DEFINITION of 'Top'

A top is the highest price reached by a security before its upward trend reverses and the price moves downward, at least temporarily, forming an arch. This term is most commonly used in stock, forex, options and futures trading. A top can be sharp, like an inverted V, or rounded if the security's price consolidates near the high for an extended period before moving lower.

BREAKING DOWN 'Top'

The opposite of a top is a bottom, which refers to the lowest price reached before an upswing. Ideally, investors look to buy securities at a bottom and sell at or near a top.

Short- and mid-term traders rely on tops and bottoms to time their trades. Even securities that display strong upward or downward trends over a prolonged period do not typically move in one continuous direction day after day. A security's price experiences many smaller ups and downs from moment to moment, hour to hour. These tiny changes are the focus of day-traders who make their living buying securities when they hit short-term bottoms and selling when the price nears a top, sometimes mere minutes later. On a slightly larger scale, swing traders look to pinpoint tops in broader price movements that span weeks or months.

Resistance Levels

The concept of tops is strongly linked to the concept of resistance, which refers to the difficulty security prices have in breaching previous highs. When a stock begins to near a price that it has not recently exceeded, for example, shareholders tend to become uneasy that it will fail to continue its upward trajectory. Fearing the formation of a top and the subsequent fall, investors often choose to sell their shares to lock in current gains before the downswing. If enough shareholders do so, then the stock does tend to stall, creating a top at or around the resistance level, before moving downward to more neutral territory.

Chart Patterns

Traders and analysts use several charting patterns to predict the future behavior of a given security. A single top on a chart is not indicative of much, except perhaps the existence of an area of mild resistance. A double or triple top, however, may indicate that the security is nearing the end of a larger upward trend and is preparing to move lower. A double top occurs when a security reaches a given price, moves back down, and then rises back to the same level a second time before finally descending. A triple top is identical, but the price must reach the same high three times consecutively. Both of these patterns indicate that the security has tried and failed multiple times to push past an area of resistance. This failure typically discourages investors, who then liquidate their holdings to avoid losing value if the uptrend reverses, thereby pushing the price down and fulfilling their own prophecy.

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