume decreases. A neckline or support level is formed during the consolidation phase. Finally, the price begins declining steadily in the downtrend stage, completing the rounded or inverted ‘U’ shape.
Traders identify a rounding pattern by looking for an uptrend in a market, visually drawing the rounded dome shape of the pattern on the price chart, and looking at volume and technical indicators like RSI and moving average to validate the pattern.
To trade the rounding top pattern, traders identify the rounding pattern, draw the neckline, look for volume confirmation, place the trade, set the stop-loss and take-profit orders, and then manage the trade.
The advantages of a rounding top pattern include clear trend reversal signals, defined entry and exit points, volume confirmation, versatility, and easier swing trading.
The disadvantages of the rounding top pattern include false signals, slow development, subjectivity in identification, no guarantee of reversal, being unreliable on short-term time-frames, and costly trading.
What is a Rounding Top Pattern?
The rounding top pattern is a bearish reversal chart pattern that appears at the end of an uptrend. The rounding top pattern derives its name from its distinctive smooth curve that resembles an inverted U-shape or upside-down bowl. Rounding top patterns indicate a gradual shift in price movement from an uptrend to a downtrend.
The rounding top pattern occurs when buying pressure weakens in the market, resulting in increased selling activity as the price flattens and starts declining. The formation of the rounded top pattern appears on various time-frames in a price chart, from short-term intraday charts to weekly and monthly charts.
Rounding top pattern signals are typically more accurate and reliable on higher time frames, making it a valuable tool for long-term investors and swing traders. Rounded top patterns have a neckline, similar to the head and shoulders pattern, and traders look for shorting opportunities when the price breaks the neckline.
The rounding top is a widely used term in Forex vocabulary among technical analysts and is often associated with the rounding bottom and U-shape chart patterns.
Is Rounding Top and U Patterns in Trading the same?
No, the rounding top and U patterns are not the same in trading. The rounding top pattern is a bearish reversal pattern that resembles an inverted U-shape curve on a price chart. U patterns are bullish reversal patterns that form when a security’s price, like a currency pair, stock, or cryptocurrency, creates a U-shape on the price chart.
Rounded top patterns occur at the end of a bullish market trend, indicating potential reversal from uptrend to downtrend, while U patterns appear at the bottom of bearish markets, indicating potential reversal from downtrend to uptrend.
Volume in rounded top patterns typically decreases as the pattern forms and increases during the breakout to the downside. The volume of U patterns increases during their formation and is particularly high during the breakout to the upside.
Traders look for both the rounding top pattern and U patterns when trying to understand market trends during the consolidation phase, making them vital in trading.
Why is the Rounding Top Pattern important in trading?
The rounding top pattern is important in trading because it provides an early warning of a potential bearish reversal, enabling traders to position their trades for maximum profitability. Rounding top patterns provide clear entry and exit points, influence market sentiment and behavior, and help traders with risk management.
The rounding top pattern provides an early warning of a potential bearish reversal by indicating that the bullish momentum is dying off and that sellers will soon gain control. Traders spot the rounding top pattern forming and exit their long position, locking in profits before the price begins falling.
Rounding top patterns enable traders to identify clear entry and exit points in the market using the pattern’s neckline. A confirmed breakout below the support level or neckline provides an entry point for short positions, while the height of the pattern is projected from the breakout point to provide a clear target price.
The rounded top pattern influences market sentiment and trader behavior by helping traders understand the psychology of other market participants. Traders spot when market sentiment is bullish and when it turns bearish on one asset, like a currency pair, and correlate the impact of the sentiment shift to the broader financial markets, like how a shift in US dollar index sentiment affects all USD-related Forex pairs, stock indices, gold, and the global bond market.
The rounding top pattern helps traders with risk management by providing a clear stop-loss level and alerting them when to exit trades. Traders place their stop loss above the pattern’s peak, protecting the trader from sudden reversals. The rounding top pattern enables the trader to remain aligned with market sentiment, ensuring they do not hold onto long positions in a potential downtrend.
How does the Rounding Top Pattern work?
The rounding top pattern is a reversal chart pattern that creates a gradual, rounded shape on a Forex chart. The rounded top pattern resembles an inverted U-shape and signifies a change in the supply and demand of an asset in the market. Rounding top pattern relies on price action, volume analysis, and other technical indicators to complete.
