Increasing your technical analysis knowledge and adapting your strategy accordingly is necessary to survive in the market. As Yvan Byeajee states, “Trading doesn’t just reveal your character; it also builds it if you stay in the game long enough.”
You may have seen the movie The Wolf of Wall Street, where Leonardo DiCaprio’s character makes his fortune by being aggressive in his trades and hunting down new prey to pad his investments. New traders are like a lamb among wolves when they enter the market. If you are not careful, you will lose everything you have. So you have only one way to go: becoming a wolf.
But what does it mean to become a wolf? When you know many techniques and learn classic patterns well, after a while, you can analyze all the tricks and signals of the market and hunt like a wolf from this market.
This article will teach you the rounding pattern at the top and bottom to increase your profit significantly. It can also protect you from market storms like an umbrella, and you can trade without fear of getting wet.
I earned $35,000 in 2022 with this pattern. The rounding top and rounding bottom patterns are two of the most profitable patterns, so let’s get into how they work.
Rounding Top pattern
The rounding top is a classic reversal pattern. This pattern forms at the end of upward trends, and the price enters a downward trend after that.
After forming this pattern in one-sided markets, we know that the stock or currency is expensive and not worth buying. In two-sided markets, you can open a short position on this pattern because the price will go down after that, and you will get a good profit from the market.
The rounding top pattern has a shape like an umbrella. It is a major wide top consisting of several minor tops with a design similar to a semi-circular or an umbrella shape, with a left lip and a right lip at the bottom. You can stand under this umbrella in the stormy days of the market, which misleads many traders, and take your profit from the market with complete peace of mind.
To form this pattern, we need several top majors, which, by forming next to each other, form the shape of the rounding top. The price trend is ascending on the left side of the pattern, and on the right side, the trend is descending.
After an upward trend with high momentum, the price reaches a resistance zone, and the price momentum decreases. In this case, the price rises slowly, and after a while, the price can not make higher highs and higher lows, and the momentum slowly declines.
Occasionally, the price might break the resistance zone, pivoting above the resistance zone which results in a bull trap. Then the price goes down with a gentle momentum until it reaches the level of the neckline. But where is the neckline? I will teach you a simple method to find it easily.
After an upward trend with high momentum, the price reaches a resistance zone, and the price momentum decreases (Williams Indicators can also help identify this).
Just look at the uptrend before the pattern and find out when the price has reduced the momentum. In this area, find the lowest or first minor bottom and draw a horizontal line from the price of the bottom. This horizontal line is the neckline, and when the price returns to this neckline after forming the rounding top pattern, the pattern is completed, and we have a rounding top.
The rounding top pattern is also known as the inverse saucer pattern and is similar to the triple top pattern. Of course, many traders believe this pattern is identical to the double top, but I see little similarity because we need more than 2 top majors to form this pattern.
The rounding top pattern forms in all markets, but we can only open a short position in two-sided markets such as Forex and Cryptocurrency. In one-sided markets such as stocks, it is used as a signal to exit a long position or to show that the stock has reached its highest value and is no longer worth buying.
The market volume is high at the beginning of the pattern formation, and in the consolidation process, the volume decreases until the price breaks the neckline. When the price breaks the neckline, the market volume increases again.
Trade on the Rounding Top pattern
You can earn good money from this pattern, and the good news is that it’s relatively straightforward. After forming the rounding top pattern with the standards I mentioned. When the price goes down and passes the neckline, you can enter the short position and place the stop loss above the highest top in the pattern.
Of course, you must be careful and check against other confirmations. If the break of the neckline is by a breakout candle like a marubozu candle, this breakout is valid, and you can enter a short position after closing the candle below the neckline and place the stop loss above the candle.
There are alternative ways to place the stop loss in this pattern. You can place a stop loss above the last minor pivot before breaking the neckline in this pattern. This way, you get a higher risk-to-reward ratio. The take profit in this pattern equals the distance from the neckline to the highest top in the pattern.
Please look at my short position on the EUR/USD chart on the daily time frame:
After forming the rounding top pattern, I waited for the price to break the neckline and enter a short position at the right time. The price went down and passed the neckline with a valid breakout candle.
After closing the breakout candle, I entered the position below the candle at 1.19700 USD and placed a stop loss above the breakout candle at 1.21500 USD. My take profit was equal to the distance from the neckline to the highest top in the pattern, and I set it at 1.17200 USD. I made an $8,000 profit in this position, and it was a good day for me.
Failed Rounding Top
Sometimes, this reversal pattern fails, and the price continues its upward trend after completion. The price should rise and pass the highest top in the pattern to fail a rounding top pattern. In this case, this pattern will fail, and the price will enter a definite upward trend.
There is no need to worry, because you can open a long position in this situation. For this, you can enter the long position after passing the highest top and place the stop loss under the breakout candle or the right lip. The take profit in this case equals the distance from the highest top to the neckline.
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Rounding Bottom pattern
Rounding bottom is a classic reversal pattern. This pattern is as valuable as a diamond and worth learning. The rounding bottom forms at the end of the downward trends, and the price enters a new upward trend after forming it.
This pattern develops in all markets. Forming this pattern means that the price reaches a support zone and indicates the cheapness of the stock price or the currency.
The rounding bottom is shaped like a soup bowl. It is a major wide bottom that consists of minor bottoms, and these bottoms are placed in the design of a semicircle or bowl with two left and right lips at the top. This bowl is not filled with soup, but with profit — so it’s a good pattern to keep an eye out for.
