Zero Basics of K-Line | 14 Top Escape Pattern — Rounding Top
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Price movements follow trends; understand the language of price;
Trading signals indicate entry and exit; no more trading on gut feeling.Trading.
In this lesson, we will introduce a top pattern that is the opposite of the rounding bottom — the rounding top. Let's first look at what a rounding top looks like.
As shown in the chart, during an overall upward trend, the rising momentum clearly slows down, and connecting the highs forms roughly a semicircle. This pattern is called a rounding top.
Let's simplify this pattern. Draw a horizontal line that passes through the most lows — this is called the neckline. The neckline appears in multiple patterns and is a very important reference line.
Not every upward-curving arc pattern is a rounding top. How do we confirm whether a rounding top is valid?
As shown: when a candlestick closes and its body crosses below the neckline, the rounding top pattern can be considered valid.
Depending on where the rounding top appears, we classify it into two categories.
1) A rounding top in the early stages of an uptrend, where the pattern takes a relatively longer time to form.
2) A rounding top during a downtrend, where the pattern lasts a noticeably shorter time.
Now that we have a basic understanding of the rounding top pattern, how do we apply it in live trading?
When the price breaks below the neckline, the first type of selling signal is generated. This type of signal is relatively aggressive and has a lower success rate.
When the price falls below the neckline and then pulls back, followed by a bearish engulfing pattern, evening star, or other bearish signals, the second type of selling signal is generated. This is a more conservative selling signal with a significantly higher success rate.
When the price continues downward and breaks below point A, the third type of selling signal is generated. In most cases, entering after the third selling signal appears is the safest approach.
Not every rounding top forms all three selling signals. In extremely weak market conditions, it is very likely that only one selling signal appears. In this case, the price typically breaks below the neckline with a strong bearish candle, and then continues to decline.
The decline has been confirmed — how do we predict the depth of the drop?
The method for estimating the minimum target of a rounding top is simple. From the high point of the arc, draw a vertical line down to the neckline. Shift this line segment below the neckline to get the minimum target level.
We can also roughly predict the extent of future price decline based on the formation period of the rounding top.
In most cases, the longer the rounding top takes to form, the greater the potential decline afterward.
Let's look at three real-world rounding bottom case studies below.
Case 1: Screenshot from OKX MITH/USDT 6-hour chart. After a downtrend, the price formed a rounding top with a relatively short time span. In this pattern, only one selling signal appeared, followed by a sharp decline where the price quickly fell below the minimum target level.
Case 2: Screenshot from OKX MITH/USDT 6-hour chart. After a sharp rally, the price formed a rounding top with three well-defined selling signals. The price then continued to decline, surpassing the minimum target level.
Case 3: Screenshot from OKXMANA/USDT 6-hour chart. After a modest rally, the price formed a rounding top, with all three selling signals appearing in sequence, and the final decline exceeded the minimum target level.
Just as a rounding bottom does not always succeed, rounding tops can also fail. What conditions indicate that a rounding top has failed?
First scenario: shortly after breaking below the neckline, the price rises back above the neckline. The neckline breakout fails, and the rounding top construction is invalidated. In this case, any positions sold should be bought back.
Second scenario: after the rounding top pattern forms, the price does not break below the neckline and instead rallies above the nearby swing high. In this case, the rounding top construction fails.
Rounding Top Failure Case Studies:
Chart 1: The price fails to break below the neckline, the rounding top pattern is invalidated, and the price forms an uptrend.
Chart 2: The price forms a rounded shape but fails to break below the neckline for a long time, and eventually rallies above the nearby swing high, invalidating the rounding top.
This concludes our discussion of top escape patterns. In the next lesson, we will cover "Smart Money Accumulation Patterns."
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