The rounding top pattern begins when there is strong demand for a currency pair, and buyers are in control. The price of the currency pair is rising due to buying pressure as new buyers are willing to pay higher prices to get into the market. The demand for the currency pair starts to decrease when the price approaches a resistance zone, and buyers become wary of opening new positions. Technical traders use oscillators like the RSI, Stochastics, and ATR to determine whether the price at the resistance is overbought, further decreasing their appetite for long positions.
The peak of the rounding top chart pattern is formed when the price gets close to the resistance zone, where early investors and traders choose to take their profit, and new sellers take trades to capitalize on the potential reversal. Sellers gain more confidence as bullish momentum drops in the markets, and supply begins to increase at this point, leading to the start of a reversal and the formation of a gentle curve at the top of the chart pattern.
The market enters a small consolidation when the demand for a currency is weakening and a neckline that acts as a support line is formed. Downward pressure in the markets causes prices to begin falling as supply increases, showing that sellers are taking control. The reversal is confirmed when sellers overwhelm buyers, and the increased supply leads to the breaking of the neckline, marking a shift in control from buyers to sellers.
The rise in supply and gradual weakening of demand that occurs during the formation of the rounding top pattern reflects the market’s sentiment shift from optimism to uncertainty to pessimism, allowing traders to anticipate the reversal and adjust strategies appropriately.
How does the Rounding Top Pattern form?
The rounding top pattern forms when a security’s price action gradually reverses direction, creating a rounded or curved shape on the chart. Formation of the rounding top pattern occurs in three phases, the initial uptrend, the consolidation or rounding phase, and the downtrend. Each phase during the formation of the rounding top pattern experiences different price movements, volumes, and sentiments.
The initial uptrend phase in a rounding top pattern begins with the continuation of an established uptrend where the price is making higher highs and higher lows on the charts. Trading volume is high during this phase because demand is high, and buyers dominate the market, pushing prices higher.
The consolidation phase in a rounding top pattern starts when the rate of price increase begins to slow down in the markets and fluctuates within a narrow or sideways range. Price becomes choppy and begins to flatten out during consolidation, forming a rounded top shape that indicates a loss in upward momentum. The highs in the market fall off gradually, leading to the formation of a rounded peak as trading volume decreases and buying pressure declines. The consolidation or rounding phase often consists of double and triple tops when incomplete.
The final phase in a rounding top pattern is the downtrend, where the price breaks out of the support neckline, signaling the start of a new bearish trend. Trading volume increases during this phase as range-to-range sellers join in the selling activity, leading to an accelerated price decline.
Rounding top patterns take a long time to form, usually between several days to a few months and sometimes years. The actual duration of the rounding top pattern depends on the analysis time frame used and the prevailing market conditions. Charles Bukowski, in his book “Encyclopedia of Chart Patterns,” projects that successful rounding top patterns take between 182 (6 months) and 371 days (1 year) to form.
Traders consider rounding top patterns formed on higher time frames like daily, weekly, and monthly to offer the highest accuracy, making the pattern ideal for swing trading.
False breakouts in the rounding top pattern form when the price momentarily breaks below the support level or neckline to indicate the start of a new trend lower, only to reverse direction and move back above support. False breakouts occur for several reasons, including stop-loss hunting, high market volatility, and news events that cause sudden price moves.
When is the Rounding Top Pattern formed?
The rounding top pattern is formed when an extended upward price trend is approaching its end, and there are not enough new buyers to sustain the movement. Rounding top patterns form when a currency pair’s price is close to a resistance level or when the price becomes overbought on technical indicators like the relative strength index (RSI).
The rounding top pattern is formed when the price approaches a resistance level because buyers lock in their profits by exiting their positions, and buyers reduce their activity to avoid making purchases at high prices.
The rounding top pattern usually lasts anywhere from a few weeks to a few months on the weekly and monthly charts, depending on the market’s volatility and the preceding uptrend’s strength.
Traders using technical indicators wait for the rounding pattern to form when indicators like the RSI show that a currency’s price is overbought, suggesting that a trend correction is about to happen.
How does the Rounding Top Pattern differ from other Chart Patterns?
The rounding top pattern differs from other chart patterns in its shape and duration of formation. The rounding top pattern is compared to the head and shoulders pattern, inverse cup and handle, double top and bottoms, and other U or V-shaped chart patterns, indicating continuations or breakouts.
The rounded chart pattern has a unique rounded curve with one distinct peak, which is different from the head and shoulders pattern, double tops or bottoms, and triangle patterns. The inverse cup and handle pattern shares a similar rounded top curve with the rounding top pattern but has an extra ‘handle’ that forms after the rounded top, which does not appear in the rounding top pattern.
