A rounding bottom pattern is a U-shaped reversal chart pattern that signals a potential bullish reversal. Traders also call a rounding bottom a saucer bottom, and the pattern usually takes several weeks, months or even years to form.
Traders use one main entry strategy on a rounding bottom: a long position when a candle closes above the neckline on rising volume. The neckline is the horizontal resistance line at the high where the decline started, and the trade comes with a stop-loss below the lowest point or a recent swing low and a price target set by the measure rule.
What Is a Rounding Bottom Pattern?
A rounding bottom pattern is a U-shaped chart pattern that marks the end of a long downtrend and signals a potential reversal to an uptrend. Thebowl on the chart shows market sentiment shifting slowly from bearish to bullish.
Traders also call the rounding bottom a saucer bottom because the bowl looks like a saucer, and some traders call it the U pattern in trading. The names rounded bottom, round bottom pattern and rounding bottom chart pattern all refer to the same rounding bottom pattern.
A rounding bottom is a rare pattern that takes several weeks, months or even years to form, so the pattern suits patient traders. A rounding bottom breakout points to a long-term change in trend, and a trader may need to hold the position for months.
How Does a Rounding Bottom Work?
To explain how a rounding bottom works, we need to look at price action and trader psychology. During the decline, selling pressure from existing downtrend pushes price lower and the speed of the decline slows as selling pressure fades.
Buyers then start to enter the market at low prices, which flattens the decline into a rounded base. As more buyers step in, demand also increases and price climbs the right side of the bowl until a candle closes above the neckline.
A rounding bottom pattern is a bullish reversal pattern when the pattern forms after a downtrend.
What Are the Key Elements of a Rounding Bottom Chart Pattern?
A rounding bottom chart pattern has 5 key elements: 1) the trend prior to the pattern formation, 2) the decline, 3) the rounded base, 4) the recovery, and 5) the neckline and breakout.
| Key element | What the element looks like on the chart |
|---|---|
| 1) Trend prior to the pattern formation | A downtrend that the rounding bottom pattern reverses. |
| 2) Decline | Price falls from the left rim toward the lowest point, either smoothly or in a jagged way with several swing highs and swing lows |
| 3) Rounded base | Price flattens out around the lowest point for at least a few weeks, with no sharp V shape |
| 4) Recovery | Price rises gradually up the right side of the bowl, ideally over about the same time as the decline |
| 5) Neckline and breakout | A horizontal resistance line through the left rim, which is the high where the decline started, and a candle close above that line |
Figure: Rounding bottom pattern diagram: the decline, rounded base, recovery, neckline, breakout and price target, with volume following the same U shape.
The left and right sides of a rounding bottom are ideally symmetrical, but the 2 sides do not have to match in time or slope. A recovery that is too sharp puts the pattern in doubt, because a rounding bottom reflects a gradual shift from sellers to buyers.
Some rounding bottoms start after a long period of flat trading, so the lowest point may not be the lowest price of the past few months. A flat base that lasts several months before a rounding bottom often leads to a strong trend after the breakout.
A bump is a sudden price jump midway through a rounding bottom, near the rounded base. After a bump, price usually falls back most of the way to where the bump started, and the recovery then continues.
| Important: A bump in a rounding bottom usually falls back near its starting price, so a long position entered before a candle closes above the neckline has a much higher chance of failing. |
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How Does Volume Confirm a Rounding Bottom Pattern?
Volume confirms a rounding bottom when volume follows the same U shape as price. In an ideal rounding bottom, volume is heaviest at the start of the decline, lowest at the rounded base, and rising on the recovery and the breakout.
| Rounding bottom stage | Volume | What the volume shows |
|---|---|---|
| Start of the decline | Heaviest | Sellers are in control |
| Rounded base | Lowest, often flat | Selling pressure has faded |
| Recovery | Rising | Buyers are returning |
| Breakout | Expanding | Buyers are pushing price above the neckline |
Volume at the start of the decline is the least important stage for confirming a rounding bottom, and rising volume on the recovery and the breakout matters most. A simple way to check the volume is to draw a line across the tops of the volume bars, because that line should form the same rounded shape as price.
Do note that spot forex has no central exchange volume, so MT4 and MT5 show tick volume, which counts the price changes inside each candle. Forex traders read each rounding bottom volume stage on tick volume.
| Pro Tip: On MT4 and MT5, treat a rounding bottom breakout candle with tick volume below the recent average as a likely fakeout, also known as a fake breakout. |
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How Do You Trade the Rounding Bottom Pattern Step by Step?
