Rounding Bottom Pattern: Definition, How it Works, and Trading

A rounding bottom pattern is a ‘U’ pattern in trading that forms when a security’s price action creates a curved, saucer-like shape, indicating a gradual shift in market sentiment from bearish to bullish.

The round bottom pattern is important in trading because it indicates a potential reversal from a prolonged downtrend to a potential uptrend, reduces false signals, and helps traders understand market psychology.

The rounding bottom pattern works in four stages, the downtrend stage, the bottoming stage, the early uptrend stage, and the confirmation stage. Price begins with an extended downtrend due to persistent selling pressure in the downtrend stage, followed by price stabilizing in the bottoming out stage, then price gradually begins rising in the early uptrend stage, and finally volume surges and the uptrend is sustained in the confirmation stage.

Traders identify the rounding bottom pattern by looking for a downtrend, observing the bottoming phase, identifying the uptrend, connecting the neckline or resistance level, waiting for a breakout, and using technical indicators to confirm the pattern.

To trade the rounding bottom pattern, traders begin by identifying it, drawing the neckline, confirming it, defining entry positions, setting stop-loss orders, determining the profit targets, and monitoring the trades.

The advantages of the rounding bottom pattern include a reliable reversal indicator, defined entry and exit points, an early indication of trend reversal, volume confirmation, and valuable psychological insight.

The disadvantages of the rounding bottom pattern include false breakouts, subjectivity in identification, lengthy formation period, limited risk-reward ratio, and influence by market conditions.

What is a Rounding Bottom Pattern?

A rounding bottom pattern is a U-shaped reversal chart formation that forms at the end of a prolonged downtrend, indicating a gradual market shift from a downtrend to an uptrend. The rounding bottom pattern is also called the saucer pattern because of the rounded ‘U’ trough with a flat bottom that resembles a saucer.

The rounding bottom pattern is visually represented by a series of price declines, followed by a price level off or consolidation, and transitioning to an upward trend to complete the rounded bottom shape. The rounding bottom pattern appears in Forex, stocks, indices, and commodities charts on higher timeframes, such as daily, weekly, and monthly, since it takes a long time to form.

Long-term traders use the rounded bottom chart pattern to identify potential buying opportunities in the markets. Rounding bottom pattern traders rely on volume and price action to confirm the sentiment change and verify the pattern.

The rounding bottom pattern is a popular term in forex trading vocabulary used when referring to reliable chart patterns that signal a potential positive market reversal.

Is Rounding Bottom and U Pattern in Trading the same?

No, the rounding Bottom and U patterns are not the same in trading. The rounding bottom is a type of U-shaped pattern that forms gradually at the end of a bearish trend. The U pattern is a general term referring to any chart pattern that resembles the letter U when drawn on a chart.

The rounding bottom pattern is a reversal indicator, suggesting that the market trend of a currency pair or other asset is about to turn from bearish to bullish. The U pattern indicates bullish and bearish market sentiment depending on where they occur on a price chart.

U patterns forming in the middle of an uptrend indicate bullish price continuations with temporary pullbacks, while U patterns at the end of an uptrend typically signal a potential trend reversal.

Most traders look for price breakouts above resistance to take opportunities in the rounding bottom and U pattern charts. The precise entry and exit points are different for the rounding bottom and U patterns because the U pattern includes patterns like the cup and handle and double bottom, which differ slightly in the symmetry levels with the rounding bottom pattern.

Why is the Rounding Bottom Pattern important in trading?

The Rounding Bottom pattern is important in trading because it signals a potential reversal in the market trend and sentiment. Rounding bottom patterns provide reliable early warning signals of potential trend change and ensure precise entry and exit levels, which is crucial for decision-making. The rounding bottom pattern reduces false signals for traders and helps traders in risk management.

The rounding bottom pattern signals a potential reversal in the market trend when the price is still in a downtrend, granting them ample time to adjust their open trades. Rounding bottom patterns alert traders that the market sentiment is potentially turning from a bearish trend to a bullish one, offering them the chance to enter the early stages of a new bullish trend.

Rounding bottom patterns provide clear entry and exit points, making it easier for traders to design trading strategies and execute trades. The long formation period required by the rounding bottom pattern means that traders experience few false signals or breakouts and experience a higher win rate.

