What Is a Top?
A top in finance refers to the peak price of a security during a trading period, before it begins a downward trend.
- A top in finance refers to the peak price of a security or asset during a trading period, before it begins a downward trend.
- Charting tops and bottoms in an asset's price fluctuations help inform investors about its performance. Typically, an investor will desire to sell an asset when it reaches a top in order to maximize profits on investment.
- A double top occurs when a security reaches a top price, declines, and then rises again to the same top a second time before ultimately declining.
Short and mid-term traders such as day traders often rely on watching for tops and bottoms in price fluctuations to time their trades. Typically, an investor will desire to sell an asset when it reaches a top in order to maximize profits on investment, just as they will attempt to purchase an asset when it is close to a bottom, or the lowest price of an asset before it begins climbing, in order to maximize the potential for profit on an investment.
Because prices of securities are constantly in motion, even when markets or assets experience strong overall trends upward or downward, they will experience small price fluctuations over minutes, hours, and days. These small shifts in price are the primary focus of day traders, who watch for temporary peaks, or tops, to sell assets and temporary bottoms to acquire assets.
Swing traders, who operate on a somewhat larger scale, look to identify price movement tops and bottoms over periods of time which are broader, spanning weeks or months, in order to assess their investment strategies and time their trades.
Traders and analysts find charting price ranges useful for predicting the future performance of a market or an asset, often relying on patterns over time to inform investments.
Charting the price performance of an asset over time usually reveals a pattern of resistance levels or the price range which an asset maintains over a period of time. Typically, as an asset reaches a top price, it will peak somewhat near the upper limit of its resistance level for that period of time, and then begin a period of decline towards its established bottom. When a price exceeds its upper resistance level limit it is known as a breakout, and when a price declines below its lower resistance level limit, it is known as a breakdown.
Types of Tops
When charting price ranges for assets, tops can take many forms. A top can often manifest as a sharp peak, like an inverted V, and it can also appear more rounded in situations in which the price of a security consolidates near the high for an extended period of time before declining.
When an asset performance charting a double or triple top without experiencing a breakout will often signal that a security may be nearing the end of an overall upward trend. A double top occurs when a security reaches a top price, declines, and then rises again to the same top a second time before ultimately declining. A triple top is exhibited when the asset fluctuates to the top price three times before ultimately declining. Both patterns reveal that the security has tried and failed multiple times to move past its resistance limit, which can be a discouraging condition for investors.