What is the Rounding Bottom Pattern?

Analyzing chart patterns is a competitive advantage that helps traders stand out from the crowd. Chart patterns are complete pictorial presentations showing price and volume movements during stock trading periods. It also shows the clash between bulls and bears. Chart patterns can either be continuation patterns or reversal patterns.

A reversal pattern is when the stock price starts going in the opposite direction as compared to the previous one. Rounding bottom is one such reversal pattern that works completely opposite to the rounding top pattern. This article details what the rounding bottom pattern is, how it works and how to trade using this pattern.

Rounding Bottom Pattern?

Also known as the Saucer pattern, Rounding Bottom is a reversal chart pattern. This pattern is an indication of the end of the downtrend and the potential beginning of an uptrend. Price and volume are considered key indicators for identifying and confirming this pattern.

The rounding bottom pattern can last for any time frame including days, weeks, months, or years with longer time frames. Generally, this pattern is an indication of a bullish future for the assets traded. This pattern has a relatively high success rate. However, it is rarely found.

This pattern resembles the double top or triple top price pattern. The cup and handle chart pattern is one of the variations of this pattern. The main difference between both the patterns is a bearish pullback at the neckline in the cup and handle chart pattern.

How does a rounding bottom work?

The market behaviour behind the formation of rounding bottom pattern is inverse to that of rounding top pattern. During the beginning of the formation of this pattern, the stock price continues to fall. The reason is the lack of buyers for the stock in the market.

As the price falls, traders start showing interest. This reduces the pace of price decline. The price, then, stabilizes for a time as more buyers start showing their interest. With the increased rate of buying, the stock price starts increasing. The buyer’s willingness to pay a higher price for the stock tends to start the uptrend.

This results in the formation of a rounded shape that looks similar to ‘U’.

How to trade the rounded bottom?

To trade with a rounding top pattern, you need to be patient as it can take quite a long time to develop. This pattern is said to develop when the decreasing price trend stabilizes for some time, and then begins to increase. This confirmation is strengthened when the volume traded is higher on the decrease, flat on stable price, and increasing on the price.

Once the pattern is confirmed, the next step is to draw a neckline. A neckline is a line connecting swings in a pattern. After a point where the stock price crosses through the neckline, the traders can think of booking a long position. Some traders also set stop-loss limits while going long.

Once the price hits the target, traders look to exit their position.

In a summary, the rounding bottom pattern is formed when the price of security decreases to a new low, then moves horizontally and finally, increases. Thus, it takes the shape of a rounding bottom.

If identified correctly, this rounding bottom pattern can safeguard traders from selling in a potentially unfavourable market. In fact, it helps the traders to take advantage of huge profits.