The rounding bottom is a chart pattern that represents trend reversal and resembles the shape of the alphabet “U”. This reverses the bearish trend into a bullish trend.
This is the simplest chart pattern but it is not easy to trade because of the complex structure of price on the chart. Newbies mostly get confused between U and V shape patterns but both are completely different patterns.
How to identify rounding bottom patterns?
As the name defines that this chart pattern should form at the bottom of the chart. And it must resemble the shape of the alphabet “U”. it is a good indication of a trend reversal if the price forms a higher high at the end of the pattern.
Look at the image below for a better understanding of the rounding bottom pattern.
How to draw neckline in Rounding Bottom pattern?
The neckline is a line meeting the starting and ending point of U shaped rounding bottom pattern. it is called the neckline of this pattern
A trend reversal is only confirmed after a valid neckline breakout. Without neckline breakout, trend reversal will not occur.
To identify a valid neckline breakout, a big candlestick must breach through the line.
What does rounding bottom tell traders?
You need to read the price action to know the logic behind the rounding bottom chart pattern. After a long downtrend, now the price wants to change direction.
There are two ways to change the direction either by a breakout or by slow trend reversal. slow trend reversal means like the shape of “U”. or example price will continue to move downward. Now market makers want to change the direction
of the market for a specific key level. when the market will approach that key level then the number of sellers will continue to decrease and the number of buyers will continue to increase.
At the key level, buyers will dominate the sellers and a new bullish trend will start.
Nowadays, market makers choose a fakeout strategy to reverse the trend instead of rounding the bottom. that’s why it is a rare chart pattern. but it still works.
Trade Plan for rounding bottom pattern
After learning to identify patterns on the chart, the next step is to learn how to trade this chart pattern.
Pro Tip: A rounding bottom chart pattern completes only when price breaks the neckline
Open a buy order
When price will break the neckline, then open buy order in your trading platform.
Take profit level
In this chart pattern, take profit level is measured by calculating the distance between the lower low and neckline. Now, Mirror that measured distance above the neckline and adjusts take profit level.
According to rules, the stop loss level should be below the lower low but this will decrease the risk-reward ratio. that’s why it is recommended to set stop loss below the 61.8% Fibonacci level of distance between the neckline and lower low.
Risk only 2-5% of your trading account balance per trade. The risk size also depends on your strategy. for example, scalping traders should not risk more than 0.5-1%. In the case of rounding bottom trading, the risk-reward ratio should be greater than 1:1.5
Rounding Bottom Trading Strategy
A strategy is made by optimizing a trade setup to make it more profitable and reliable. By adding confluences or filters, the winning ratio of strategy increases. To make a profitable rounding bottom strategy, follow the following steps.
- The higher timeframe trend should be bullish. The simplest method is to zoom out the price chart and check the formation of higher highs and higher lows. it will confirm the bullish trends.
- The rounding bottom pattern should form at the bottom of a wave. do not try to find out this pattern at the top of the price chart.
- Increase the risk-reward ratio by extending take profit level using Fibonacci. for example, Split the take profit into two. Set the second take profit level to 1.618x of the first TP level. 1.618 is a Fibonacci extension level that’s why it is being used here. breakeven the trade after first take profit level and let the rest of the trade run until it hits second take profit level.
These are the rules you need to follow before trading a rounding bottom pattern. It will also improve your trading psychology.
Trading this chart pattern with confluence will improve your trading abilities. Because a straightforward chart pattern will not work in a long term. That’s why the addition of confluences to filter out bad trade setups is necessary. Don’t
forget to backtest the strategy before trading on a live account.