The Rounded Top pattern, and how to use it
The rounded top pattern, also known as a saucer top pattern, is a bearish chart pattern that is formed by a rounded, “U” shaped pattern. This pattern is created when the price of an asset rises to a resistance level, makes a series of lower highs, and then eventually starts to fall. The rounded top pattern is typically seen as a bearish sign and indicates that the asset’s price is likely to reverse its upward trend and start falling.
To form a rounded top pattern, the asset’s price will typically rise to a resistance level, make a series of lower highs, and then eventually start to fall. The pattern gets its name because the shape of the price action resembles a rounded, “U” shape. The pattern is typically completed when the price breaks through the support level, at which point it is likely to continue falling as traders enter into short positions.
One of the key characteristics of the rounded top pattern is that the trading volume tends to increase as the pattern progresses. This is because the price is making a significant move and there is more activity from traders. However, once the price does break through the support level, trading volume may decrease as the price starts to fall and traders become less active.
In order to trade the rounded top pattern, traders should look for the following characteristics:
- A rounded, “U” shaped pattern: This is the key feature of the rounded top pattern, as the asset’s price rises to a resistance level, makes a series of lower highs, and then eventually starts to fall.
- Increasing trading volume: As the pattern progresses and the price approaches the support level, trading volume should increase.
- A breakdown: Once the price breaks through the support level, traders should enter into short positions and expect the price to continue falling.
It is important to note that the rounded top pattern is a bearish pattern, but it is not a guarantee that the asset’s price will fall. As with any trading strategy, it is important to use risk management techniques and to always be aware of the potential for losses.
One way to trade the rounded top pattern is to set a sell order just below the support level, as this is where the price is likely to break through and start falling. Traders can also set a stop loss order just above the resistance level, in case the price does not break through the support and instead rises back up.
Another way to trade the rounded top pattern is to wait for confirmation that the price has indeed broken through the support level before entering into a short position. This can be done by looking for additional bearish signals, such as a bearish crossover on a moving average or a bearish candlestick pattern.
It is important to keep in mind that the rounded top pattern can take some time to form, as the price needs to rise to the resistance level, make a series of lower highs, and then eventually start to fall before breaking through the support level. Traders should be patient and wait for the pattern to complete before entering into a trade.