A rounding bottom trade follows 4 steps: 1) identify the rounded bottom pattern and draw the neckline, 2) enter on the rounded bottom breakout, 3) place the stop-loss, and 4) set the price target with the measure rule.
Step 1: Identify the Rounded Bottom Pattern and Draw the Neckline
Traders identify a rounded bottom pattern by finding 1) a smooth decline, 2) a stable rounded base, 3) a gradual recovery on the right side, and 4) volume that falls at the rounded base and rises on the recovery. A rounding bottom appears on daily and weekly charts, and the weekly chart shows the rounded shape most clearly.
The neckline is the major horizontal resistance line drawn through the left rim, the high where the decline started. Traders draw the neckline before the breakout, because the neckline sets both the entry level and the price target of a rounding bottom trade.
Step 2: Enter on the Rounded Bottom Pattern Breakout
A rounded bottom breakout is confirmed when a candle closes above the neckline with rising volume. Traders then enter a long position at the close of the breakout candle, and a candle that rises above the neckline but closes below the neckline does not confirm the breakout.
On a weekly chart, a rounding bottom breakout is only confirmed when the weekly candle closes. By that close, price can already sit well above the neckline, which moves the entry further from the stop-loss and closer to the price target.
Traders check a rounding bottom breakout with other technical tools as well, because a rounding bottom on its own gives limited information. Common checks are 1) a bullish candlestick pattern such as a hammer near the rounded base, 2) a new high in on-balance volume (OBV) on the breakout, and 3) a relative strength index (RSI) reading that rises with the breakout.
Step 3: Place the Round Bottom Stop-Loss
Traders use 2 stop-loss placements on a round bottom pattern trade: 1) a safer stop-loss just below the lowest point of the rounding bottom, and 2) a stop-loss just below a recent swing low on the recovery side of the bounding bottom.
A stop-loss below the recent swing low sits closer to the entry, so the risk distance from breakout is lesser, hence a position size can be larger for the same account risk, but a fakeout has a higher chance of hitting that stop-loss. A safer stop-loss below the lowest point survives most fakeouts and needs a smaller position size.
A safer stop-loss below the lowest point usually gives a risk-reward ratio below 1:1. The risk on that trade is the distance from the neckline to the lowest point plus the gap between the neckline and the entry, while the reward is the same distance minus that gap.
A rounding bottom breakout can fail, so every rounding bottom trade needs a stop-loss. A fakeout happens when a breakout happens and immediately goes back to the opposite side of the support & resistance line. In this case, when a candle closes above the neckline and price then falls back below the neckline, weekend gaps can carry price past a stop-loss, so a trade can close at a worse price than the stop-loss level.
Step 4: Set the Rounding Bottom Price Target
The measure rule sets the price target for a rounding bottom. Traders measure the vertical height of the rounding bottom, which is the distance from the neckline to the lowest point, and project that distance upward from the breakout point.
For example, a rounding bottom with a neckline at 1.2000 and a lowest point at 1.1500 has a vertical height of 500 pips, so the price target is 1.2500. The measure rule gives an estimate, and price can stop short of the price target or move beyond the price target.
Price often pauses at the neckline after a rounding bottom breakout, and some breakouts come back to retest the neckline as support. A rounding bottom that retests the neckline tends to perform worse after the breakout than a rounding bottom that does not.
A rounding bottom trade can take months to reach the price target, and the position stays open for that whole period. A CFD position pays or earns swap, the overnight financing charge, for every night the position stays open, so traders check the swap rate in the MT4 or MT5 symbol specification before entering a position.
Rounding Bottom Trading Example on EUR/USD
The EUR/USD weekly chart in this example shows a rounding bottom that formed between mid-2000 and mid-2002. A downtrend prior to the pattern formation took EUR/USD from about 1.18 in January 1999 to about 0.96 in mid-2000, which set the left rim and the neckline.
Figure: EUR/USD weekly chart: rounding bottom with a neckline near 0.96, a lowest point near 0.825, a breakout in June 2002 and a price target near 1.095. All levels are approximate and read from the chart.
The decline reached the lowest point of about 0.825 in October 2000. EUR/USD then produced a clear bump: price jumped to about 0.96 in January 2001, stalled at the neckline, and fell back to about 0.835 by July 2001.
A long position on the January 2001 bump would have lost money, because no weekly candle had closed above the neckline. The recovery then lifted price in uneven swings, and the last swing low before the breakout formed at about 0.86 in February 2002.
In June 2002, a weekly candle closed above the neckline at about 0.97, about 2 years after the left rim formed. The RSI (14) rose above 70 around the breakout, which showed strong momentum, but this chart has no volume data, so this example confirms the breakout on the candle close and the RSI.
