What is the rounding bottom pattern? Although this pattern has a high success rate, it’s relatively rare. But when it comes, you’ll want to be ready for it. This highly reliable bullish reversal pattern is one you can’t afford to forget.
Table of Contents
- What Is a Rounding Bottom Pattern?
- Rounding Bottom Identification Guidelines
- The 4 Steps Required to Trade the Rounding Bottom Pattern
What Is a Rounding Bottom Pattern?
- For those of you wondering, I am not referring to your backside. However, I am starting this new Brazilian bubble butt workout that promises a rounded bottom in one week. I have my doubts, but I’ll keep you posted. Anyways, I digress. In it’s simplest form, a rounded bottom, or saucer chart pattern is just that – a chart that forms a rounded bottom. Many refer to it as a U shape.
What Does a Round Bottom Chart Pattern Signify?
Just like a roller coaster, stocks go up and down in price every day. We rarely see them soaring; they need time to pause and digest, and that’s exactly what this pattern does.
A rounding bottom when it comes to stock charts indicates a positive market reversal. To put it in another way, investor expectations and momentum (i.e. sentiment), is gradually shifting from bearish to bullish.
Often, it’s more of a pausing pattern, allowing the stock to consolidate before it builds enough energy to move up in price.
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When Do You See a Rounding Bottom Pattern?
We see rounding bottoms at the end of extended downward trends. Like I mentioned above, they signify a reversal in long-term price movements.
Sometimes the pause and reversal takes time, even eight to twelve weeks, depending on market conditions.
Rounded bottom pattern on $SBUX weekly chart.
Is a Rounding Bottom Pattern the Same as a Cup and Handle?
Visually, a rounding bottom looks like the cup and handle pattern, but doesn’t have the temporary downward trend of the “handle” portion. Remember, the C&P patterns is a continuation pattern whole the rounding bottom pattern is a reversal pattern.
Similarly, there are other chart patterns that are first cousins to the rounding bottom, such as the saucer bottom and half-pipe bottom pattern.
- Volume decreases
- Consolidation (predominantly flat over several months)
- Volume increases as buyers enter the market at a low price
- Begins to make higher lows and finally higher highs
- Powerful rally
- Upward trend occurs
- Demand for the stock increases
Rounding Bottom Completes
- Bullish push higher
- The stock breaks out
- Upward trend continues
You can spot rounded bottoms on all time frames, above we are showing a daily chart of $AAPL which rounded out a bottom, broke out, and back-tested the red neckline. Chart platform is TrendSpider.
Rounding Bottom Identification Guidelines
- The price gradually switches from bearish to bullish.
- Concentrate on the weekly chart as rounding bottoms can be difficult to spot on the daily.
- Price trends upward to the pattern 66% of the time (that is, 66% act as continuation patterns).
- Look for a rounded bowl shape, usually over many months and often after an upward price trend.
What I Want You to Remember
Above all, to be sure it’s a rounding bottom breakout, you must have an influx of substantial volume. Generally speaking, the trading volume in a rounding bottom chart pattern ideally follows (and confirms) the direction of the stock price.
You must have volume confirmation because volume confirms the price action.
I suggest you put the volume indicator on your chart and draw a line to connect the tops for each price frame. As can be seen, the volume will also mirror the same rounding pattern. In the long run, this is a straightforward method to validate the pattern visually.
Your Entry Point
Your entry point is the top of the U or also referred to as the “neckline,” where price breaks the resistance level.
The 4 Steps Required to Trade the Rounding Bottom Pattern
- Confirm The Rounded Bottom by finding a price decrease, that slowly switches to a range followed by a price increase. Your strongest confirmation shows high volumes on the decline, flat volumes on the range and increasing volumes on the reversal.
- Draw The Neckline by drawing a horizontal line across the top of the bearish and bullish sides of the rounding bottom pattern.
- Verify Rounded Bottom Breakout. This happens when the price penetrates the neckline in a bullish direction. Furthermore, the stock should show strength in the form of price expansion and volume increase as it breaks through this neckline.
- Enter Long At Break Of Neckline: Self-explanatory
- Exit At Your Profit or Stop Loss Target. I do not believe in trading without a stop loss, nor should you.
- Put your stop loss at the midpoint of the pattern or your designated risk: reward ratio.
- Your minimum profit target for the pattern is equal to the size of the pattern when added to the breakout
Without a doubt, the rounding bottom pattern is a technical setup for the patient trader. Likewise, being able to identify stock chart patterns is a powerful asset for any trader.
Given these points, by learning to recognize patterns early on in trading, you can make profits from both breakouts and reversals. I’m a firm believer that combined with the proper technical analysis you will be successful. Let Bullish Bears show you how!