The second instalment in chart patterns is about a pattern very commonly seen in many stocks and widely trusted by technical analysts everywhere.
This blog is going to discuss the rounded bottom and rounded top chart patterns. Such a pattern is seen when the market is gradually but consistently changing its trend from what it was before.
Rounded Bottom Pattern
It is a bullish chart pattern in which the trends gradually shift from a bearish one to a bullish one. In this pattern the prices go down at first, showing a downward candlestick trend pattern reaches a low and gradually rises up, when an upwards candlestick pattern becomes visible.
The rounded bottom pattern formed makes a bowl shape with the candlesticks since the change in trend is not immediate and gradual.
The level at which the prices come back after making the bowl pattern is its neckline, which is also taken as the resistance in this case.
A real-life example of the same pattern:
Rounded Top Pattern
Exactly opposite to the previous one, this is a bearish chart pattern in which the trends gradually shift from a bullish one to a bearish trend. The prices go up at first to reach a high (upward candlestick trend) and then goes down to making a downward candlestick pattern.
The rounded top pattern looks like an inverted bowl since the change in the trend, in this case, is gradual as well.
The level at which it comes back after making the inverted-bowl pattern is known as the neckline. The neckline is taken as the support in this case.
A real-life example of the same pattern:
Why is this pattern important and how can it be used for trading?
Let us take the reliance chart to explain the application for this pattern.
A clear rounded bottom pattern can be seen in the daily chart of reliance from 22nd June to 6th July. The neckline is formed at Rs 1804.35
When such a pattern is formed, the next rally in price (increase in price) in case of a rounded bottom chart is the difference between the high and the low in the given pattern. (high - low)
In reliance, on breaching the neckline (resistance as mentioned earlier) this stock is expected to see the levels of 1903 which is 100 points above the neckline. This is because 100 (approx) is the difference between 1804(high) and 1703 (low) in the given rounded bottom pattern.
Fortunately, the stock reaches our target of Rs 1903 on 13th of July complying with the rules that the rounded patterns hold.
This way you can buy a stock at the neckline after such a pattern is formed successfully and apply the calculations to derive your next target. However, as we always say Volumes are very important in this case as well. You may not see a lot of volumes while the pattern is in formation but only when a breakout/breakdown is expected.
So now we know how to detect these supper bowls on any chart and make trades that are in your favour.
For more chart patterns stay tuned with us!
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