When determining the top and bottom areas in trading is extremely important. It helps investors optimize trading decisions and enhance trading performance. This is especially important if you use technical analysis methods. In the article below, Forex Trading will help you understand tops and bottoms most accurately using this method.
The importance of identifying tops and bottoms in technical analysis
Let’s see the importance of determining tops and bottoms through the following content.
- Determine entry and exit points: Tops and bottoms are key points on the price chart. When you correctly identify these two zones, they help you know when to buy and sell stocks, foreign exchange or other financial assets. To determine, you can learn about the price action trading method. So what is price action trading? A trading method that focuses on analyzing price charts without the use of technical indicators or other analytical tools.
- Detect investment opportunities: You will recognize the opportunity to buy low and sell high if you identify a top or bottom.
- Risk management: Identifying peaks and troughs also helps you evaluate and manage risks more effectively. When the market is at its peak, you can reduce your investment proportion to protect your capital. If the market is at its bottom point, you can increase your investment proportion to take advantage of price increases.
- Determine the trend: Peaks and bottoms are also of important points for you to determine the market trend. When a new higher peak appears, it can tell you a price increase is about to continue. Conversely, when a new lower low appears, it means continued price decline.
See more : Master the Forex “game” with Price action
These tops and bottoms according to technical analysis
In technical analysis, what are the tops and bottoms? Follow Forex Trading to find out.
How to determine the peak area according to technical analysis
In determining the peak area according to technical analysis, some signs of peak formation are clearly shown on the chart. To understand better you need to know different types of chart . In addition, you need to know how to determine the peak area in the following directions:
Identify the peak according to the decreasing growth momentum to devise a trading strategy
When the market is in an uptrend, the fact that the price index continues to step over the old peak to create a new peak is an important sign. This requires momentum to increase in line with rising price momentum. There is a corresponding relationship between momentum and price in this case.
However, if the price has surpassed the old peak but the momentum indicator is decreasing, this is not a good sign. It shows that the risk of a reversal is very likely to occur. Establishing a new price peak is not feasible at this time.
During trading, you can use momentum indicators such as RSI or MACD to evaluate the correlation between price and momentum. From there, you can easily make smart decisions in trading.
Identify the peak according to the sharp increase in trading volume on the technical chart
In such a situation, you can identify the peak based on the sharp increase in trading volume. But, if the index does not increase accordingly, it could be a negative sign.
What is often seen in these situations is a strong uptrend, with multiple series of continuously increasing prices. However, trading volume can suddenly increase sharply while the index increase does not reflect a significant increase.
This indicates that a trend reversal is about to occur. The market could see a strong selling as many traders try to take profits. And then the upward momentum gradually declines and gradually disappears.
Determine the peak according to the price recovery after the adjustment period
Now the price is trying to recover after the previous correction period. However, with the new price peak will be difficult to surpass the previous price peak. Identifying the top based on this situation shows that the established pattern can be a double-top zone or a triple-top zone.
Although the price may increase again, it seems that this adjustment is not strong enough to push the price to a new peak. It may be lower than the previous price peak. This shows the decreasing strength of the uptrend and the possibility of a peak or an end to the uptrend.
Determine the peak according to the exhausted price gap after growth
If you’re looking for tops and bottoms, especially the top area. So this is a popular method that you can apply.
After a period of strong growth, liquidity levels are often very high. In this context, an explosive trading session can occur. The trading volume tends to increase sharply right from the beginning of the session.
This usually results in a price gap compared to the previous trading session. If this sign appears when the price is moving in the accumulation zone, it is a positive signal, indicating that the price will continue to increase.
However, if the price has increased sharply before. The appearance of a gap can be a distribution signal. Shows that you may be excited about the outcome of the trade and are starting to take profits.
How to determine the bottom area according to technical analysis
Right below are ways to determine the bottom zone. Follow and recognize for more convenient transactions in the future.
Determine the bottom according to the decreasing momentum in technical analysis
In a downtrend, if the price index continues to breach the most recent low while the momentum indicator is higher than the most recent low. This shows that the downward trend will continue. However, according to the decreasing inertia, it has narrowed and decreased compared to the previous cycle.
When the momentum indicator establishes a higher low than the previous low. This is a signal that the market is preparing to enter the bottom zone. Indicates the weakening of bearish momentum and the possibility of a reversal in the bearish trend.
Identify the bottom according to the reversal trend with high volume
In case of a prolonged downtrend and strong selling pressure. If no other factors interfere, it is possible that the downtrend will end soon.
But if there is a reversal accompanied by strong trading volume. That could be a sign that the index is preparing to enter a reversal bottom zone. It signifies a change in market sentiment and a strengthening of demand. This leads to a reversal in the downtrend.
Determine the bottom according to the successful bottom verification pattern
In tops and bottoms, especially the bottom area, you should pay attention to this case. This is the most common signal among reversal signals. When the price turns around, there will often be a reversal and recovery if it touches the old bottom.
During this process, the price may test the old bottom. This process often creates a double-bottom or triple-bottom pattern. This is a sign of the weakening of the downtrend and the potential for a future price reversal and recovery.
Determine the bottom according to the rebound session past the accumulation area
This bottom determination is often applied in cases where the price has formed a bottom and created a cumulative price level.
When the index begins to increase strongly, the buying cash flow is often collected more aggressively. In case the price can rebound strongly, then return to test the resistance level. If the verification process is successful, it means the price overcomes the resistance level. This could confirm a new uptrend and the index has successfully established a bottom.
This process often indicates a strengthening of demand, and the possibility that the next bull cycle is about to begin.
See more: Discover Exness – The world’s leading Broker
Differences in tops and bottoms
Identifying tops and bottoms are two important aspects of technical analysis. However, it also has some differences as follows:
Differences in the nature of the market in tops and bottoms
The identification of a top is often associated with the termination of an uptrend. Determining the bottom is often related to the end of a bearish cycle.
Differences in chart characteristics affect trading strategies
The peak usually appears at the highest price in a trading cycle. The bottom usually appears at the lowest price.
Differences in determination methods in tops and bottoms
Identifying the peak area often uses a number of technical indicators such as broken trend lines, reversal patterns, and the MACD indicator to determine the decline of upward momentum. To determine the bottom, reversal patterns, RSI indicators and candlestick patterns are often used to determine the decline of downward momentum.
Different in impact on trading strategy decisions
When identifying the peak, you can decide to sell or stop the game to avoid the risk of further price decline. Identifying the bottom, you can decide to buy or increase your investment proportion to take advantage of rising prices.
Epilogue
Hopefully, with the information Forex Trading gives, you understand what the top and bottom zones are in technical analysis. Please read the article carefully to know the tops and bottoms, so you can make smart decisions about buying or selling, as well as effectively manage risks.
Frequently asked questions?
How do you know when a top or bottom has been successfully identified?
A top or bottom is successfully identified when there is confirmation from price patterns and other technical indicators.
Is there a way to determine the change in trend from top to bottom?
The change from top to bottom is often accompanied by a shift in momentum from positive to negative and vice versa. You can observe that change in price patterns and chart patterns. Or pay attention to changes in the MACD and RSI indicators.
Is it necessary to use different methods to identify a top or bottom?
Using multiple methods to determine tops or bottoms is ideal. Because it provides more authenticity and trust to you. The combination of price chart analysis, volume analysis, and technical indicators will help solidify your assessment.
