Rounded Bottom Pattern in Trading: Meaning and Factors

In our previous chapter, we dived deep into the rounded top chart pattern, exploring its characteristics and implications. Now, we shift our focus to its counterpart, the rounded bottom pattern. 

Just as the rounded top pattern signifies a bearish reversal, the rounded bottom pattern serves as a powerful signal for a potential bullish reversal. The pattern displays a gradual yet strong shift in momentum from a downtrend to an uptrend, giving it the shape of the bottom of the bowl. 

By understanding the key components of this pattern, such as its formation, breakout, volume behaviour and more, you can gain insight into trend reversals and plan your trading strategies accordingly.  So, let’s explore the rounded bottom pattern in detail and also understand how to trade alongside such patterns. 

What Is the Rounded Bottom Pattern?

The rounded bottom pattern, also known as a saucer or a bowl pattern, is a long-term bullish reversal pattern. It is characterised by a gradual and smooth transition from a downtrend to an uptrend, forming a rounded shape resembling a bowl or a saucer. This pattern indicates a momentum shift in the market sentiment from bearish to bullish, indicating a potential trend reversal.

Take a look at this image – 

The rounded bottom pattern can be viewed as a mirror image of the rounded top pattern, which was covered in the previous chapter. To know more, click here.

Now, for a rounded bottom pattern to emerge, there must be a prior downtrend in place. The low point of the rounding bottom should ideally mark a new low, indicating that the selling pressure has been exhausted. However, there are instances where the low may have occurred months earlier, and the security trades in a sideways manner before the pattern formation.

Before we go any further,  let’s study the components of this pattern in detail below – 

• Phase 1: The decline phase is the first part of the rounding bottom pattern. It represents the continuation of the previous downtrend and can take various forms with multiple highs and lows. The decline sets the stage for the eventual reversal.
• Formation of Rounding Low: The low of the rounding bottom is essential to the pattern. It may resemble a “V” bottom but should not exhibit an excessively sharp decline. The pattern can be strongly confirmed if it emerges over a couple of weeks, displaying a gradual shift in market sentiments. It is worth noting that the low of the rounding bottom may not necessarily be the lowest point reached in the last few months, as the pattern focuses on the overall reversal rather than the absolute lowest level.
• Advance Phase: Following the low, the price enters the advance phase, forming the right half of the pattern. This advance should take approximately the same amount of time as the preceding decline. Note that if the advance is too rapid, it might cast doubt on the validity of the pattern.
• Volume: Volume plays a role in confirming the rounding bottom pattern. In an ideal scenario, volume levels will mirror the shape of the pattern. In that sense, the volume will be high during the start of the decline, tapering off towards the end of the decline and then increasing again during the advance and during the breakout. This increase in volume during the advance and the breakout further validates the pattern’s bullish potential.
• Resistance/Neckline: The horizontal line connecting the high points in the pattern can be marked as the resistance or neckline. A bullish confirmation occurs when the price breaks above this neckline. Now, the breakout above the neckline or resistance level is a significant signal for traders, indicating the potential for further upward movement. The resistance level can also serve as a support level going forward, although it may not be as strong as other support levels.

How to Trade and Identify a Rounded Bottom Pattern?

Now that we understand the rounded bottom pattern and its components, let's explore how to place a stop loss and calculate the target price during the formation of this pattern.  Let’s interpret the rounded bottom pattern using a hypothetical stock example. 

First, identify a stock that exhibits a prior downtrend. Assume we are analysing A company’s stock chart. On the chart, we notice a gradual decline in prices over several months, indicating the presence of a downtrend. Next, look for a rounded bottom formation. The rounding bottom pattern will appear as a smooth and gradual transition from a downtrend to an uptrend. In our example, we observe that the stock price gradually levels off and begins to curve upwards, forming a rounded shape resembling a bowl. 

To confirm the pattern, pay attention to the volume. Ideally, the volume should be high during the initial decline, decrease during the flat phase, and then increase during the subsequent advance and breakout. This volume behaviour adds credibility to the pattern. 

Once the rounded bottom pattern is identified, it is crucial to determine the appropriate stop loss. Now, a common approach is to set the stop loss slightly below the neckline or the resistance level. This can help curtail losses if the pattern fails or the trend reverses. 

Now, to calculate the target price, you will consider the distance from the lowest point of the rounding bottom to the resistance level. Then, add this distance to the breakout level. This projected target price estimates the potential upside once the pattern is confirmed. 

For example, if the lowest point of a rounding bottom is at ₹30 and the resistance level is ₹80, then the distance is 50. So, now, if the breakout occurs at ₹90, then the target price would be ₹140 (₹50+ ₹90). 

Do note that the target price is not a guaranteed outcome and should be used as a guide rather than an absolute prediction. It is also wise to monitor the price actions closely and adjust your stop loss and target price accordingly. 

Factors To Consider When Trading Rounded Bottom Pattern

With a better understanding of the rounded bottom pattern, keep in mind the following factors before trading this pattern – 

• Pattern Confirmation:

Before trading the rounded bottom pattern, wait for the pattern confirmation. Look for a breakout above the resistance or neckline and this breakout must ideally be followed by increased volume. 

• Volume:

Pay attention to the volume trend through the pattern. It must ideally be high at the start and beginning of the pattern and least at the centre. For instance, if the volume is weak during the advance phase, there could be low buying interest, and the trend may not pan out. 

• Overall Market Conditions and Time Frame:

Ideally, the longer the time frame, the stronger the chance of the pattern pan out. Also, market conditions are something you should keep in mind. For instance, if during Phase 1, while the downtrend is in phase, a negative economic report comes out, then there is a good chance that the downtrend will continue further (and even sharply). 

It is important to account for the above-mentioned factors before you trade a rounded bottom pattern. Also, you could use technical indicators like RSI and MACD to further confirm trends and patterns. Lastly, remember that no pattern is foolproof, so combine risk management techniques with effective trading strategies for safe and sound trading. 

And with this, we close charting patterns. We hope you now understand the different chart patterns and how they can be studied when trading.