The vertical height of the rounding bottom is about 1,350 pips (0.96 minus 0.825), so the price target is 0.96 + 1,350 pips = about 1.095. After the breakout, EUR/USD climbed to about 1.02 in July 2002, retested the neckline near 0.965 around October 2002, reached the price target around March 2003, and kept rising to about 1.18 by mid-2003.
The table compares the 2 stop-loss placements for this EUR/USD trade, assuming an entry at 0.97 on the close of the breakout candle, a $10,000 account that risks 1% ($100) per trade, and a pip value of $10 per standard lot.
| Stop-loss placement | Stop-loss level | Risk | Reward to price target | Risk-reward ratio | Position size |
|---|---|---|---|---|---|
| 1) Safer stop-loss below the lowest point | 0.8200 | 1,500 pips | 1,250 pips | 1:0.83 | 0.007 lots |
| 2) Stop-loss below the recent swing low | 0.8550 | 1,150 pips | 1,250 pips | 1:1.09 | 0.009 lots |
The safer stop-loss below the lowest point risks more pips than the price target pays, and the stop-loss below the recent swing low only gives a risk-reward ratio slightly above 1:1. The retest near 0.965 would not have reached either stop-loss.
Both position sizes in the table fall below the 0.01 lot minimum on most MT4 and MT5 accounts, which is a common problem on weekly charts. At 0.01 lots, this trade risks $150 or $115, which is 1.5% or 1.15% of a $10,000 account, so a trader either accepts the higher risk or skips the trade.
Traders can practise drawing the neckline and comparing the 2 stop-loss placements on a TMGM demo account in MT4 or MT5 before trading with real money. Past price action on this chart does not guarantee future results. CFD trading involves significant risk and is not suitable for all investors. You could lose more than your initial deposit.
Rounding Bottom vs Cup and Handle: What Is the Difference?
A rounding bottom and a cup and handle both have a rounded, U-shaped low, and the handle is the main difference between the 2 patterns. A cup and handle adds a small pullback after the cup and before the breakout, while a rounding bottom breaks out directly through the neckline.
| Feature | Rounding bottom | Cup and handle |
|---|---|---|
| Shape | Rounded bowl with no handle | Rounded bowl with a small pullback on the right side |
| Breakout level | Neckline at the left rim | Top of the handle |
| Vertical height | Neckline to the lowest point | Top of the handle to the lowest point |
| Stop-loss | Below the lowest point or a recent swing low | Just below the lowest point of the handle |
| Price target | Vertical height projected from the breakout | Vertical height projected from the breakout |
A rounding bottom can also be compared to an inverse head and shoulders pattern with no identifiable shoulders. The lowest point of a rounding bottom sits where the head would be, and the volume stages and the neckline breakout work in a similar way.
Rounding Bottom Pattern FAQ
What Does "Rounding Bottom" Mean?
A rounding bottom is a U-shaped or bowl-shaped chart pattern, also called a saucer bottom, that usually appears at the end of a long downtrend. A rounding bottom shows selling pressure slowly fading and buyers taking control, and the pattern has 3 parts: 1) the decline, 2) the rounded base, and 3) the recovery and breakout.
Is a Rounded Bottom Bullish?
Yes, a rounded bottom is a bullish reversal pattern that signals a potential shift from a downtrend to a new uptrend. A rounded bottom is only confirmed when a candle closes above the neckline, ideally with rising volume.
How Do You Find Rounding Bottom Stocks?
To find rounding bottom stocks, traders use a stock screener and then check each weekly or daily chart for 1) a long, gradual decline, 2) a flat rounded base, 3) a gradual recovery on the right side, and 4) volume that shrinks at the rounded base and expands near the neckline. Traders can run the same 4 checks on any chart in MT4 or MT5.
What Does "Bottom" Mean in Stocks?
A bottom in stocks is the lowest price that a stock, index or market reaches during a downtrend before price stops falling and starts to recover. Traders usually recognise a bottom only after price has started rising, and common bottom patterns include 1) the rounding bottom, 2) the double bottom, and 3) the rising bottom.
How Long Does a Rounding Bottom Take to Form?
A rounding bottom usually takes several weeks to several months to form on daily and weekly charts, and some rounding bottoms take years. The EUR/USD rounding bottom in this article took about 2 years from the left rim to the breakout.
What Is a U Pattern in Trading?
A U pattern in trading is another name for a rounding bottom, where price falls, flattens out and rises back up in a U shape. U pattern trading follows the same rule as rounding bottom trading: a long position when a candle closes above the neckline, with a stop-loss below the lowest point or a recent swing low.
