What is the Rounding Top?

Last Updated on September 27, 2023 by BFSLTeam BFSLTeam

When you picture a trend reversal in the market, it’s common to think of a sharp reversal from a bullish to a bearish trend (or vice versa). However, trend reversals do not always occur within the same trading session. Often, the reversal may span across several days or even weeks. These trend changes are slower and give traders more time to align their strategies to changing market conditions. 

Nevertheless, you need to understand how to identify such reversals in price patterns. Candlestick patterns like the rounding top can help you with this. In this article, we’ll take a closer look at the rounding top pattern, how to identify it and what it indicates.

What is the Rounding Top Pattern?

The rounding top pattern, also known sometimes as the inverse saucer, is a bearish reversal pattern that occurs at the top of an uptrend in the market. It resembles an extended concave curve or an inverted saucer, hence its name. This pattern typically develops over several trading sessions spanning days, weeks or even months at a time. 

During the trading sessions that make up the rounding top, it may appear that the market is moving sideways, with no prolonged uptrend or downtrend. This is because the market takes its time to reverse the uptrend after a consistent bullish price movement. During this phase, there are multiple minor price rises and drops, but none so prolonged as to warrant a complete trend reversal.

How to Identify a Rounding Top Chart Pattern?

There are three main elements that you can look out for to identify a rounding top pattern. They include the following:

• An extended curve where the prices trend higher, then taper and trend lower — repeating a similar pattern several times
• Inverted trading volume pattern, where the volume of trades is higher at the two ends of the rounding top, but lower in the middle
• A neckline support level that prevents the price from dropping immediately after the first downtrend, instead pushing it upward again multiple times 

A rounding top occurs because the buying pressure from the bulls is almost equally matched by the selling pressure from the bears. So, the price of the stock exhibiting the rounding top pattern consistently rises, then dips slightly to the neckline support range before rising again to form a new high. Repetition of this price pattern leads to a resistance level from the selling pressure.

Eventually, the selling pressure may build sufficiently to break through the neckline support and start a bearish trend, confirming the trend reversal. 

How to Trade the Rounding Top?

How you trade the rounding top pattern depends primarily on your risk profile. Typically, if you are a conservative trader who is risk-averse, you may be sceptical about whether or not the trend will reverse. So, a natural course of action for you would be to wait for a break from the sideways price movement and close your position when the price falls below the neckline support. You can then wait to test if the neckline support holds before choosing to reenter the market. 

However, if you are an aggressive trader who can afford to take risks, you may want to take a short position when the price falls below the neckline support. This effectively indicates that you are fairly certain that the bearish trend will prevail. You can then set an exit target at a lower price. 

Relationship with Other Patterns

The rounding top pattern may include or coincide with other extended bullish trend reversal patterns like the double top or the triple top candlestick patterns. In fact, the rounding top may have several tops of varying levels before the price finally reverses and starts to trend downward. Although these patterns all occur at the top of an uptrend, your trading strategy may need to be adapted to each pattern as needed. 

Conclusion

This concludes the handy guide on what a rounding top pattern is and how you can plan your trades if you identify this pattern. Since the rounding top is a candlestick pattern that is formed from historical price movements, you need to be good at technical analysis to observe and interpret candlestick charts. Only then can you watch for patterns like the rounding top and formulate trading strategies as needed.