Rounding Bottom Reversal

Entry Logic

• Enter long on a breakout above the neckline of the rounding bottom pattern.
• Confirmation is a significant increase in volume on the breakout.
• Use a weekly timeframe for this pattern.
• Entry should be above the 40-week SMA.
• This pattern works best in a market that is slowly turning from bearish to bullish.

Exit Logic

• The profit target is a measured move from the breakout, equal to the depth of the pattern.
• Scale out 33% at a time at 1R, 2R, and the measured move target.
• Trail the remaining position with the 20-week EMA.
• Exit if price closes back below the neckline.
• Exit on a confirmed bearish reversal pattern.
• Exit if the trade is not profitable within 6 months.
• Exit if the MACD shows a bearish crossover.

Stop Loss Structure

• Place a hard stop below the midpoint of the rounding bottom.
• A soft stop is a close below the 40-week SMA.
• Maximum dollar loss is $3000 per trade.
• Maximum percent loss is 6% of the account.
• The structural stop is the low of the rounding bottom.

Risk Management Framework

• Risk 3% of the account per trade.
• Daily loss limit is not applicable for this timeframe.
• Weekly loss limit is 10% of the account.
• Maximum drawdown is 50%.
• Minimum risk-reward ratio is 3:1.

Position Sizing Model

• Use a reduced position size for this very long-term setup.
• Adjust size based on the volatility of the instrument.
• No conviction sizing is used.
• Do not scale into trades.
• Scale out at predefined profit targets.

Trade Filtering

• Avoid trading this pattern on speculative stocks.
• Requires a clear, symmetrical rounding bottom pattern.
• Trade only established companies with a long history.
• Avoid trading this pattern during a recession.
• Do not trade in markets with no clear trend.

Context Framework

• The monthly chart should show a potential long-term bottom.
• Price should be reclaiming the 200-week SMA.
• The setup should occur after a multi-year downtrend.
• The economic cycle should be turning positive.

Trade Management Rules

• Do not move the stop to breakeven until the first profit target is hit.
• Scale out at 1R, 2R, and the measured move target.
• Do not add to winning trades.
• Be extremely patient, as this pattern can take years to play out.

Time Rules

• This pattern can form over several years.
• The entry is taken on a weekly close above the neckline.
• The trade can last for several years.

Setup Classification

• A+ setup: Perfect rounding bottom, massive volume breakout, strong market reversal.
• A setup: Clear rounding bottom, high volume, neutral market.
• B setup: Messy rounding bottom, low volume, counter-trend.
• C setup: No clear pattern, avoid.

Market Selection Criteria

• Trade blue-chip stocks and major stock indices.
• The company should have a strong moat and a history of profitability.
• The stock should be a leader in its industry.

Statistical Edge Metrics

• Expected win rate is 80%.
• Average win is 10R.
• Average loss is 1R.
• Profit factor is 8.0.
• Expectancy per trade is 7.8R.

Failure Conditions

• The strategy fails if the breakout is false and price reverses.
• A common failure is a failure to follow through after the breakout, leading to a long period of consolidation.

Psychological Rules

• Have the conviction to hold the trade for a very long time.
• Do not be influenced by short-term market noise.

Advanced Components

• Use fundamental analysis to project long-term earnings growth.
• A demographic analysis can identify long-term trends.
• Avoid trading this pattern on multiple stocks in the same sector.
• The yearly chart must confirm a generational buying opportunity.

Location

• The setup is strongest when it forms at a multi-decade low.
• The setup is weakest in a secular bear market.
• The location of the pattern is the most important factor for success.