Descending Tops

What Are Descending Tops?

The term descending tops alludes to a pattern in a price chart in which each peak in price is lower than the previous top in price. The descending tops pattern demonstrates a bearish trend in the price of the security. Descending tops and other related patterns are regularly utilized in technical analysis, a trading methodology traders use by concentrating on charts and diagrams to find entry and exit points.

Figuring out Descending Tops

Investors have different investment analysis options at their disposal when they need to examine market and investment performance. One of these strategies is called technical analysis. Traders who utilize this strategy assess and recognize patterns in stock prices by concentrating on diagrams and charts. Thusly, they are able to determine points of strength and weakness, along with trading patterns that assist them with distinguishing bullish and bearish patterns that signal viable entry and exit points.

One of the patterns traders might find on a stock price chart is a descending tops pattern. This trend shows that the market for the security being referred to is turning bearish. Bear markets are those that experience critical declines in security prices — regularly 20% or more from the latest highs. Descending tops can be recognized when a subsequent pinnacle is not exactly the primary pinnacle — which is called the top — and afterward confirmed when a third pinnacle is not exactly the subsequent pinnacle.

A descending tops pattern needs to eventually end. On the off chance that the next top in price is higher than the ongoing top in a descending top run, the trend is broken and the market will either go bullish or deteriorate. Some of the time a descending tops pattern will have drops that continuously slip, too. This pattern is called descending bottoms. While a descending tops pattern reverses, a descending bottoms pattern is probably going to reverse simultaneously, or inside another drop and pinnacle.

Special Considerations

Since descending tops might last just only minutes, long-term value investors are probably not going to invest explicitly during this pattern. Traders who time the market — likewise called day-traders — can see as descending tops advantageous to assist them with bringing in money during a short run. These short-term investors generally short the stock. This means that the longer the descending run lasts and the lower the price, the more money they can make.

Since descending tops are a chart pattern that will generally last for a couple of time spans of minutes, hours, days, or weeks, long-term value investors won't involve them in their analysis and strategies. Paradoxically, informal investors will depend on such patterns to boost profits during a continuation of price trends.

The key to progress while shorting a descending tops market is to set an upper limit over quite possibly of the earliest pinnacle — maybe the second or third pinnacle — and to escape that position when the market reverses. To set the upper limit, a trader enters a stop-loss order.

To know when to escape the position altogether in light of the fact that the market is switching, short-term traders need to comprehend that the principal top over the previous pinnacle is their signal to trade out of their position.

Descending Tops versus Ascending Tops

On the off chance that descending tops are an indicator of a bearish market, there must be a term that portrays when the market turns bullish, right? This term is known as ascending tops — something contrary to descending tops. It is a pattern found on price charts in which each price top is higher than the previous one.

Traders affirm an ascending tops pattern when the third pinnacle is higher than the second. For instance, the principal top in a stock's price might hit $35, then fall to $25. The price may then rise to $40 and drop down to $28. This signals the subsequent pinnacle. The trader might recognize an ascending tops pattern in the event that the next top goes past $40, signaling a bullish market.

Instance of Descending Tops

The accompanying chart is a genuine illustration of how to picture descending tops and how they work.

You can see that the tops in the chart all successively decline from the primary pinnacle. As referenced over, the main pinnacle is called the top while every one of the subsequent pinnacles are called the descending tops.

We should accept the chart and apply a speculative guide to assist you with figuring out the concept of descending tops. Say the primary pinnacle of Company XYZ's stock leaps to $40. The stock price then, at that point, drops to $28 and tops at $37 before dropping down to $25. At the point when charted, this seems to be descending tops. Assuming the next top is under $37 — and on account of the chart above, it is — this affirms that this is a descending tops price pattern, and the trader or investor ought to prepare for a bear market, even if by some stroke of good luck for the short-term.

Features

• This pattern demonstrates a bearish trend in the price of the security.
• Descending tops is a pattern found in the price chart of a security in which each top in price is lower than the previous pinnacle.
• Something contrary to descending tops is known as ascending tops, which is a pattern wherein each price top is higher than the previous one.
• Traders recognize descending tops after three successive pinnacles.