In technical analysis, the rounding bottom chart pattern is seen as one of the reversal patterns formed mainly on higher time frames. If you spot such a pattern in the chart in time, you can predict that the bearish trend is going to switch to the bullish one.
In our article, we shall explore what this pattern looks like and what signals it gives.
1. Rounding Bottom Chart Pattern: What Does It Look Like
2. Rounding Bottom Reversal Pattern: How to Trade It
3. Working with Rounding Bottom: Mistakes
Rounding Bottom Chart Pattern: What Does It Look Like
The rounding bottom appears on higher time frames. Ideally, it’s better to track it on a weekly time frame. This is a smooth transfer of a downtrend to an uptrend with a pronounced basis (also known as the “bottom”).
The rounding bottom has three formation stages:
1. The price declines. In this case, the downward trend becomes more gradual when changing the angle.
2. The price goes flat as the pattern’s bottom starts to form. Candlesticks can be small in size. Here you can see a base or a bounce from a strong support level. In this case, the reversal signal gets stronger, while you can expect the price growth.
3. The price reverses and grows — this means that the rounding bottom is complete. Here you can see the bullish trend forming with an increasing angle of slope. It usually extends up to the same level where the downward trend started.
Rounding Bottom Reversal Pattern: How to Trade It
When the rounding bottom appears on the higher time frame, it can take a long time to work through on lower time frames. As this is a reversal pattern, traders should be primarily aimed at seizing the moment when the rounding bottom completes forming the “bottom” and the uptrend formation begins.
There are several ways to enter a long position:
1. Aggressive and risky — from the “bottom” of the rounding bottom. You should identify the formed “bottom” and enter a long position, placing a small stop-loss that’s much lower than the minimum values of your “bottom”. In this case, you can make the most of the rounding bottom.
2. Conservative and safer — once the price starts to reverse. In this case, it’s better to open a long position after a new uptrend forms a downward correction.
3. The price growth goal is the left edge of the rounding bottom, i.e., the beginning of a downtrend.
Working with Rounding Bottom: Mistakes
The rounding bottom is a technical analysis pattern that can hardly be called autonomous. When trading this pattern, it’s better to use additional tools to confirm the price reversal.
Our students study the technical analysis patterns during a free training with mentor bot.
The major mistakes in trading the rounding bottom:
- Looking for a pattern on lower time frames.
- Deciding on a trade without additional confirmation signals.
- No stop loss to protect you in case the pattern fails.
- Late entry into a trade.
If you want to avoid the problems caused by the above mistakes, you need to stick to the following tried-and-tested trading rules:
- Use signal confirmation methods with your trading strategy, e.g., a base pattern, strong horizontal levels, oscillators and other technical chart patterns.
- Always place stop-loss orders.
- Keep in mind that the risk/reward ratio in a trade should be 1:3 on average and preferably higher if the market permits. If you see the rounding bottom on the chart when the pattern is halfway through, you shouldn’t open a position afterwards. The size of your stop-loss can be large compared to the remaining endurance.
The rounding bottom chart pattern is just one of the tools used to identify the optimal entry points. The more tools you master, the easier it will be to choose the one that you’ll be using.
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