The rounding bottom pattern helps traders in risk management by allowing traders to set stop-loss orders below the support zones or previous peak to protect the trader’s account in case the market moves against their position. The rounding bottom makes it easy for the trader to confirm a trade by monitoring volume increase, ensuring traders do not get into bad or impulsive trades.

The rounding bottom pattern is crucial in helping traders understand the prevailing market psychology and sentiment, which in turn helps them make better decisions when trading in different market conditions.

How does the Rounding Bottom Pattern work?

The rounding bottom pattern occurs as a U-shaped pattern at the end of a prolonged downtrend, signaling the end of a bearish trend and the start of a bullish market. Rounding bottom patterns rely heavily on supply and demand to form a series of lower highs and lower lows, followed by higher highs and higher lows, which explain the actions of buyers and sellers in the forex market.

The rounding bottom pattern works when there is an excess supply of an asset, like a currency pair, in a downtrend market. The excess supply increases selling pressure on the currency, driving the currency pair prices lower until the price reaches a resistance zone, where selling momentum declines due to profit-taking or exhaustion. Buyers step into the market once they sense that selling pressure is declining, reviving the demand for the asset in the market. The rate of price decline reduces as demand increases and supply decreases until the price reaches the lowest point of the rounding bottom pattern, where supply and demand for the asset are temporarily at equilibrium, meaning prices are stable.

Traders accumulate their orders when the price is in equilibrium, with more buyers placing orders and believing that the asset is undervalued. The clustering of buy orders increases the demand for the asset, and the price begins to rise. The rounding bottom pattern shows a slow and steady change in the supply and demand dynamics during the order accumulation, and sentiment takes time to shift from bears to bulls.

Demand increases in the market as more buyers exploit the opportunity to buy an appreciating asset, leading to aggressive buying and increased bullish pressure. Supply of the asset drastically decreases in the market as sellers hold back and wait for better prices. The rounding bottom pattern is complete when the price continues in its uptrend due to the increase in demand and decrease in supply.

The left side of the ‘U’ in the round bottom pattern forms when supply exceeds demand in the market, leading to higher selling pressure, while the right side of the pattern forms when demand exceeds supply, resulting in higher buying pressure. The bottom, or flattened part, of the pattern occurs when supply and demand are in equilibrium.

How does the Rounding Bottom Pattern form?

The rounding bottom pattern forms when the price gradually declines and stabilizes or flattens before reversing into an upward trend. The rounding bottom pattern occurs in four stages; the downtrend stage, the bottoming stage, the early uptrend stage, and the confirmation stage.

The initial downtrend phase in a rounding bottom pattern begins with the price making a series of lower highs and lower lows, leading to an extended downtrend. Volume gradually decreases as the market sells off, indicating that sellers are losing momentum. The left side of the U in the round bottom shape is formed in the downtrend stage.

The bottoming-out stage in a rounding bottom pattern marks the beginning of a consolidation that shows the price is stabilizing. Price finds support at a lower price, and markets range between a support and resistance zone with little volume, resulting in a flattening effect. The curve at the bottom of the rounding bottom pattern is formed in the bottoming-out stage.

The initial uptrend stage in a rounding bottom pattern begins when the price starts making higher highs and higher lows away from the consolidation zone and forming the right side of the ‘U.’ Most upward moves in this stage revert to the full 100% range of the left side of the U, retesting the swing point at the left of the rounding bottom pattern and forming a neckline or resistance level.

The confirmation stage in a rounding bottom pattern involves the price maintaining its upward movement and breaking through previous resistance levels to validate the bullish pattern. The rounding bottom U pattern is complete once the price breaks above the neckline, confirming the trend reversal.

The rounding bottom pattern is a long-term reversal pattern that takes a long time to form, often ranging from several weeks, months, or years to complete. The exact duration for the formation of a rounding bottom pattern depends on the time frame analyzed, market conditions, and asset type being traded. The rounding bottom pattern takes a few hours to days to complete on lower timeframes like hourly or daily and a few weeks to months on higher timeframes like daily and weekly.

The rounding pattern takes a shorter time to form in volatile markets or volatile assets because price moves faster. Most traders estimate the time to formation for the rounding bottom to be between 6 to 12 weeks. According to Thomas Bulkowski’s ‘Encyclopaedia of Chart Patterns,’ the rounding bottom has an average formation duration of 8.5 months or 259 days.

