Chart Pattern #4: Rounding Bottom
What happens when you put a bull, a bear and a pig on a rollercoaster?
Well, we know the bear will freak out through the whole ride and get off at the safest opportunity.
The bull’s an adrenaline junkie and can’t wait for that massive rally back to the top.
And the pig? Well, the pig didn’t secure its seat belt… so the pig is dead.
The same thing happens in the marketplace whenever you see a rounding bottom chart pattern.
Definition of a Rounding Bottom
A rounding bottom is a technical analysis that’s associated with a flow of price that moves in a “U” shape…
Just like a rollercoaster that makes a massive drop and then shoots back up again (as seen below.)
You can see a rounding bottom form at the end of a prolonged downward trend.
When that happens, it indicates a reversal of low and long-term price movements. The time frame of rounding bottoms can vary from several weeks to months.
And this is heavily affected by volume and price.
What Does This Mean For You?
A confirmed rounding bottom means there’s been an overload of supply. This forces the price to tank.
The transition to an upward trend starts when you enter a position at the lowest point.
That means there’s an opportunity for you to ride the stock all the way back to the top and profit. So enter at a great price and exit whenever it makes sense for you.
This is perfect for the bulls and bears who stick to their trading strategies.
How To Trade For Rounding Bottom
To trade a rounding bottom requires some technical analysis. There are several things you need to consider and align with your trading strategy:
- Share price decline: at what price do you confirm a downward trend?
- Bottom: when will you assess the lowest point of the price to enter at?
- Share price recovery: at what point do you confirm your exit for gains?
- Volume: Are there enough buyers that are moving the price to confirm a rounding bottom?
The Risks Involved
Remember, rounding bottoms don’t happen overnight so they require a lot of patience. They take several weeks to months to confirm. It can possibly take years.
This is because of the “tug-of-war” element between bulls and bears.
So this is more of a long play that can lock up capital, so don’t trade with money you’ll need in the short term.
Make sure you pay attention to the market cycles of trader sentiment. At the end of the market cycle regarding rounding bottoms, there tends to be mass hysteria when an asset reaches its peak.
By now, the bulls and bears should get off the rollercoaster before it crashes.