Methodology

Stocks

Module 4

What is a portfolio?

Rounded tops

You guessed it, a rounded top pattern is similar to head & shoulder and triple top patterns. When each pattern forms, it suggests that the stock market will move in the opposite direction.  So, when a rounded top pattern forms, it suggests that the price of a stock will go down. This enables a trader to sell their investment before the price goes down, helping them to avoid losses.

 

Rounded tops are arguably the easiest to identify as you simply need to look for a smooth, semi-circular shape. There is no set timeframe for how long a rounded top takes to form. 

 

A valid rounded top pattern will return down to the original starting point, before continuing to follow a downward trend.

Rounded bottoms

Rounded bottom patterns are also similar to an inverse head and shoulders pattern or a triple bottom pattern. When it fully forms, it suggests that the price of a stock will continue to follow an upward trend.

 

Traders would use a rounded bottom to identify an entry point for their investment, hoping to start in a profitable position as quickly as possible.

 

For a valid rounded bottom pattern to form, the semi-circle should return to the original starting point, before continuing to follow an upward trend. This is obviously the same as the rounded top pattern, only the opposite.

How effective are technical indicators?

Technical indicators, like the rounded tops and bottoms patterns, are primarily used by short term investors. They may also be used by long term investors to identify entry points for their investment, but this is not common.

 

Technical indicators work well for thousands of traders around the world, however, they are not an exact science. They may work some of the time but not all of the time. As a consequence, short term trading may not be suitable for everyone. As technical indicators do not always work, it means that traders are very likely to make losses on a regular basis.

 

The goal of most traders is to win more than they lose. However, they are generally well aware that they will make losses. For example, a trader may make a profit only 60% of the time, with the other 40% resulting in losses. 

 

Whether technical indicators are worthwhile or not, depends on how comfortable you are with the idea that they may not work all of the time.

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