WHAT IS 'Descending Tops'

Descending tops is a pattern in a price chart in which each peak in price is lower than the previous peak in price was. The descending tops pattern indicates a bearish trend in the price of the security. A descending tops price chart looks like this:

An example of a chart depicting descending tops.

You can see that the peaks all successively decrease from the first peak.

BREAKING DOWN 'Descending Tops'

Descending tops is a pattern on a stock price chart indicating that the market for that security is turning bearish. Descending tops can be recognized when a second peak is less than the first peak, and then confirmed when a third peak is less than the second peak. For example, say the first peak is $40 and the stock price drops to $28, then peaks at $37 and drops to $25. This looks like descending tops when charted. If the next peak is less than $37, this confirms that this is a descending tops price pattern, and the trader or investor should prepare for a bear market, even if only for the short-term.

Eventually a descending tops pattern has to end. If the next peak in price is higher than the current peak in a descending top run, the trend is broken and the market will either go bullish or stagnate. 

Sometimes a descending tops pattern will have drops that progressively descend, too. This pattern is called descending bottoms. When a descending tops pattern reverses, a descending bottoms pattern is likely to reverse at the same time or within one more drop and peak.

Strategy for Investing During Descending Tops

Since descending tops may last only a matter of minutes, long-term value investors are unlikely to invest specifically during this pattern. Traders who time the market or day-traders, however, can find descending tops convenient to help them make money during a short run. These short-term investors will short the stock, so the longer the descending run lasts and the lower the price, the more money they can make. The key to success when shorting a descending tops market is to set an upper limit above one of the earliest peaks, such as the second or third peak, and to get out of that position as soon as the market reverses. To set the upper limit, a trader enters a stop loss order. To know when to get out of the position entirely because the market is reversing, short-term traders need to understand that the first peak above the previous peak is their signal to trade out of their position.

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