Rounding Bottom Complete Guide

What is Rounding Bottom?

The Rounding Bottom, often referred to as a 'Saucer' or 'Bowl,' is a long-term bullish reversal pattern that signals a gradual shift in market sentiment from bearish to bullish. Unlike the sharp V-bottom, this pattern represents a slow, agonizing process where supply is eventually exhausted and demand begins to build. Visually, it appears as a smooth 'U' shape on the chart. According to Thomas Bulkowski in the 'Encyclopedia of Chart Patterns,' the rounding bottom is one of the best-performing patterns, though it is relatively rare compared to head-and-shoulders or double bottoms. It typically forms over several months, requiring at least 40 bars to be considered valid. The pattern begins with a price decline, followed by a period of consolidation where the price moves sideways, forming the bottom of the bowl. Finally, the price begins its gradual ascent. A key characteristic is the volume profile, which often mirrors the price action, forming its own 'U' shape—high volume during the initial decline, low volume at the base, and increasing volume on the rally. Bulkowski’s research indicates that in a bull market, the average rise following an upward breakout is approximately 43%, with a remarkably low failure rate of around 5%. Traders typically look for a breakout above the 'rim' or the highest point of the pattern's left lip to confirm the reversal. While highly reliable, its long duration requires significant patience, as the transition from a downtrend to a confirmed uptrend can take a considerable amount of time to materialize.

Identification Rules

1. A clear prior downtrend must exist before the pattern begins to form.
2. The price action must form a smooth, concave 'U' shape rather than a sharp 'V'.
3. Volume should ideally decline toward the center of the pattern and increase during the right-side ascent.
4. A valid pattern typically requires a minimum of 40 bars to establish the 'rounding' characteristic.

References

• Thomas N. Bulkowski (2005). Encyclopedia of Chart Patterns.
• Steve Nison (2001). Japanese Candlestick Charting Techniques.

More Analysis