The rounding top pattern takes the longest time to form compared to other chart patterns like the head and shoulders or triangles. Triple tops and double tops sometimes appear inside the formation of a rounding top pattern before it is complete, meaning the entire pattern may take months to form. Other chart patterns form in a few hours to several days, which is a much shorter duration.
The rounding charts feature a gradual decline from the peak to indicate a sentiment shift and the start of a bear trend, which differs from other chart patterns like triangles, which experience more abrupt changes in market sentiment.
Is the Rounding Top Pattern bearish?
Yes, the rounding top pattern is a bearish reversal pattern, suggesting that the upward trend is losing momentum, and a potential bearish trend may follow. There are, however, studies that show that rounding top patterns could be bullish continuation patterns. For instance, Charles Bulkowski, in his book “Encyclopedia of Chart Patterns” indicates that in 81% of cases from his research, the rounding top pattern reverses to a bullish continuation position.
According to Charles Bulkowski, the rounding top pattern is bearish when it breaks out below the lowest point of the pattern and bullish when it breaks out above the highest point (‘the peak’) of the pattern.
Rounding top patterns indicate a loss of momentum in long-term trends and the start of consolidation, meaning traders have to consider the broader context of markets before concluding that a rounding top pattern is bearish.
How to identify the Rounding Top Pattern?
To identify the rounding top pattern, traders look for markets with prolonged uptrends, a rounded top or dome-like shape, a neckline, a candle close below the neckline, and confirmation using volume and technical indicators. Traders monitor the time the pattern takes to form and conduct sentimental analysis to confirm that the underlying investor behavior supports the formation of the rounding top pattern.
Forex traders begin identifying the rounding top pattern by looking for a period of sustained rising prices followed by a gradual rounding of price at the top. The traders identify the peak of the pattern, which is the highest point, and then monitor the decline that follows.
Rounding top patterns decline in a curved shape inside a consolidation range to form a consistent ‘U’ shape instead of sharp price declines. The right side of the rounded top usually mirrors the left side, with prices declining at relatively similar rates. Traders check the symmetry of a rounded top pattern by connecting the highs using a curved line.
Traders monitor the volume and momentum of each phase of formation to confirm the rounding top pattern. Volume in the rounded top pattern increases during the uptrend, decreases during the rounding or consolidation phase, and increases slightly during the reversal phase and breakout.
Confirmation traders may use other technical indicators like the moving average to confirm trade signals from the rounding top. Moving averages indicate that the price is set to continue bullish if it crosses above the moving average during the uptrend phase. A break below the moving average during the downtrend phase confirms the rounding top’s reversal signal.
Traders identify the rounding top by the time it takes to form. Reliable and accurate rounding top patterns usually form within several weeks to months. Rounding top patterns forming on lower time-frames, such as intraday, often result in false breakouts because the market experiences a lot of noise.
Traders conduct sentimental analysis on specific currency pairs to determine whether investors are optimistic or cautious about trading the asset. Rounding top patterns form when investors are uncertain about a currency pair and opt to short the assets after a period of time, increasing the supply of the asset and causing its price to decline.
What does the Rounding Top Pattern look like?
Is the Rounding Top Pattern easy to identify?
No, the rounding top is not easy to identify because it looks like a head and shoulders pattern or the double tops and bottom patterns early in the formation stages. The rounding top pattern takes a long time to form, adding a layer of difficulty and subjectivity to traders trying to spot it in the markets.
The rounding top pattern forms several peaks and troughs as it enters the consolidation phase, making it look like a head and shoulder pattern or the double or triple top chart patterns. Traders have to wait for the complete pattern to be certain that the formation is a rounding top.
Beginner and impatient traders experience multiple false breakouts and signals since the rounding pattern may take up to a year to form. The ambiguity that ensues during the waiting period makes the rounding pattern one of the hardest to identify on the markets in real time.
How to Trade with Rounding Top Pattern?
To trade with rounding top pattern, follow these steps:
- Identify the rounding top pattern: Look for a confirmed uptrend on the chosen Forex chart time-frame and identify the peak where the uptrend stalls and the price starts to decline. Ensure the pattern resembles an inverted U-shape on the chart.
- Draw the neckline: Identify the support level created at the base of the pattern and draw a horizontal line connecting the lows to establish the neckline.
