“Round Top” formations are usually reversal patterns that generated over a long periods of time. Indecisive markets move in slow and gradual changes near the tops and bottoms. “Round Top” patterns are formed when prices trade in a tight range making sporadic “lower highs” and “higher lows”. Usually the volume traded in this pattern is very low compared to the prior trend before the pattern formation. Breakdowns from “Round top” patterns will be fast and sharp when price movement occurs. “Round top” patterns also have a high failure rate.

Trade: A trend line is drawn connecting the “Round top” to the previous swings to find the possible trade opportunity. A close below the trend line indicates a trend change and provides a trading opportunity. A “short” trade is entered below the low of the breakdown bar.

Target: Successful “Round top” patterns have very sharp moves to the downside from the breakdown levels. There may be two targets possible. The first target is set at the depth of the “Round top” pattern from the trend line breakdown level. The second target is set at or near the prior “swing lows” before the pattern formation.

Stop: For trades taken on inclined trend line breakdowns, place a “stop” order above the trend line (on close basis) and for trades using horizontal trend line breakdowns, use the mid point of the “Round top” pattern to protect the trade.

Trading Rounding Top Pattern

Trading Rounding Top Pattern

The example above shows a “Round top” pattern formation from the Amazon (AMZN) daily chart. From November 2006 to January 2006, Amazon formed a “Round top” pattern. A trend line is drawn connecting the previous swing low to the “Round top.” “Round top” depth is measured for a target range. In January 2006, Amazon closed below the trend line to confirm a “Round top” breakdown.

  1. Enter a “short” trade below the trend line at $47. The depth of the pattern is $3.
  2. Set a first target at $44 (depth from entry). Set another target near the “swing low.”
  3. Enter a “stop” order above the trend line (on close basis). A long-term trade stop loss is set above the high of the “Round top” pattern.

Trading Round Top Pattern

Trading Round Top Pattern

The example above illustrates a “Round top” pattern formation from the Russell Emini (ER2) 610 tick chart. From April 16,2007 to April 18,2007, ER2 made a “Round top” formation. On April 18’~E, R2 closed below the key support areas of “Round top” formation to signal a “short” trade.

  1. Enter a “short” trade below the low of the breakdown bar at 830.
  2. Place a “stop” order above the 50% depth range of the “Round top” pattern.
  3. Target 100% of the “depth” from the breakdown level.

Source : “Trade Chart Patterns Like the Pros” by Suri Duddella