Rounding Bottom pattern

21. Okt. 2022

Hey everyone! 👋

Today we are going to share a quick write-up about the “Rounding bottom” formation, along with a few examples that may help you solidify your understanding of this chart pattern.

Please remember this is an educational post to help all of our members better understand concepts used in trading or investing. This in no way promotes a particular style of trading!

The post will shed some light on the following topics:
➡ Basics and identification of the pattern
➡ Components
➡ Important aspects



What is a Rounding bottom pattern?

• A rounding bottom is a bullish reversal pattern that resembles the shape of the "U".
• Rounding bottom pattern occur at the end of long downtrends and indicate a potential reversal.
• The pattern is also referred to as a saucer bottom due to its resemblance to a saucer.
• Although, the volume and price move in sync but in practice, this can vary widely.
• When the price moves above the neckline, it indicates strength and suggests that the stock may begin a new uptrend.

Components of a Cup and Handle pattern:
A rounding bottom pattern can be divided into three main parts.
• Decline
• Formation of the base
• Advance



Important aspects:

1. Prior Trend: Since it is a bullish reversal pattern, the prior trend must be a downtrend. The low of a rounding bottom should ideally mark a new low or reaction low. The stock may trade sideways or flat for a long duration before the formation of the pattern.

2. Decline: The sell-off or decline that leads to the formation of the low, can take a variety of forms. Sometimes, the down move has many whipsaws while other times, the stock may just trade flat.



3. Low: In general, the pattern resembles a "U" shaped bottom. However, it can also resemble a "V" or a "W," but the low should not be too sharp. In addition to this, there is always a possibility of a new low due to a selling climax.



4. Advance: In general, the formation of the right half of the pattern should take about the same amount of time as the left half. This means that the up move off the lows should take about the same time as the down move. Moreover, the advance shouldn't be too sharp, or else there is a possibility of breakout failure.

5. Breakout: The pattern is confirmed once the price breaks and sustains above the neckline. The price may return to the neckline to test for the demand before continuing upwards.



6. Volume: In general, the volume levels should be
➡ High during the down move
➡ Low during the formation of the base
➡ Rising during the up move

However, these are only guidelines and should not necessarily be taken at face value.

7. Target: Using the measurement objective, the target comes out to be equal to the depth of the base. It can be measured by calculating the distance between the bottom of the base and the neckline.



8. Stop-loss: Ideally, the stop loss is placed at the lowest point of the base. But if the price oscillated up and down a number of times near the neckline, the stop-loss can also be placed below the most recent swing low.

Exhibit: Rounding bottom pattern with a failed breakout



Thanks for reading! As we mentioned before, this isn't trading advice, but rather information about a tool that many traders use. Hope this was helpful!
See you all next week. 🙂
– Team TradingView

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