The Rounding Bottom Breakout – How to Trade?
As a passionate trader exploring new ways, techniques and strategies to increase your chances of earning, have you ever thought about using the rounding Bottom chart pattern? Have you ever heard about the rounded Bottom chart pattern that numerous severe and experienced traders use in their everyday practice?
First of all, nowadays, learning how to trade on the market is challenging and exciting since there is so much about trading that one can learn and master! Knowing what the rounding Bottom chart pattern is, for example, is just one piece of the puzzle that’s crucial for improving your trading skills, and soon you’ll understand why.
However, to do so, let’s get to know what a rounding Bottom pattern is in the first place and why it is so crucial to know how to use it properly, shall we?
What is a rounding Bottom chart pattern?
The rounding Bottom chart pattern represents a technical setup for a patient trader. The pattern can take some time to develop before any compelling price moves start happening.
In other words, a chart pattern used in technical analysis is identified by a series of price movements that form a shape of “U”. Keep in mind that rounding bottoms exist at the end of extended downward trends. They represent a reversal in long-term price movements.
The time frame of this particular pattern is known to vary from several weeks to several months. Therefore, numerous traders deem it a rare occurrence. In ideal circumstances, price and volume will occur in tandem, in which volume will confirm the price action.
How does a rounding bottom pattern work?
To understand how a rounded Bottom chart pattern, a rounding bottom looks similar to the handle pattern and the cup. However, it doesn’t experience the temporary downward trend that happens to be the “handle” portion. The initial declining slope of a rounding bottom that indicates an excess of supply forces the stock price down.
For the transfer to an upward trend, buyers need to enter the market at a low price. This is particularly important because it increases the demand for the stock.
Traders need to understand that the rounding Bottom chart pattern indicates a buoyant market reversal. It means that investor expectations and momentum shift gradually from bearish to bullish, also known as sentiment.
What are the crucial parts of a rounding Bottom chart?
A rounding Bottom chart can be divided into several main areas. The prior and first trend represents the buildup to the stock’s initial descent towards its low. Vividly, the trading volume is the heaviest at the start of the decline.
Once the sharp price levels off and approaches the Bottom of the pattern formation, the trading volume would increase. In addition to that, as the stock recovers and moves to complete the rounding Bottom chart pattern, the volume will increase once investors purchase shares once again.
Explanation of the rounding Bottom breakout
The rounding bottom breaks out of its low point once the price of a stock price closes above the price, just before the commencement of the initial decline. So, the trading volume in this pattern ideally follows the direction of the stock’s price. Nonetheless, it is unnecessary to obtain a perfect volume price correlation.
In often situations, trading volumes when the share price also reaches its Bottom, trading points get to be at their lowest point. The volume of traded shares peaks typically at the start of the decline and once the stock reaches its previous high with building volumes on the so-called “approach”.
When does the rounded bottom breakout occur?
The rounded Bottom breakout occurs once the price penetrates the neckline right in the bullish direction. The stock must show strength as it crosses through the neckline. Remember that the strength should display itself in the price expansion form and increased volume.
How can you find this pattern?
The Rounded Bottom Breakout pattern could be found in the following manner:
- Plot them with the 20-day ordinary moving average
- The 34-day exponential moving average
- 50-day simple moving average
- 200-day simple moving average
The breakout is very likely to spot when you get these moving averages on your chart. You can also plot the 8-day exponential moving average or even the t-line that stands for an indicator for entering and exiting trades successfully.
Why is the t-line useful?
The t-line isn’t necessary to spot the breakout. However, it helps choose an exit point when you are in a trade.
- The chart must be a downtrend. Keep in mind that the longer the downtrend, the better. The 20-day SMA equals the 34-day EMA below the 50-day SMA, below the 200-day SMA. We are talking about the clear downtrend.
- The Bottom needs to be formed so that the chart is trading sideways, forming a double bottom. Because o that, it has reached its low, and you’d like the price action to come above the 50-day SMA. It will cause the 20–day SMA, the 34-day EMA, and ultimately the 50-day SMA for cross over to be on top of each other from being set below each other.
- What happens to be the actual trigger is once the stock price, in addition to the 20-day SMA and the 34-day EMA, crosses right above the 50-day SMA. In usual circumstances, the price will close above the 50-day SMA.
- The breakout will happen once there’s a confirmation of a trend reversal. The price will close above the 50-day usual moving average and once the 20-day SMA and the 34-EMA cross over the 50-day SMA.
- In ideal situations, you’d like the price action and the 50-day SMA to at least reach 10% below the 200-day SMA. Remember, it’s always good for the percentage below the 200 SMA to be larger since it will result in more significant gains. It will happen in a good downtrend.
- Also, as a serious trader, it is crucial not to forget that the primary target refers to the 200-day simple moving average in a rounded-bottom breakout. It’s likely the following resistance level.
Traders from all over the world should be aware that there could be a more significant target. It all depends on the individual chart. However, the 200-day SMA happens to be the best possible target very often. You’d wish to look for a lower target in a rounding Bottom breakout chart that’s in a downtrend for a long time. That target could be a strong resistance level that happens right before the 200-day SMA.
How to trade the rounding Bottom pattern?
If you were wondering how are you able to trade the rounding Bottom pattern, it’s essential to know a relevant step-by-step guide that will help you do it most virtually.
Confirm the rounded Bottom figure
You’re able to confirm the rounded Bottom figure by finding a price decrease in the first place. That price decrease will switch to a range, followed by a price increase. The strongest confirmation comes once the volume indicator represents high volumes on the decline, in addition to flat volumes on the range and reversal’s increasing volumes.
Draw the neckline
So, once you have managed to identify the pattern, it is time to draw the neckline. It can be done by drawing a horizontal line across the top of the bearish and bullish sides of the rounding Bottom pattern.
Confirm a Rounded Bottom breakout
After that, the rounded Bottom breakout occurs once the price enters the neckline, as we mentioned earlier, in the bullish direction.
Enter a long trade on the breakout
Traders need to get long when the stock could break through the neckline.
Place your stop-loss order in the middle of the pattern.
In short, it is time to place your stop-loss order. Even though the rounding Bottom chart pattern is known to be relatively reliable, there is no warranty that you are able to protect your capital. So, a stop-loss order is a must while trading. It would be best to place it at the midpoint of the pattern.
If you are looking for a more conservative approach, we advise you to place your stop-loss order right below the low of the breakout candle. In this way, in case the stock falls, you are able to exit the position quickly and search for much better trading opportunities.
The target of the rounding Bottom
Keep in mind that the minimum target for the rounding bottom chart is equal to the size o the pattern once added to the breakout. When the price hits your target, you should look to exit the current position.
Key Takeaways
- The rounding Bottom pattern is a gradual price shift from bearish to bullish.
- With the volume, the indicator comes the strongest confirmation of the pattern.
- The pattern is known to have an extremely bullish potential. The expected price move is equal to the size of the pattern itself.
- Even though the rounding Bottom pattern incorporates a high success rate, it’s rare.
- The pattern’s size is the distance between the top of the handle and the figure’s Bottom.
- The target of the rounding Bottom pattern is the size of the pattern that’s applied from the moment of the breakout.
- Make sure your stop-loss is placed right below the lowest point of the handle.
