Rounding bottoms occur at the market bottom while rounding tops develop at market top. These chart patterns indicate a potential reversal point on a price chart.
Rounding top is also referred to as the “inverse saucer” pattern. It appears as an inverted ‘U’ shape.
On the other hand, the rounding bottom appears as a clear “U” shape on the price chart. It is referred to as a “Saucer” pattern.
Both chart patterns indicate a gradual change in the demand and supply due to which the underlying security slowly picks up momentum in the opposite direction to the prevailing trend.
It’s difficult to know the breakout point when this kind of pattern develops.
How to recognise a rounding top pattern
The chart below shows how a rounding top pattern looks visually.
Here are the characteristics of a rounding top price pattern;
- Price must be in an uptrend
- At the top, it is consolidated for an extended period of time by forming a pattern like inverted ‘U’ shape.
- Eventually it falls back down by breaking the neckline of the consolidated area.
Traders wait for a break below the neckline to take a trade. Once price closes below the neckline, they prefer to go short with a sell order having a stop loss just above the breakdown candle.
How to identify a rounding bottom pattern
The chart below shows how a rounding bottom price pattern looks visually.
Rounding bottom pattern is the opposite of the rounding top.
Here are the characteristics of a rounding bottom;
- Prive moves downside in a continuation of the downtrend before consolidation.
- Price consolidates for an extended period of time by forming a price pattern like ‘U’ shape.
- After consolidation, price starts moving upward by breaking the neckline of the consolidation area.
Once price breaks through the neckline drawn just above the consolidation area, traders prefer to go long with a buy order.
In this case, the stop loss can be placed below the breakout candle.
Some traders prefer to put the stop loss below the neckline or the consolidation area. It’s up to the trader based on the risk they can afford.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
