Profiting with Rounding Tops and Bottoms
Rounding tops and bottoms are yet another set of chart patterns less popular but effective at sucking profits from the Forex market if used correctly. They are both reversal patterns that signify the end of a trend and the beginning of a new one.
Rounding bottoms are formed when an arc is traced round the lows of the candlesticks in the chart at the end of the down-trend, forming what looks like a cup. There is some similarity to a cup and handle pattern, only that this looks like a cup (or more aptly, like a saucer) without the handle. Rounding tops are formed when an arc is traced round the highs of the candlesticks, forming what looks like an inverted saucer.
Indeed, the rounding top and rounding bottom patterns are also known as saucers.
How to Trade the Rounding Tops and Bottoms
The key to trading the rounding tops and bottoms is to be able to identify when the prices are either topping or bottoming out in a pattern that does not resemble a straight line, but in a curved fashion. Once this position has been identified by the trader on visual inspection of the charts, the saucers can be drawn on the charts using the appropriate tool on the trading platform. That way, traders can project when prices will bounce against the saucer in preparation for the trend reversal.
The reversal point is usually seen when the price bounces against the saucer at a resistance point (rounding top) or at support (rounding bottom).
In addition, another phenomenon that a trader should look out for is ‘thrust', which is simply the response of the price action of the currency pair after it has bounced off the saucer about 2 or 3 times. Thrust occurs when the price has gained momentum after bouncing off the saucer, confirming that the trend has effectively reversed and is moving in the direction of the new trend. It is therefore essential that the trader takes a position on the asset by using pending orders set at different points along the arc of the saucer.
The opening trade of choice is a pending order, which is the Buy Limit order. This is used to trade the rounding bottom pattern according to the steps that follow;
a) Trace the arc round at least two points where the price action has formed highs. Trace the saucer such that the tip of the arc is symmetrical at both ends. This will throw up possible points where the buy limits can be set.
b) If the price retreats to a point on the saucer where it crosses a support line, the signal to go long is reinforced.
The Sell Limit order is the preferred type of trade to open your position. This is used to trade the rounding top pattern based on the steps that follow below;
a) Trace the arc round at least two points where the price action has formed lows. The trace must be done so that the tips of the saucers on both sides are in the same horizontal plane.
b) If the price of the asset rises to hit the saucer at a point on the saucer where it crosses a resistance line, the signal to sell is reinforced, as seen clearly on this chart below.
Rounding tops and bottoms produce sure signals that can deliver good profits, but as with other patterns, you have to make sure the patterns are traced correctly.