- Look for confirmations: Wait for the price to break out and close below the neckline to indicate the start of a potential bearish trend. Look for increased volume during the breakdown to validate the pattern.
- Plan the entry: Place a sell order once the price breaks below the neckline for an aggressive entry, or wait for the price to retest the breakout zone from below before opening a position for a safer entry.
- Set a stop-loss order: Place the stop-loss above the neckline or the highest point of the pattern, depending on the risk tolerance.
- Define the profit target: Measure the height of the pattern (the distance between the highest point of the rounding top and the neckline) and project that height downwards from the breakout point to set a profit target.
- Manage the trade: Monitor the trade and adjust stops when market conditions change. Use trailing stops and take partial profits at key support levels to secure gains as the position runs towards the profit target price.
When to Trade Rounding Top Pattern in Trading?
The best time to trade the rounding top pattern in trading is when looking for signals to close a long position, when looking to capture early entries in a trade reversal, when looking to capture pullback or retracement buys, and when combining trading strategies to align positions to the broader market trend.
Forex traders trade the rounding pattern when looking to close their long positions in an uptrend to avoid getting caught in a reversal. The rounding top pattern helps traders identify when bullish pressure is weakening, enabling them to exit trades before the reversal starts and eats into their profits.
Traders use the rounding pattern when positioning their trades in a new bearish trend. Rounding top patterns allow the traders to place their trades below the neckline immediately after the pattern completes, providing excellent entry points for maximum profits.
Sentiment traders and investors utilize the rounding top pattern when looking to assess the market supply and demand dynamics and the psychology of other traders. The rounding top shows clear phases when demand and supply rise and fall, allowing traders to gauge the prevailing sentiment and make informed trading decisions.
Buyers trade the rounded top chart patterns when looking for pullback or retracement entry opportunities after an extended run. The rounding top pattern allows traders who missed the beginning of a trend to place entries as the market retraces and provides clear stop-loss and profit targets for each trade.
Forex traders and investors use the rounding top pattern when looking to combine their trading strategies with different indicators like the moving average and the Fibonacci retracement tool. The moving average acts as a confirmation once the price crosses and closes above it, while the Fibonacci indicator allows traders to project potential retracement levels, e.g., 38.2% and 61.8%, enabling traders to place entries and participate in the prevailing market trend.
Is Rounding Top a Common Forex Trading Pattern?
No, the rounding top pattern is not a common trading pattern because it takes a long time to form and works better on higher time frames like daily, weekly, and monthly. The rounding top pattern is popular among swing traders and position investors who can wait for up to a year for the pattern to form.
Rounding top patterns are unreliable when they occur on intraday time-frames like the M5, M15, and H1, making it difficult for scalpers and day traders to use them for short positions.
The formation of the rounding top pattern often looks like that of the head and shoulders pattern and the double or triple top patterns, which occur more frequently in the Forex market and are popular among short-term traders.
New traders avoid the rounding top pattern because it is difficult to identify without experience, making the pattern ideal for experienced traders who prefer long-term trading strategies.
What Trading Strategies are suited for Rounding Top?
The different strategies suited for the rounding top pattern are listed below.
- Breakout trading: Traders open short positions when the price breaks below the neckline, with the stop loss above the highest point of the pattern and the profit targets at the projected height of the pattern from the breakout point.
- Trend following: Traders use the rounding top pattern to identify precise pullbacks and retracement levels for placing trades that align with the broader market trend.
- Confirmation with indicators: Traders combine different technical indicators like the RSI, MACD, and moving averages with the rounding top pattern to develop confirmation rules and avoid taking false signals. For instance, traders want the RSI and MACD to be overbought and the price to cross below a moving average for an entry to be valid.
- Retest trading: Traders wait for the price to retest the neckline after it has broken out and closed below it. Sell positions are placed when the price fails to break back above the neckline.
- Range trading: Traders open trades when the price breaks below the neckline of the rounding top pattern, with the stop-loss above that range and take-profit at the lower end of the range.
- Divergence trading: Traders compare price movement on the rounding top pattern with momentum indicators to spot bearish divergences where the price makes a higher high, but the indicator makes a lower high, indicating a potential momentum shift. Traders incorporate divergence into different trading strategies as a powerful entry confirmation signal.
What is the accuracy of the Rounding Top Pattern?
