Rounding Bottom Pattern: How to Use It for Crypto Trading
In the crypto space, buying the dip is often recommended when you’re especially bullish on a specific coin or token. This often involves the deployment of funds and capital to accumulate the preferred cryptocurrency following a substantial dip in its price. While this can be tough because crypto traders can never fully time the market or denote when there’ll be a market reversal, they can significantly improve their odds with the help of technical analysis and recognizing chart patterns. That’s where bullish reversal patterns such as the rounding bottom come into play.
By recognizing the formation of an upcoming “U” shaped bottom, traders with knowledge of technical analysis can secure an upper hand and establish a position before the charting pattern fully plays out.
Keen to find out how to profit from the upward trend reversal? In this guide, we’ll look at how crypto traders can use the rounding bottom chart pattern to their advantage in trading.
Key Takeaways:
- A rounding bottom pattern is a technical analysis trading strategy used to identify potential reversal points in an asset’s price.
- A rounding bottom pattern is identified by the gradual decrease of an asset’s price, followed by an abrupt shift that completes the rounding motion and marks the formation of a recognizable “U” shaped bottom.
What Is a Rounding Bottom Pattern?
A rounding bottom pattern is a technical analysis trading strategy used to identify potential reversal points in an asset’s price. It’s identified by the gradual decrease of an asset’s price, followed by an abrupt shift that completes the rounding motion and marks the formation of a recognizable “U” shaped bottom.
As one of the most sought-after chart patterns to trade off of, the rounding bottom pattern typically occurs when the overall market sentiment surrounding an asset turns from neutral or bearish to bullish. As the sentiment shifts, traders can jump on the opportunity to capitalize on a price reversal by entering long positions, and potentially profit thanks to the appreciating price. This can lead to considerable profits for better crypto traders when they realize the formation of the rounding bottom pattern and create a trading plan ahead of the emerging movement.
How Does a Rounding Bottom Pattern Work?
While there’s no way to confirm with complete accuracy that a rounding bottom pattern is about to emerge on a trading chart, crypto traders can still study its formation to better understand and recognize its formation. As a trend reversal pattern that can potentially result in a breakout, the rounding bottom pattern is characterized by a sudden upward trend that emerges from a gradual decline. This often represents a shift in trader expectations and sentiment, as the momentum changes from bearish to bullish.
Depending upon the overall market sentiment, crypto traders can look to enter a long position if they believe an asset’s price will reverse course, given existing price action and momentum.
To break the rounding bottom pattern down, traders can look out for the three stages that form its “U” shaped curve.
First Stage of the Rounding Bottom
In the first stage, known as the markdown or buildup stage, an asset’s price begins to gradually decline in a steady fashion. In what some may call a bear trap, the decline in price sees weak price action, and lacks the large volume that’s usually seen in more momentum-based price movements. Traders may also notice that the asset’s price tends to face short-term bounces off support lines before resuming its gradual decline.
Second Stage
In the second stage, there’s an abrupt shift in price that turns sentiment surrounding the asset’s valuation around. This causes a flagging pattern that consists of a couple of neutral candlesticks signaling a stagnation in the asset’s price, and the halting of the price decline. On top of marking the completion of a rounded portion of the rounding bottom’s “U” shape, the flagging pattern signals that a potential reversal could be coming soon.
Final Stage
Finally, in the third stage of the rounding bottom pattern, traders might notice buying pressure buildup and the asset’s price trending upward as bullish candlesticks appear to signify the end of the flagging pattern. This is typically accompanied by a sudden increase in trading volume, confirming the asset's bullish momentum and upward price movement. During this portion, breakout traders usually start to enter into long positions with confidence, as the price action is confirmed with the surge in buying volume.
When a rounding bottom pattern is identified, it typically suggests that the overall market sentiment surrounding the asset has shifted from neutral or bearish to bullish. In order for the pattern to be confirmed, traders must observe a gradual decline of the asset’s price followed by an abrupt shift, which completes the “U” shaped bottom. After the reversal has been confirmed, traders may capitalize on the opportunity to enter long positions.
When Does the Rounding Bottom Pattern Breakout Occur?
According to breakout traders, a breakout occurs when the price of an asset reaches a new high beyond the resistance level that it previously couldn’t cross. This is typically seen when an asset’s price goes above the “U shaped neckline,” or highest point on the "U" shaped pattern. Once this occurs, it signals to traders with a technical analysis background that the reversal of sentiment has been completed, and that they should enter long positions in order to capitalize on potential gains.
Additionally, when there’s a confirmed rounding bottom pattern, traders can simultaneously watch for volume increases, as this suggests that more buyers are getting involved, and could be indicative of higher prices moving forward because of the potential fear of missing out faced by retail traders.
Benefits of Using the Rounding Bottom Pattern
As with the recognition and trading of most bullish reversal chart patterns, there are numerous benefits to taking advantage of the rounding bottom pattern.
