The Rounding Top and Rounding Bottom are two of the most famous trend reversal patterns in the Forex trading industry. These patterns are mostly used to catch the end of a trend in both bullish and bearish markets. These patterns are extremely reliable as they are back-tested rigorously by a number of professional technical traders. Learning the trading of these patterns introduces us to a lot of trading opportunities while riding a brand new trend. Always remember that the Rounding top pattern appears at the top of an uptrend, and the Rounding Bottom pattern appears at the bottom of a downtrend.
The Rounding Top pattern appears to be in the form of an inverted ‘U’ shape. Hence it is also referred to as an ‘Inverse Saucer.’ This pattern resembles the Double Top chart pattern but a bit more complex than that. Most of the time, the Rounding Top appears at the major resistance level on a price chart. This pattern has three major components – A rounding shape where the price action fails to print a higher high, a taper off, and the beginning of the lower trend.
The Rounding Bottom is a bearish reversal chart pattern, and it appears at the end of a downtrend, indicating a long term reversal in the price action. This pattern resembles the Cup and Handle pattern, but it doesn’t go through the temporary downward trend of the handle portion. This pattern can be found at the major support area in any trading timeframe. Just like the Rounding Top, this pattern also has three major components – The Rounding Shape, where the price action fails to print a brand new lower low, taper off, and the beginning of an uptrend.
Trading The Rounding Top Pattern
The below CAD/CHF charts represents the formation of a Rounding Top pattern in this Forex pair.
We had decided to go short as soon as the pattern is confirmed when the price reached the neckline. The bear candles on the price chart were stronger than the bull candles indicating the gaining strength of sellers in the market. The sell trade is activated when the price goes below the neckline. Stop-loss is placed just above the region where the pattern is formed.
After activating the trade, price action didn’t blast to the south immediately. Instead, it pulled back to buy-side, before eventually going down. In this kind of situation, most of the traders doubt their strategy and exit their positions because of fear. But since our analysis is strong enough, it is a good idea to hold our positions and wait for the price to move in our direction.
Trading The Rounding Bottom Pattern
The below EUR/USD, 240 Minutes chart, represents the formation of the Rounding Bottom pattern on the price chart. We can see the market being in a downtrend when the Rounding Bottom pattern is formed. This is a clear indication for us to understand that the bears are losing momentum, and bulls are about to take over the market. We took a buy-entry when the price went above the neckline. The take-profit was placed at the higher timeframe’s significant resistance area.
Rounding Top Pattern + RSI Indicator
In this strategy, we have paired the Rounding Top pattern with the RSI indicator to identify accurate trading signals. As we all know, the RSI is a momentum indicator that measures the magnitude of the price change. RSI stands for Relative Strength Index, and it is developed, J. Welles Welder.
This indicator oscillates between the 0 and 100 levels. When RSI reaches the 70 level, it indicates overbought market conditions, and we must expect a downside reversal. Likewise, when it reaches the 30 level, it indicates the oversold conditions, and we must expect a buy-side reversal.
The strategy is simple – Identify the Rounding Top pattern and see if the price action is going below the neckline. If yes, check where the RSI indicator is. If it is in the overbought area, it is a clear indication for us to go short.
The below price chart represents the formation of the Rounding Top pattern on the EUR/CHF Forex pair.
In the below chart, we can see the price going below the neckline. At the same time, RSI gave a reversal at the overbought area, indicating us to go short in this pair. We have activated the trade at the neckline, and the stop-loss placement was above the most recent higher low. We had closed our positions when the price action started to struggle at the Bottom.
Rounding Bottom Pattern + RSI Indicator
The below chart represents the formation of the Rounding Bottom pattern on the NZD/CAD Forex pair.
We had gone long when the price broke the neckline, and the RSI gave a reversal at the oversold area. As you can see in the chart below, right after our buy activation, the price smoothly blasted to the north. We booked our whole profits when the price reached a significant resistance area. Stop-loss was just below our entry as the neckline acts as a strong support to the price action.
The Rounding Top and Bottom are bullish and bearish reversal patterns that are used to identify the end of an ongoing trend. You need to know that you must wait for the breakout of the neckline to take long or short positions according to the pattern formed. The stop-loss can be placed above the neckline when trading the Rounding Top and below the neckline when trading the Rounding Bottom pattern.
The take-profit must be equal to the size of the pattern formed, and if the trend is strong enough, consider going for deeper targets. Overall, these patterns are quite popular and easy to spot on the price chart. Practice trading these patterns using a trading simulator or a demo account before applying these strategies on live accounts.
We hope you find these strategies informative. If you have any questions, make sure to let us know in the comments below. Cheers.