The accuracy of the rounding pattern varies depending on the time frame used, pattern definition, market conditions, and confirmation factors. The accuracy of the rounding top pattern in predicting reversals is around 69 – 79%, according to Charles Bulkowski’s book ‘Encyclopedia of Chart Patterns.’ Bulkowski observed that the rounding top pattern is more accurate, nearly 90%, at predicting bullish trend continuation after the pattern forms than a trend reversal.
The accuracy of the rounding top pattern changes depending on the time frame of research used. Traders find more occurrences of the rounding top pattern on lower time-frames but experience numerous false signals, resulting in bad data and lower accuracy rates. Higher time-frames reduce the sample size when backtesting the pattern but result in higher accuracy and better data quality.
The accuracy of the rounding top pattern is higher in strongly trending markets and lower in highly volatile markets. Traders who use confirmation tools like volume analysis and technical indicators like moving averages and oscillators achieve higher precision and accuracy when trading the pattern.
Experienced traders identify the rounding top pattern faster and more easily, allowing them to achieve a higher success rate when trading it than novice traders.
What are the Advantages of Rounding Top Patterns?
The advantages of Rounding Top Patterns are listed below.
- Clear trend reversal signal: The rounding top pattern has high accuracy in predicting potential bearish reversals and continuation in bullish markets.
- Defined entry and exit points: The rounding top pattern provides clear entry points after the break of the neckline and exact profit targets measured from the height of the pattern.
- Volume confirmation: The rounding top pattern is easy to confirm and validate using volume, with increased volume during neckline breakouts indicating stronger bearish signals.
- Versatile across assets: The rounding top pattern is tradable across all time-frames in any market with an uptrend, including stocks, forex, cryptocurrencies, and commodities.
- Precedes bear trends: The rounding top pattern forms gradually, allowing traders to receive early warnings about the potential reversal and enabling them to plan their trades.
- Swing and position trading: The rounding top pattern is well-suited for swing trading and position trading, as it provides clear entry and exit points for trades that last from a few days to several months.
What are the Disadvantages of the Rounding Top Pattern?
The disadvantages of the Rounding Top Pattern are listed below.
- False signals: The rounding top pattern produces many false breakout signals, making it difficult to determine if a breakdown below the neckline is a genuine reversal signal or a false move.
- Slow development: The rounding top patterns form gradually over long periods, ranging from weeks to months, making it difficult for traders who prefer shorter time frames.
- Subjectivity in identification: The rounding top patterns are subject to every trader’s interpretation and do not have straightforward patterns, leading to inconsistent identification and analysis.
- No guarantee of reversal: The rounding top patterns also indicate bullish market continuations and may lead to losses for traders who ignore other factors when trading the pattern.
- Unreliable on short time-frames: The rounding top patterns are difficult to trade on short time-frames like M1, M5, and M15 because of false signals and short-term price volatility.
- Expensive to trade: The rounding top patterns take long to play out, so traders require large capital to place short positions and hold them throughout the period.
Is Trading with Rounding Top Effective?
No, trading with the rounding top is not effective for most day traders and scalpers. The rounding top chart pattern takes too long to form and provides few trading opportunities for short-term traders to capitalize on for profits. Rounding top patterns are difficult to identify and experience many false signals on lower time-frames.
Identifying the rounding top pattern is subjective and based on the trader, making it a difficult pattern to spot on the charts. The formation of the rounding pattern is similar to that of other simpler chart patterns like the head and shoulders pattern, and new traders struggle to differentiate the two, making it ineffective for trading.
Most short-term traders do not have the patience to wait for six months to a year for the rounding top pattern to form and are likely to make impulsive or emotional trades that result in unplanned losses and promote undisciplined trading.
The high number of false signals associated with the rounding top pattern on intraday time-frames increases the risk of traders losing capital and facing margin calls.
The rounding top trading pattern is only effective for swing traders and investors who practice the buy-and-hold strategy and have the capital to weather short-term price fluctuations in the Forex market.
What is the difference between Rounding Top and Rounding Bottom?
The difference between the rounding top and rounding bottom chart patterns lies in their shape and direction of trend reversal. The rounding top pattern forms at the end of an uptrend and resembles an inverted ‘U’ or dome shape, while the rounding bottom pattern forms at the end of a downtrend and resembles a ‘U’ or bowl shape.
The rounding top pattern signals that the market is about to transition from a bullish to bearish trend, while the rounding bottom indicates that the bearish trend is turning bullish.
The rounding top pattern and rounding bottom pattern are mirror images of each other and follow similar rules of formation. Traders look for long positions when trading the rounding bottom pattern and short positions when trading the rounding top pattern.