Top Pattern

"V-Top" and "V-Bottom" are extreme patterns that are easy to spot in a chart. "V-top" patterns (Inverted V) ascending market action and angle of ascent is very sharp with increased volume. Once a top is made, a sharp price reversal occurs and the descending angle usually will mirror the ascending angle. There will be clear signs at the top (A Dark Cloud or Island Top pattern) before a reversal can occur. Most of the time, prices will retrace all the way down to the start of the rally to make it a true (inverted V) "V-top" formation.

Although the pattern is easy to spot, trading opportunities are challenging due to its steep ascent and the fear associated with it. A trend line is drawn connecting the swing lows in a V-Top pattern. A breakdown below this trend line offers a potential opportunity to short.

Trade: Connect "swing lows" in the ascent of "V-top" pattern. A close below the trend line signals a breakdown. Enter a "short" trade below the low of the breakdown bar.

Target: After price reversal, "V-top" patterns tend to travel in the similar angle as the ascent angle. A target is set at the "swing low" of the pattern before the rally.

Stop: Place a "stop" order above the close of the trend line. A longer-term stop would be above the high of the "V-top" Pattern.

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Trading V-Top Pattern

Trading V-Top Pattern

The example above shows a "V-top" formation from the daily Gold futures chart. Gold futures rallied during year 2005 and in part of year 2006. In May 2006, Gold made a new high and closed near 760. A Dark Cloud candlestick pattern signaled a reversal in Gold as it started to descent. By mid May 2006, Gold closed below the trend line at 680 to signal a potential "short" trade.

1. Enter a "short" trade below the trend line at 680.

2. Place a "stop" order above the trend line at 705 to protect the trade.

3. Place a "target" at the "swing low" prior to the "V-top" rally at 580 level.

Trading V-Top Pattern

Trading V-Top Pattern

The example above illustrates a "V-top" pattern formation from the QLogic daily chart. The chart shows a "spike and ledge" formation after the "V-top" formation. A "ledge" formation after a "spike" is usually a strong confirmation of potential reversal sign. A breakdown below the ledge will lead to a much stronger down trend. A trend line is drawn connecting the "swing lows" below the "ledge" formation. A breakdown below the "ledge" formation confirms a "V-top" pattern.

1. Enter a "short" trade below the low of the breakdown bar.

2. Place a "stop" order above the "ledge" pattern high.

3. Place a "target" at a major "swing low" or "gap" area approaching the "V-top."

11.9. V-Bottom Pattern

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