Rounding Bottom

Overview - Rounding Bottom

A rounding bottom formation is the by product of traders shifting from long-term bearish views to a more positive outlook. This process can be seen on any timeframe, but is easiest to identify on weekly charts. The volume during the beginning of the rounding bottom formation is somewhat heavy. As the security drifts downward, the volume will continue to diminish until the ultimate low is reached. After the bottom is in place, the security will begin a rally which will be virtually equal in time and price of the initial move down in the rounding bottom formation. As the security rises, there will be an increase in volume, as traders begin to add to their long positions. This rounding process will often times resemble the letter "U".

Trading the Rounding Bottom

The key to trading the rounding bottom pattern is to exercise extreme patience. If a trader pulls the trigger too soon, their capital could potentially be tied up for weeks or even months before any real move gets underway. The most reliable method for buying a rounding bottom formation is to wait for the break of the high which began the initial price decline of the formation. Many traders will confuse the rounding bottom formation with the head and shoulders pattern, but the key differential is that the rounding bottom lacks the price troughs required for the shoulders of the formation.