Increased Odds of a Good Entry and Exit Price
First, the rounding bottom pattern gives crypto traders an indication of when to enter and exit a position. Breakout traders can look to build a long position once the coin or token price is above the neckline. They can then establish their own take-profit and stop-loss levels, according to the resistance and support levels present on the chart.
Thus, by recognizing the emerging formation of a rounding bottom pattern, crypto traders can plan ahead and follow through with their trading plan when it comes to entering and exiting a potential trade.
Use of Volume Surges to Confirm the Pattern
While crypto traders may feel uncertain about trading off a single rounding bottom chart pattern, they can look for any signs of increasing volume during the pattern formation. This will confirm the emerging pattern and give traders more confidence in executing the trade, as it hints at the possibility of prices moving higher in the short term.
Risks of Using the Rounding Bottom Pattern
Despite the potential profits that crypto traders can gain from recognizing the rounding bottom pattern, there are also risks associated with its use.
Non-Fixed Period to Play Out
Unlike with other chart patterns, it’s crucial to recognize that the second stage of the rounding bottom pattern may take months or years to fully play out. This can be a pain point for crypto traders with a shorter time horizon, who prefer to day trade or perform quick scalps throughout the day and lack the patience to swing trade in order to realize a full recovery in stock price.
Due to the potential amount of time a trader may need to see the rounding bottom pattern play out, they might be better off incorporating a different charting pattern as part of their strategy.
Volatility May Impact the Rounding Bottom Pattern’s Formation
Given the volatility involved when trading cryptocurrency, the rounding bottom pattern may be considered non-viable given that it’s usually effective for trades with long time frames. While trading crypto, we may see price action suddenly shift directions and break out of an established trend without prior warning. This can result in crypto traders getting trapped in the trade after deciding to go long during the second phase of the rounding bottom pattern.
Rounding Bottom Pattern vs. Cup and Handle Pattern
The rounding bottom pattern and cup and handle pattern are two common chart formations that traders look for when trading cryptocurrencies and wanting to trade a market reversal.
Both patterns represent a bullish shift in market sentiment, with the former signaling a turnaround in an asset’s price from bearish to bullish, and the latter indicating a continuation of an asset’s price uptrend.
The main difference between the two is in their formation. For the rounding bottom pattern, the bottom part of the pattern has to show a clear "U" shape, while for the cup and handle there will be two peaks within a single price range that form the cup shape. Additionally, the cup and handle pattern extends beyond the "U" shape, indicating an extended dip below the neckline before surging once the handle is fully formed.
How to Trade the Rounding Bottom Pattern
When crypto traders spot a confirmation of the rounding bottom pattern, they should consider entering a long position upon noticing the price reversal at the bottom. This is so traders can make the most of the momentum swinging in their favor. Upon placing the buy order, traders should stay with their trading plan, and input their planned stop-loss and take-profit orders. This minimizes losses should the trade not work out as expected, and locks in profits if the price moves as expected.
Users may also look to capitalize on breakout trades by entering longs near the peak of the rounding pattern, as they can benefit from potential momentum surges. Experienced traders may leverage margin trading to increase their exposure and capitalize on larger gains.
It's important for traders to keep an eye on certain metrics that can help confirm or deny that a reversal is taking place. These include volume confirmation, trend lines, support and resistance levels and even candlestick patterns such as dojis, hammers and shooting stars.
By combining technical analysis with other methods such as fundamental analysis, traders can maximize their chances of profiting from a rounding bottom pattern in any market conditions.
Is the Rounding Bottom Pattern Worth Trying?
All in all, the rounding bottom pattern can be beneficial for both beginners and experienced traders, given that it helps traders identify the possibilities of a market or trend reversal. While basing one’s trading strategy on the rounding bottom pattern carries its own risks, proper trading discipline and order sizing will help minimize trading risk. For beginners, the pattern can help reduce their exposure to risk as they swing trade within a defined range. Experienced traders may also benefit from the inverse nature of the pattern, potentially capitalizing on larger gains when executing correctly.
Regardless of your level of experience and trading background, it’s important to understand how the rounding bottom pattern works in order to determine if it's right for you. This pattern ultimately requires patience and a sharp eye, as it typically forms over several weeks or months before becoming recognizable, instead of allowing traders to profit from short-term gains.
The Bottom Line
To summarize, the rounding bottom pattern is a long-term trading strategy that appeals to traders of all levels, and is an essential part of any trader’s arsenal of chart formations. It ultimately requires patience and an eye for detail, as it takes several weeks or months to become recognizable.
Ultimately, the rounding bottom pattern works when traders can identify its key elements, namely the initial decline, plateau, and gradual rise in price. In doing so, they can prepare to go long while taking into account the potential risks of trading on short time frames, as well as volatility that can ruin the pattern’s formation.
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