How to spot blow off tops? They are a trading pattern that, being notoriously hard to trade, can be both very risky or very rewarding if you can identify one. In this post, we’ll go over what it is, how to spot it, and how to trade it.
When excluding other factors, like broad market changes, a blow-off top is a pattern on a chart with a steep increase (well over 45 degrees). This includes a high trading volume that fizzles and is followed soon after by an equally rapid decrease that usually has high volume as well. Blow off tops can occur in any asset market. This chart pattern will look like a steep volcano cone with the tip slightly lopped off.
Hence the blow off. And this tip is the ultimate high price for the asset. Generally, this high is short-lived. But depending on the market, it can last for weeks. Thus making it very hard to judge when the cliff will come.
A blow-off top can either be the result of positive news or just a result of speculation by market participants. Blow-off tops can also be known as an “exhaustion move” or a “blow-off move.”
How to Spot Them
Speculative assets are the most likely to have blow off tops. Things like cryptos, vaccine makers, and pot stocks have all fit this category in the recent past, creating blow-offs with news like the passing legalization of marijuana in a state or even from the speculation of positive news like a tweet for a joke coin “#Doge barking at the moon” causing a 300% increase.
A price rise results in a monkey see, monkey do, FOMO (fear of missing out) attitude, bringing it higher with increased volume. Predicting a top and its duration is very difficult. And once a price drop starts, it’ll fall fast. The masses will panic and both stop orders and short sellers will bring it down even faster making the extent of the drop also difficult to gauge. So make sure you know how to spot a blow off top pattern.
What Causes a Blow Off Top?
- The asset raises with no pullbacks. This is the easiest to identify. And the asset will either have gained over 79% with no retracement, risen for 6 months or more, or risen over 100% and up to 500% or more.
- The asset has high volume continuing through downward movement. Volume is the key identifyer. The day of the blow off the volume must increase and continue to be high as the sell off pushes the price downward.
- The downward slide is extreme. After a FOMO rise where profits seem endless smart money has continually set stop losses to take profits. A potentially minor event causes panic selling. And the drop is quick and extreme now easily identifying the blow-off top.
- The broader market has its own minor or major top. The broader market can bring shareholders to their senses seeing the asset drop along with the market as a whole not believing in a recovery. This also results in panic selling.
- The counter-rally has no price or volume to it. After the initial sell-off, any counter-rally is unimpressive with its price or volume. This is aptly named a “Dead Cat Bounce.” And those with long positions will use the reprieve in plummeting price to unload their holdings. Mainly to prevent a margin call, while short sellers will set up better positions to take advantage.
Starting in July 2020 through to April 2021 ETH went up from below $250 to over $2000. There were only a few hiccups along the way.
The top lasted from May 11th where it saw the peak of $4330, till May 14th when it began its quick decline to $2400. By May 18th (highest volume day) to where it stood in June 2021 at just over $1700 with only a few bumps.
How To Trade Blow Off Tops?
This will depend on your current position and when you got in. If you have misidentified a blow-off top or made a bad trade, you’re not the first.
But it’s usually best to exit your position early on and not be left holding the bag. Falling for FOMO and buying too late can mean huge losses when that price begins dropping and fails to return to previous levels.
Likewise, short-selling a blow-off too early, assuming a pull-off in a strong rally is a top, can also result in substantial losses if the position isn’t closed quickly on the continued rise.
Basically don’t let emotions control your trading. Plan your trade and trade your plan. Stick to what you know works for you.
It’s when you deviate that you get into trouble trading things like blow off tops.
You Went Long At The Top
You fell into the FOMO after a runup that seemed to never end. Now down 75%, you have a hard decision. You need to take a fundamental look at the company and then either hold (years) till you get some back (it must go up 300% now to break even). Or if you believe in your trading skills, look for the first bounce, take your licks and buy something else with more potential.
You Bought After the Fall
Now that you chose the perfect buy point, you may get overconfident about the climb. Don’t fall into the same trap. If you see a 50 to 79% retracement, then it is now time to sell again. Rarely will blow-off tops reach their highs in the short term. When you get to 50% retracement, you have doubled your money.
Sell 50% of your holdings, and you are playing with the casino’s money from then. If it climbs higher, set a stop at the 50% retracement price, a sell of another 25%(half your remaining) at 60% retracement(set a new stop at 55%), and the rest at 79%.
Make sure you know how to spot a blow off top pattern. Those who successfully identify blow off tops have a unique opportunity to capitalize on the overreaction of other traders. However, predicting a top, its duration, and to what level the fall reaches is nearly impossible. Managing money and setting stop losses is crucial to prevent large losses and can also ensure profits. As always, never put at risk more than you are willing to lose, and good luck with all your trades.