Identifying tops in an overbought market is not an easy process. There are many factors that go into the skill of recognizing tops. One simple way that many new traders can isolate tops and bottoms is by just looking at the volume. You see, often markets will have extremely high volume around important highs and bottoms. For example, if a trader looks at a daily chart of an equity that is at an all time high and observes a high volume reversal day, week or month then it is a good indication that a trend change is about to occur. Sometimes the pattern will come in the form of a topping tail, other times in the form of a bearish reversal or even an engulfing bar. Either way, it must be accompanied by heavy volume and that is the market’s way of talking to us. Remember, it takes a lot of energy to do this and is often a very powerful signal from the market. When this happens it is a good signal that the buyers are exhausted and the sellers have now taken over. If this high volume reversal occurs on a larger time-frame like the weekly or monthly chart then it is an even more powerful signal of a reversal or top that is underway.
This is why it is so important to stay with the trend until the market tells you a turn has started. When the trend ends it will usually end with high volume. Here is a recent example in Barrick Gold Corp (GOLD). On August 8th, 2020, the stock sold off with 39.3 million shares. The weekly chart staged a reversal bar with 101.8 million shares traded. The heavy volume indicated that a reversal was underway. Since that top in the stock the shares have pulled back by 26.0%. There were also several other factors pointing to a major reversal, but even if you did not know anything else you can protect yourself by understanding what high volume reversal patterns at highs usually indicate. Traders and investors must remember high volume reversals are powerful and can be often used to spot tops as well as bottoms. Obviously, there are many more factors that should be incorporated into this, but this is an easy tip to identify for the novice chart reader.
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