What are ascending tops?
Ascending tops are a pattern you can find when you look at the price chart of a stock, bond, commodity, or market index over time. You’ve probably seen stock charts before – they have the price going up and down, making mountains and valleys.
How ascending tops form
Sometimes, those mountain peaks keep getting higher and higher as time goes on. Each new peak reaches a higher price than the one before it. When that happens, it’s called “ascending tops.”
Why? If you drew a line connecting the tops of those price peaks, the line would go up or “ascending.” It’s like the price is climbing a staircase, taking two steps forward and one step back, but generally heading higher.
What ascending tops tell us
It grabs their attention when traders and investors see ascending tops on a chart. It’s a vital clue that the price is in an uptrend. Demand for that stock or asset is growing, and buyers are eagerly jumping in, willing to pay higher prices.
This pattern shows that the bulls are in control. The bulls are optimists—they think prices will keep climbing. Each time the price dips, the bulls see it as a chance to buy, and they jump in, pushing the cost to a new high.
The Psychology Behind Ascending Tops
There’s a lot of psychology and emotion driving the price action behind ascending tops.
Optimism and FOMO
As the price keeps climbing, it feeds a sense of optimism. People see the price rising and think, “I better get in now before it’s too late!” They fear missing out, or “FOMO.”
That FOMO leads more buyers to jump in, which, of course, pushes the price up even more. Rising prices can create a feedback loop where rising buyers attract more buyers, leading to even higher prices.
Greed and exuberance
At the same time, greed starts to take over. People see others making money as the price increases and want a piece of the action. They might take on more risk than usual or put more money into the market.
On Wall Street, there’s an old saying: “Bulls make money, bears make money, but pigs get slaughtered.” When ascending tops form, it’s the bulls that are making money. But some of those bulls can turn into greedy pigs, and that’s when things can get risky.
Disbelief and capitulation
Even as the price keeps climbing, there will always be doubters and non-believers. These are often the bearish traders who think prices will fall. They see the ascending tops and think it’s unsustainable or irrational.
But if the uptrend keeps going, at a certain point, even the bears start to capitulate. They can’t fight the tape anymore. They might close out their short positions or turn into buyers themselves. This capitulation from the Bears can add even more fuel to the rally.
Why ascending tops matter
Ascending tops are essential to recognize for a few key reasons:
Signaling the trend
First and foremost, ascending tops are a clear signal that the trend is up. If you’re a trader or investor trying to profit from market moves, you want to identify the trend and trade in that direction. Ascending tops are a bright flashing sign saying, “the trend is your friend, and the trend is up!”.
Spotting potential entry points
The brief dips or pullbacks between each ascending top can also provide opportunities to enter a trade or add to an existing position. Some traders will try to “buy the dip” when the price returns to a previous high, which now acts as a support level.
Risk management
However, ascending tops can also help with risk management. Savvy traders will use the previous highs as stop-loss levels. In other words, if you buy during a pullback, you could place a stop-loss just below the prior high. If the price falls below that level, the uptrend is in trouble.
Taking profits
Lastly, each successive high can be a logical place to take some profits if you’re already in a winning trade. Some traders will sell a portion of their position at each new high, locking in some gains while letting the rest of the position ride the uptrend.
Some important caveats
While ascending tops are a powerful bullish signal, they aren’t foolproof. There are a few important caveats to keep in mind:
Timing the top is tricky
Ascending tops show that the trend is up and likely to continue, but they can’t predict precisely when a rally might end. Prices could keep notching higher highs long before a meaningful correction. Traders need to be nimble.
Reversals can be swift.
When an uptrend with ascending tops eventually reverses, it can happen quickly. All that optimism and FOMO driving higher prices can evaporate rapidly, becoming fear and panic selling. Traders need to be disciplined with stop-losses.
Broader context matters
Ascending tops are helpful, but they don’t tell the whole story. It’s essential to consider the broader context—the overall market environment, the fundamental drivers for that specific asset, and other vital levels on the chart.
Putting it all together
Ascending tops are among the most important patterns to recognize in technical analysis. They clearly show that the trend is up, the bulls are in charge, and there’s growing demand for that asset. Each pullback is met with more buying, pushing the price even higher.
But beyond just signaling the trend, ascending tops can provide valuable information for making trading decisions – things like spotting potential entries during pullbacks, using previous highs as stop-loss levels, or taking partial profits at each new high.
Of course, ascending tops don’t guarantee easy money. Timing the peak is almost impossible, and reversals can be swift and severe. You need to manage risk carefully and consider the broader context.
But if you’re an active trader or even just a student of the markets, ascending tops are an absolute must in your technical analysis toolkit. Spotting this pattern and understanding its signals can give you a significant edge in navigating the markets and making better trading decisions.
Remember, the trend is your friend – and ascending tops are one of the most evident signs that the trend is up. Pay attention if you see those higher highs stacking up on the chart! The bulls are on parade, and it may be an excellent time to join the party – but always bring your risk management hat.