Traders wait for the rounding bottom pattern to complete before taking any trades and open positions once the price breaks out of the neckline. Forex traders take advantage of the high volume experienced when the price breaks out of the accumulation or consolidation phase. The traders use volume analysis to verify that the rounding bottom pattern and price neckline breakouts are valid, minimizing the chances of false breakouts.

How does the Rounding Bottom Pattern differ from other Chart Patterns?

The rounding bottom pattern differs from other chart patterns in its shape, duration of formation, and implications for market trends (continuation or reversal). The rounding bottom pattern is often compared to the double bottom, cup and handle, and inverse head and shoulders pattern because they all form at the end of a trend and indicate a potential bullish reversal.

The rounding bottom pattern takes on a smooth, curved bottom, forming a U shape, while other chart patterns like the double bottom and head and inverse head and shoulder patterns form a ‘V’ or ‘W’ shape when drawn on a price chart. The cup and handle pattern forms a ‘U’ shape similar to the rounding bottom but is followed by a small ‘handle’ or consolidation phase, which does not exist in the rounding bottom pattern.

Rounding bottom patterns take a long time to form, usually weeks to months, which differs from most other chart patterns that form over a shorter duration. Traders look for the rounding bottom pattern on the daily, weekly, and monthly charts, making it ideal for swing traders and position investors.

Other chart patterns, such as double bottoms, flags, and triangles, appear on intraday timeframes like the M5 and M15 and hourly and may take up to a day to form, signaling quick trading opportunities for scalpers and day traders. The rounding bottom signifies a trend reversal from bearish to bullish, while other chart patterns, like triangles and pennants, indicate the continuation of the existing trend.

Trend reversals arising from the rounding pattern are long-term, while reversals in different chart patterns, such as the cup and handle, inverse head and shoulders, and double bottom charts, are usually short-lived and may only last a few weeks.

Is the Rounding Bottom Pattern bullish?

Yes, the rounding bottom pattern is bullish, indicating a potential trend reversal from a downtrend to an uptrend. Traders confirm the bullish price action when the price breaks out above the neckline or resistance level, which connects the high points of the rounded formation. The rounding bottom pattern indicates that investor sentiment is shifting, with buying pressure increasing in the market.

Traders use confirmation tools like volume and technical indicators like the RSI and moving average to identify strong buying levels on the rounding bottom pattern. Continued high trading volume and sustained price increase after the breakout shows that the bullish signal is valid.

Technical analysts estimate the potential upside target of a rounding bottom pattern after the breakout by measuring the height of the pattern. The rounding bottom price continuation often extends to twice its height from the lowest point before the market begins a correction.

How to identify the Rounding Bottom Pattern?

To identify the rounding bottom pattern, traders begin by identifying a downtrend, observing the bottoming phase, identifying the uptrend, connecting the neckline or resistance level, and waiting for a breakout. Traders watch price, volume, and technical indicators to identify and confirm that the pattern is valid.

Identifying the rounding bottom pattern starts with spotting a clear downtrend in the price of an asset or security, such as a currency pair or stocks. Traders look for a series of lower highs and lower lows to indicate the start of a rounding bottom pattern.

Traders wait for a period of consolidation, accumulation, or gradual price decline to form the base formation or the rounded part of the pattern. The rounding bottom is usually relatively flat and slightly rounded, indicating that the price has stabilized at the support level.

Traders identify the uptrend after an initial downtrend and consolidation as the price makes higher highs and higher lows. Price stops at a high of the previous resistance zone, forming a clear horizontal or slightly sloping line that traders connect to form the pattern’s highs or neckline.

Traders wait for the price to break above the neckline price level to confirm the bullish bias and look for an accompanying volume increase to strengthen the signal. Some traders use other advanced confirmation tools, like the ON-Balance Volume indicator (OBV) and the Volume Weighted Average Price (VWAP), to enhance the rounding bottom pattern identification process.

Forex traders identify the rounding bottom pattern by looking for a bowl or U-shaped pattern on a price chart occurring in the daily, weekly, or monthly timeframe.

What does the Rounding Bottom Pattern look like?

The rounding bottom pattern looks like a curved, shallow saucer or bowl, resembling the letter ‘U,’ which is common in curve pattern trading. The rounding bottom pattern looks visually similar to the cup of the cup and handle pattern and only differs in the time it takes to form.

