As the name implies, this pattern appears as a gentle reversal to the trend, rather than a violent change in trend. It takes time to form and is characterised by diminishing higher highs eventually giving way to increasingly lower highs.
A rounded top signals the end of a bull market and suggests a reversal in trend. It is difficult to identify until it has actually formed and is therefore favoured by longer term trend followers. Once it has formed, however, it marks a significant level from which we can start a whole new series of calculations and projections.
In the example below, the top is well formed before it becomes obvious, but the potential for the down move to continue is high once we have identified the rounded top.
A rounded bottom is the result of gentle change in trend. It is quite subtle while it is in progress and only obvious once complete. The bar that creates the low is not all that significant in this pattern, but the price is very important. The bars on the left of the actual bottom make progressively and gradually lower lows, while the bars on the right of the bottom reverse that trend, making slightly higher lows at first and then increasingly higher lows as we move further away from the low.
A rounded bottom can be used as confirmation of a low, and therefore as a major reference point. It can be important as a major signal for trend change.
© The MacLean Group Pty Ltd ACN 096 967 038. All rights reserved 2003. This article has been prepared by The MacLean Group and licensed to ASX. The views are those of the author and not of ASX. This material is educational and it is not intended to constitute financial advice.