As we know, one of premise of technical analysis is history repeats itseilf. In other words, human behavior tends not to change. Then technical analysts study chart patterns, which reveal the psychology of the market. Chart patterns worked well in the past. They are assumed to work well in the future. Hence, the future is predictable. In this topic, we will define chart patterns and how to trade based on those patterns.
Rounding bottom forms the shape of a U. It can be found at the end of extended downtrend and signal a reversal in long term price movements. The initial downleg of a rounding bottom shows an excess of supply, which drives the price down. When buyers enter the market at low price, demand increases and pushes the price up. The tug of war continues between sellers and buyers. Sellers are losing their interest. They start thinking that the price can not go down further and close their short selling positions. Once the rounding bottom is complete, the price breaks out and will continue going up.
This pattern is opposite to rounding bottom. It can be found at the end of extended uptrend and signal a reversal in long term price movements. The initial upleg of a rounding top becomes exhausted as the demand dries up. When sellers enter the market, supply increases and pushes the price down. The tug of war continues between sellers and buyers. The pattern can develop over several weeks, months or even years. Buyers are losing their interest. They start closing their long positions. One the rounding top is complete, the price breaks down and will going down.
The example below describes how to trade a rounding top pattern. A sell order should be placed below the key support 110.