Is the Rounding Bottom Pattern easy to identify?

No, the rounding bottom pattern is not easy to identify due to its visual similarities with other chart patterns, such as the cup and handle and head and shoulders. The rounding bottom takes a long time to develop fully and requires strong confirmations to be accurate.

Novice traders have a hard time differentiating the round bottom pattern from other similar ‘U’-shaped trading patterns and often misinterpret the rounding bottom, leading to losses when they execute trades.

The slow development period of the rounding bottom pattern exposes traders to numerous short-term price movements, making it difficult for traders to identify the right swing points of the pattern correctly.

Traders require strong volume confirmation signals to confirm that the rounding bottom pattern is complete. Beginner traders experience challenges determining exact breakout points and interpreting real-time volume, making the rounding bottom pattern difficult to identify.

How to Trade with Rounding Bottom Pattern?

To trade with the rounding bottom pattern, follow these steps:

1. Identify the pattern: Begin by identifying the rounding bottom pattern on the price chart. Look for a gradual, rounded shape that forms after a prolonged downtrend, indicating a potential reversal in market sentiment. Ensure the pattern forms over a reasonable time frame, like several weeks or months.
2. Draw the neckline: Connect the highest points (top of the bearish and bullish sides) of the rounded bottom pattern with a horizontal line or trendline to identify the neckline resistance level.
3. Confirm the pattern: Confirm the rounding bottom pattern by waiting for a price expansion that breaks and closes above the resistance level (neckline) formed by the curve’s rim. Use technical volume indicators such as the on-balance volume (OBV) and Money Flow Index (MFI) to confirm the breakout.
4. Define the entry points: Open long position entries after the breakout when the price closes above the neckline of the rounding bottom pattern for an aggressive entry. Wait for a pullback to the neckline after the breakout and open buy orders when the price retests the neckline and the resistance level holds.
5. Set stop-loss orders: Place a stop-loss order below the lowest point of the rounded bottom. Use a large stop order because the rounding bottom pattern takes a long time to materialize.
6. Determine profit targets: Measure the height of the pattern, which is the distance from the lowest point of the rounding bottom pattern to the neckline, and project that distance upward from the breakout point to set a price target. Alternatively, set a trailing stop once the price continues to rise to lock in profits.
7. Monitor and adjust trades: Finish by monitoring the trade and adjusting the stop loss as market conditions change. Take partial profits when the price shows signs of resistance.

When to Trade Rounding Bottom Pattern in Trading?

The best time to trade the rounding bottom pattern is when anticipating positive reversals in a market and when all confirmations validate the reversal signal. Rounding bottom pattern traders open buy positions when looking for pullback entries, reacting to news events, and when the pattern forms on a high timeframe.

The rounding bottom pattern offers excellent results in trading when traders anticipate a financial asset like a currency pair or stock to strengthen and grow. The rounding bottom pattern indicates when a currency pair such as EUR/USD is about to turn from bearish to bullish, allowing traders to take buy positions early in the trend.

Traders trade the rounding bottom pattern when the setup is confirmed by volume and other technical indicators like RSI, OBV, moving averages, and VWAP. The rounding bottom offers a higher success rate to traders when they wait for the price to break above the neckline with volume before executing the trades. Traders validate the pattern when the price is oversold on the RSI and OBV indicators, proving declining supply in the market. The traders verify increasing demand when the price crosses above the moving average and VWAP indicators, which signal buying pressure.

Investors and intermediate traders trade the rounding bottom pattern when anticipating a retracement or price pullback, which provides an entry for long positions. The uptrend in rounding bottom patterns forms higher highs and higher lows, allowing traders to take positions as the market corrects to form higher lows.

Fundamental and sentiment traders place trades in the market when positive economic news or geopolitical events occur that have the potential to increase the demand for a currency pair, leading to a bullish reversal.

The rounding bottom pattern offers better results when traded in some seasons, e.g., the earnings season in the stock market or during autumn months (September to December) in Forex when trading activity is at its peak after the summer holiday calm.

Is Rounding Bottom a Common Forex Trading Pattern?

