Subscribe for real-time financial insights on Trade Target’s WhatsApp Channels
Understanding chart patterns is important for anyone using technical analysis to make trading or investing decisions. One such important formation is rounding top pattern, which indicates a possible shift in market direction. If you’ve been wondering what is rounding top pattern and how it can impact your trades, this blog will guide you through its structure, importance and how traders use it to anticipate bearish reversals.
Before diving into the technical details, let’s first understand what is rounding top pattern means.
What is Rounding Top Pattern?
Rounding top is a bearish reversal chart pattern that signals a shift from an uptrend to a downtrend. It forms after a upward price movement followed by a gradual loss of momentum. This pattern reflects a change in investor sentiment from optimism to caution and indicates selling pressure is building.
Rounding top pattern shows up on the chart as a gentle, rounded curve that looks like an upside-down “U.” It doesn’t happen overnight, it slowly takes shape over several weeks or even months and is characterized by:
- Shape: A smooth, hill-like curve where prices go up slowly, stay flat for a while at the top and then begin to fall.
- Duration: Unlike short term reversal patterns, a rounding top takes time to develop making it more reliable for long term analysis.
- Volume: Trading volume usually drops as the pattern forms, showing buyers are losing interest.
- Price Behavior: Prices start by rising quickly, then begin to slow down as they reach the peak and eventually start falling indicating a possible trend reversal.
Formation of Rounding Top Pattern
Here’s how this pattern unfolds:
- Uptrend Phase
- Prices rise steadily with strong bullish momentum.
- Market sentiment is positive and traders are confident.
- Momentum Slows Down
- Upward pace starts to weaken.
- Prices begin to flatten, showing signs of reduced buying interest.
- Peak Formation
- Price reaches its highest point.
- This rounded peak marks the transition zone from bullish to bearish sentiment.
- Price Reversal Begins
- After the peak, prices start to fall gradually.
- Selling pressure increases and buyers lose control.
How to Trade Rounding Top Pattern?
Rounding top candlestick pattern is a bearish reversal signal that appears after an uptrend. Recognizing and trading this pattern effectively can help traders identify sell opportunities before a larger downtrend begins. Here’s a step by step guide to trading rounding top pattern:
- Identify the Rounding Top Formation: After a strong price rise, watch for the chart to slowly curve at the top, forming a shape like an upside down bowl. This shows buyers are losing strength. It doesn’t happen in a day, the pattern usually takes a few weeks or even months to fully form, if you’re looking at daily or weekly charts.
- Watch for the Price Decline: Once the price hits its highest point and begins to slowly fall, it shows sellers are starting to take control. If the price breaks below a key support level, it confirms the trend is turning downward and that’s usually the point where traders look to enter a short position.
- Validate with Volume Analysis: During the rounding top formation, volume declines, reflecting reduced interest. A sharp increase in volume during the breakdown backs the pattern's reliability and confirms bearish sentiment.
- Enter a Short Position: Initiate a short position when the price breaks below the support line of the rounding top. In India, short selling is only permitted through the Futures & Options (F&O) segment, not in delivery trades. Ensure you are aware of the associated risks such as time bound contracts and margin requirements.
- Set a Stop Loss and Target Price: Place a stop loss just above the peak of rounding top to protect against false breakouts. Set your target price using previous support zones or by measuring the height of the pattern and projecting it downward from the breakdown point.
Advantages and Disadvantages of Rounding Top Pattern
Rounding Top pattern has certain pros and cons, which are listed below.
- Early Trend Reversal Indication: Offers a visual cue that bullish momentum is weakening allowing traders to prepare for a reversal.
- Capital Preservation: By identifying exit levels from long positions or entry points for short trades, the pattern supports capital protection.
- Defined Risk Levels: Traders can set stop loss orders above the pattern’s peak helping manage risk more effectively.
- Improved Trade Timing: It provides a gradual formation, giving traders enough time to analyze volume shifts and price action before acting.
- False Breakdowns in Volatile Markets: Price swings in uncertain markets may trigger misleading signals causing premature entries or exits.
- Slow Formation: This pattern takes time to form, sometimes weeks or even months which can make traders feel unsure or impatient.
- Limited Reliability Across Market Conditions: Price may not always fall after forming a rounding top if the market is strongly bullish or moving sideways
Rounding Top vs. Double Top
Rounding top and double top patterns may look somewhat similar at first glance but they are different in how they form, what they signal and how traders should respond to these two. Understanding these differences is important for accurate technical analysis and risk management.
Here’s a detailed comparison:
| Criteria | Rounding Top | Double Top |
|---|---|---|
|
Shape |
Two sharp, distinct peaks forming an "M" shape |
Two sharp, distinct peaks forming an "M" shape |
|
Formation Time |
Slow to form, takes weeks or even months |
Forms relatively faster, over a few days to weeks |
|
Volume Trend |
Volume gradually decreases as the pattern develops |
Volume usually spikes during each peak and drops in between |
|
Signal Type |
Suggests a gradual shift from bullish to bearish sentiment |
Signals a quick and sharp trend reversal |
|
Risk Level |
Lower risk due to slow formation and clearer confirmation points |
Higher risk if the second peak gives a false breakout |
|
Reliability |
Reliable in trending markets when supported by volume and other indicators |
High reliability but needs confirmation like neckline break and volume drop |
|
Common Usage |
Helps long term traders plan exits or short entries cautiously
|
Often used by swing traders for short term reversals |
|
Confirmation Signal |
Breakdown below support with volume pickup confirms the pattern |
Break below the neckline after second peak confirms the reversal
|
Final words
Rounding top pattern signals a slow shift from bullish to bearish sentiment after an uptrend. Since it forms over time, patience is key. Look for confirmation like volume spike during the breakdown before exiting long trades or taking short positions (often via F&O in India). Use stop losses and target levels for risk control and combine this pattern with other technical tools for better accuracy.
Frequently Asked Questions
Is a rounding top bullish or bearish?
A rounding top is a bearish reversal pattern that signals a possible price decline after an uptrend.
What does rounding top chart pattern signal to investors?
It indicates weakening bullish momentum and a possible shift to a downtrend.
What are common mistakes when trading rounding top pattern?
Entering too early, ignoring volume confirmation and failing to set proper stop loss levels.
What does a rounding top mean for future investment?
It suggests the asset may have peaked and a downward phase could follow, time to reassess or exit positions.
How is volume affected during a rounding top pattern?
Volume declines during the curve and often spikes on the breakdown, confirming bearish sentiment.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