To form this pattern, after a downward trend with high momentum, the price hits a support area, and the price momentum decreases. The price makes lower bottoms and lower tops, but over time, the momentum decreases, and the price cannot make a lower bottom and enters an upward trend with a gentle momentum, then the price momentum increases.
In this case, the rounding bottom pattern forms, and this pattern completes when the price reaches the neckline again. But where is the neckline? It’s easy to find.
When the price decreases the momentum, find the highest minor top and draw a horizontal line from the price of this top. This horizontal line is the neckline, and if the price passes it, that’s your signal to buy.
The rounding bottom pattern is also known as the saucer pattern and is very similar to the triple bottom pattern. The rounding bottom pattern develops in all markets, and you can open a long position on it in one-sided markets such as Stocks and two-sided markets such as cryptocurrency and forex.
The market volume is high at the beginning of the pattern formation, and in the consolidation process, the volume gradually decreases until the price breaks the neckline. When the price breaks the neckline, the market volume increases again.
Sometimes this pattern is formed along with a gap, which you should check carefully because it may be an island pattern. It’s a good idea to get a solid handle on the island pattern (you can check out this article to brush up) so you can get familiar with the differences between the two.
Trade on the Rounding Bottom pattern
You can enter the long position when the rounding bottom pattern completes, and the price passes the neckline. To be more precise, you can wait for the breakout candle to close above the neckline and then enter the long position.
It will help if you place the stop loss below the lowest bottom in the pattern in standard mode. For a higher risk-to-reward ratio, set the stop loss below the breakout candle or below the last minor pivot before breaking the neckline. The take profit in this pattern is equal to the distance from the neckline to the lowest bottom.
Please look at my trade on the ETH/USDT chart in a 1-hour time frame.
After completing the pattern and crossing the neckline, I waited for the breakout candle to close above the neckline. Then I entered the long position at 3028 USDT, and placed the stop loss below the breakout candle at 2910 USDT.
My take profit was equal to the distance from the neckline to the lowest bottom at the pattern, and I set it at 3150 USDT. I earned $6,500 profit in this position, which is a good chunk of change.
Failed Rounding Bottom Pattern
The rounding bottom is a reversal pattern, but in some cases, this pattern does not reverse the price, and the price continues its downward trend after forming this pattern. But you don’t need to worry because even if that happens, I have a plan for you. You can still make a profit from the market.
When the rounding bottom pattern is completed, if the price declines again and passes the lowest price in the pattern, it means that the pattern has failed, and you can enter the short position here and place the stop loss above the right lip. Your take profit equals the distance from the neckline to the lowest bottom in the pattern.
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Research by scientists on Rounding Top/Bottom
Analysts are always looking to improve their win rate using applied statistics. Bulkowski, Kirkpatrick & Dahlquist are prominent scientists who have done much research on this pattern.
This research can speed up your profit-making process and help you become a professional trader sooner. In this section, we’ll go over their findings in laymen’s terms. So stay with me!
One of the most exciting parts of technical analysis is the statistics of great scientists and analysts. Kirkpatrick and Dahlquist state that rounding bottoms are seen more often than rounding tops in the chart. According to them, this pattern is usually long-term and takes a lot of time to form. They also said that tall patterns have more credibility.
Bulkowski has optimized the target of this pattern in such a way that if you use these targets, your profitability and win rate will be higher. For the rounding top, he set the target as 24% of the vertical distance from the right lip to the highest top.
Bulkowski also determined the size of 57% of the vertical distance from the right lip to the lowest bottom for the rounding bottom pattern.
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Can we profit from a rounding top/bottom pattern?
Yes, the rounding top/bottom pattern is one of the market’s most profitable patterns. You can place a position based on this pattern and make much money with the tips you learn from this article.
Does the rounding top/bottom pattern form in all markets?
Yes, the rounding top/bottom pattern develops in all markets, but when it forms at the top and ends of the upward trend, we can only profit from it in two-sided markets like forex and cryptocurrency.
Does the rounding top/bottom pattern form a continuation pattern?
Yes, When the rounding top/bottom pattern fails, The price continues in its previous direction with a lot of momentum. So this is an opportunity for skilled traders to profit by placing a reverse position on this pattern.
What are the other names of the rounding top/bottom pattern?
Many traders call it the “saucer pattern” because it has a similar shape. Of course, this pattern is very similar to triple top/bottom, but it differs in detail.
This is a rule in the capital market: a trader who needs to learn new things will drown in the market. In this article, we learned that the rounding top is a reversal pattern that forms at the end of the upward trend, and the rounding bottom, which is the exact inverse of this pattern, forms at the end of the downward trend.
The rounding top pattern is used in two-sided markets, but we can use the rounding bottom pattern in both markets to make a profit. This article also taught you that the Top/Bottom Rounding Patterns could fail, but you can also profit from this failure. In this article, you learn more about the statistics of this pattern to increase your profit.
You need more than just read this article, however; you have to practice its essential points in the chart to get profit. Be sure to remember this point to observe capital management in positions. Of course, you should know that capital management is in the wrong position.
This is because positions where the market moves in the direction of our analysis, capital management is automatically observed. So you have to stick to your rules under challenging situations.
In Olawale Daniel’s words, “In trading Bitcoin and other commodities, everyone wants 1000% in a week, but can’t handle 20% drop in a week. That’s the beginning of witchcraft.” Thank you so much for being with me during this article. I hope you’ve learned some useful takeaways for your future trading.
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