No, the rounding bottom is not a common forex trading pattern because it forms on higher timeframes like weekly and monthly and has to be completed before traders can place trades. The long formation period of the rounding bottom pattern makes it ideal for swing trading and position investing, which are not popular among most retail and intraday traders.

Forex traders prefer short-term trading patterns that occur frequently on price charts and have a clear visual formation pattern. The rounding bottom pattern may occur once or twice in a year on a daily timeframe, making it unreliable for most forex traders.

The most common patterns used in forex trading for beginners include the head and shoulders and the double bottom patterns, which occur in short-term timeframes, like M1, M5, and M15 timeframes, for intraday traders like scalpers and day traders.

How do traders use the Rounding Bottom Pattern with CFD Brokers?

The ways traders use the Rounding Bottom Pattern with CFD brokers are listed below.

• Pattern search: The rounding bottom pattern is not frequent, so traders use CFD brokers to search for the pattern on different tradable financial assets, particularly forex currency pairs, stocks, indices, commodities, and crypto.
• Graphical pattern analysis: Traders use online trading platforms provided by CFD brokers and related chart analysis tools to analyze, evaluate, and confirm chart patterns such as the Rounding Bottom pattern. Traders draw trendlines to connect the highs and lows, ensuring the symmetry of the Rounding Bottom pattern and the smoothness of the curve.
• Confirmation of the pattern with indicators: Traders exploit the technical analysis tools provided by CFD brokers, such as technical indicators like volume and moving averages and oscillators such as RSI and OBV, to confirm the validity of the Rounding Bottom pattern.
• Use of leverage: Traders take advantage of the opportunity provided by CFD brokers to use leverage to maximize returns on trades executed using chart patterns such as the Rounding Bottom pattern.
• Use of trading orders: Traders use the variety of trading orders provided by CFD brokers to set up an operational strategy to trade chart patterns such as the Rounding Bottom pattern. Traders use the Buy-Stop to enter the market after the breakout of the neckline or a Buy-Limit when the price pulls back to the neckline after the breakout. Traders use the stop loss to protect themselves against a pattern failure and the take profit or trailing stop to secure gains in the event of a positive trade.

What Trading Strategies is suited for Rounding Bottom?

The trading strategies suited for rounding bottom are listed below.

• Breakout trading: Traders open long positions when the price breaks above the neckline, with the stop loss below the lowest point of the rounding bottom pattern and the profit targets at the projected height of the pattern from the breakout point.
• Pullback entry trading: Traders monitor the rounding bottom pattern to identify precise pullbacks and retracement levels for placing trades that align with the broader market trend.
• Trend following: Traders use the rounding bottom pattern to ride the trend after the breakout above the neckline. Traders place buy orders at the breakout points and maintain the positions while the trend is strong. Trend followers use trailing stops to lock in profits.
• Range trading: Traders measure the range of the rounding bottom pattern from the lowest point to the neckline and project that range from the breakout point to a new resistance level. Traders place buy positions at the rounding bottom pattern breakout point to exploit that range, with the target at the projected resistance price.
• Confirmation with indicators: Traders combine different technical indicators like the RSI, OBV, and moving averages with the rounding bottom pattern to develop confirmation rules and avoid taking false signals. Traders want the RSI and OBV to be oversold and the price to cross above a moving average, or VWAP, for an entry to be valid. Technical indicators are integrated in different types of trading strategies to confirm the validity of chart patterns.

What is the accuracy of the Rounding Bottom Pattern?

The accuracy of the rounding bottom pattern varies depending on the market conditions, analysis timeframe, experience of the trader, and the confirmation indicators used. The rounding bottom pattern has an accuracy rate of around 63% to 65%, according to Thomas Bulkowski’s book ‘Encyclopedia of Chart Patterns,’ with an average return of 10% to 15% per trade.

The accuracy of the rounding bottom pattern increases in stable and bullish-trending markets compared to more volatile markets because stable markets experience less noise and reduced false signals.

Traders experience reduced accuracy when trading the rounding bottom pattern in shorter timeframes because of the wild short-term price fluctuations. The rounding bottom pattern is more reliable on a higher timeframe, such as the daily or weekly.

Rounding bottom patterns are more accurate at signaling potential bullish reversals and generating more profits when utilized by experienced traders who identify the pattern correctly and adopt proper risk management.

What are the Advantages of Rounding Bottom Pattern?

