Chart pattern: Rounding top
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What is a rounding top?
A rounding top is a U-shaped peak, also called a "reversed saucer". The peak is very rounded with a flat bottom . However, in many cases, there are several bullish peaks, but they do not call into question the pattern’s validity.
The pattern’s neck line is formed by the low point preceding the inverted U’s formation. A rounding top might be a bullish continuation pattern or a bearish continuation pattern.
Unlike rounding bottom, the price objective is calculated according to the traditional pendulum rule . It is calculated by measuring the depth of the U and then plotting that on the neck line.
The rounding top has long been considered as a reversal pattern. However, Bulkowski's work has shown that in many cases, rounding top is a continuation pattern.
Graphical representation of a rounding top
Statistics on rounding tops
Here are some statistics about rounding tops :
In 81% of cases, the figure reverses to a continuation bullish position
In 61% of cases, there is a bullish exit
In 90% of cases, there is a continuation of the upward movement at the break in the neck line
In 48% of cases, a pullback intervenes on the neck line
In 70% of cases, the objective is achieved
Notes on rounding tops
- The price often pauses when it returns to the neck line
- The flatter the peak, the more forceful the movement at the break in the neck line
- In case of pullback on the neck line after the break, the bullish movement will be less forceful
- If a large bearish peak occurs after the peak has formed, it is possible to draw a bearish line to connect the high point that preceded the formation of the rounding top and the low point of the bearish peak.
Trading strategies with rounding tops
The traditional strategy:
Entry: Open a long position at the patterns highest break point
Stop loss: The stop loss is placed under the last lowest one
Objective: Theoretical objective of the pattern
Advantage: Many lowest points form during the price rise, so it is easy to place your stop loss.
Disadvantage: There has to be a major movement the objective to be achieved.
The aggressive strategy:
Entry: Open a long position if the price retraces 32% of the movement between the highest point of the rounding top and the lowest right point of the inverted U
Stop loss: The stop is placed under the lowest right point of the inverted U
Objective: A return to the highest point of the rounding top
Advantage: It is not necessary for a major movement to take place for the objective to be achieved.
Disadvantage: The percentage loss of the trade is higher because the rounding top pattern is not yet confirmed.
For your information: A Rounding Top is a reversal chart pattern. Its opposite is a Rounding Bottom.