The advantages of the rounding bottom pattern are listed below.

• Reliable reversal indicator: The rounding bottom pattern is a strong and reliable indicator of a potential shift from a downtrend to an uptrend, allowing traders to identify potential buying opportunities.
• Defined entry and exit points: The rounding bottom pattern provides clear entry points, typically at the breakout above the resistance level, and exit points at the projected price using the height of the pattern (measured move technique), making it easier for traders to plan their trades.
• Early indication of trend reversal: The rounding bottom pattern provides an early signal of a trend reversal before it starts gaining momentum, allowing traders to exit losing positions and prepare for the market shift.
• Volume confirmation: The rounding bottom pattern is often accompanied by a volume increase during the neckline breakout, indicating strong buying interest and confirming the pattern’s validity.
• Valuable psychological insight: The rounding bottom pattern reflects a gradual shift in market sentiment from bearish to bullish, providing insight into the psychology of market participants as buying interest accumulates and selling pressure diminishes.

What are the Disadvantages of the Rounding Bottom Pattern?

The disadvantages of the rounding bottom pattern are listed below.

• False signals: The rounding bottom pattern generates false breakouts, where the price briefly rises above the resistance level but then falls back below it, resulting in losses for traders who open long positions without volume confirmation.
• Subjectivity in identification: The rounding bottom pattern is subject to different interpretations since determining the exact starting and ending points of the pattern varies for each trader.
• Lengthy formation period: The rounding bottom pattern formation takes a long time, often ranging from several weeks to months, and requires patience from intraday traders like scalpers and day traders.
• Limited risk-reward ratio: The rounding bottom pattern is limited to a small risk reward-ratio of between 1.2 and 1.6 according to Thomas Bulkowski’s research, which limits a trader’s potential.
• Influenced by market conditions: Rounding bottom pattern accuracy is influenced by market volatility, economic data, and geopolitical news, making trading the pattern challenging.

Is Trading with Rounding Bottom Effective?

Yes, the rounding bottom pattern is effective for trading long-term strategies such as swing trading and position investing. The rounding bottom pattern is not effective for short-term trading strategies like scalping, arbitrage, or day trading because the pattern’s formation takes a long time.

The rounding bottom pattern has a high accuracy rate in higher timeframes and experiences fewer false signals on the daily, weekly, or monthly timeframes. Traders relying on the rounding bottom pattern receive early signals of a potential bullish trend reversal after a long-sustained downtrend, allowing them to exit their short positions and reposition their trades for the potential market rise.

Trading the rounding bottom pattern is ineffective for scalpers and day traders because the pattern occurs with numerous shape ambiguities on short timeframes, making it difficult to identify the pattern accurately.

Rounding bottom patterns experience more false breakouts on lower timeframes, which affects the traders’ win rate and leads to numerous unplanned losses.

What is the difference between Rounding Bottom and Rounding Top Pattern?

The difference between the rounding bottom and the rounding top pattern lies in their shape during formation and their implications on trend direction. The rounding bottom pattern resembles a ‘U’ or saucer shape on a price chart, while the rounding top pattern resembles an inverted ‘U’ or an upside-down saucer or bowl.

The rounding top and bottom pattern occurs at the end of long-term trends and signals a shift in investor sentiment. The rounding bottom occurs at the end of a downtrend and signals a potential bullish reversal, while a rounding top pattern forms at the end of an uptrend and signals a potential bearish reversal.

Forex traders look to enter long positions when the price breaks above the neckline of a rounding bottom pattern in an uptrend market and consider opening short positions when the price breaks below the neckline of the rounding top pattern in a downtrend market.

What is the difference between Rounding Bottom and Cup and Handle?

The difference between the rounding bottom and cup and handle pattern lies in their shape during formation. The rounding bottom pattern has a smooth, curved shape that resembles the letter ‘U,’ while the cup and handle pattern resembles a teacup with an attached handle.

The rounding bottom and cup and handle patterns form at the end of an existing downtrend and indicate a potential reversal from a downtrend to an uptrend. The cup and handle pattern may indicate the continuation of the previous trend if it occurs mid-trend on a higher timeframe.

The breakout point of the rounding bottom pattern occurs above the resistance level formed at the top of the ‘U’ shape, while the breakout point of the cup and handle pattern occurs above the resistance level formed by the top of the handle.