Reversal bars – examples
This lesson will cover the following
- Reversal bars with small bodies and long wicks
- Reversal bars, appearing in a trading range
- Other cases
Let us look at a few cases, where reversal bars are involved.
Reversal bars with small bodies and long wicks are usually evaluated in relation with the previous price action. As we can see on the 10-minute chart of USD/JPY above reversal bar 1 was a breakout below a previous swing low, while the market was largely oversold. A few large bear trend bars are to be seen, which represent successive sell climaxes. Buyers probably waited for the price to test the area below the daily low. Thus, no buying was to be observed. The absence of buying activity during the several bars until candle 1 caused the market to decrease. Buyers probably thought there was no need to enter above the low, because they were to some extent convinced that a new low will be formed. No need to buy now, while you can buy lower in a matter of minutes.
We should note that despite the fact a traditional reversal bar provides one of the most reliable signals, in many cases reversals occur without the appearance of reversal bars. Very often the signal bar is stronger, if it is a trend bar in the direction of the trade. In order to buy a reversal at the bottom of a downtrend with success, a trader need to look for a signal bar with a closing price above its open price and near its high price.
On the 10-minute chart of EUR/CAD we can see a distinct bear signal bar (S), that appeared in a trading range. There probably were trapped buyers just before the appearance of the doji bar and the bear reversal bar, which were forced to close their positions, while this bolstered selling pressure of those positioned short. More experienced traders expected that sellers were stronger than buyers below the low price of the bar marked with (S), so they went short there. They expected enough selling to follow, so that they can scalp a profit.
Usually when prices are in a trading range in a downswing, a bear flag occurs. In case of a strong pattern, traders will need to buy close to the low and sell close to the high.
Sometimes bear reversal bars may have a high price, which does not exceed the high price of the previous bar or bars, but still lead to a reversal in markets direction. On the 1-minute chart of GBP/MXN above we can see a large bear trend bar marked as (R), that appeared in an uptrend, with its body reversing price direction. Its closing price reversed the closing prices of the previous 28 bars and the low prices of the previous 13 bars, which suggested strength. Traders who went long on the close of the bar marked as (L) and also during the formation of the next 28 bars, would now be holding losing positions. If these traders were not to close as the large bear trend bar was forming, they would probably have closed on its closing price or after the following bar traded below its low price.
Bulls with the largest strength usually keep their positions when pullbacks occur and will probably keep them until they are convinced that the trend has flipped. Such a strong reversal bar like that marked as R has the potential to change price direction. Such a bar could also urge strong buyers to think that prices will probably tumble enough, so that they could close their long trades and immediately go long again at much lower levels (sometimes at a distance down, based on the height of the large bear trend bar).
These traders will embrace any chance to close their long trades. Although they expect to exit the market at a loss at this point, they would like to see as small loss as possible. They may place limit orders above the closing price of the bar marked as R or even above the high price of previous bars.
If no pullback occurs, which would enable trapped buyers to exit with a smaller loss within the next several bars, these traders will likely exit on the closing prices of bars with bear closes.
Buyers, who continued to hold their positions through the close of the bar marked as R, are known as swing bulls. They can afford to hold positions through a pullback. They are usually the strongest players in the market, as the majority are corporate entities with formidable financial capacity, thus, they are able to tolerate pullbacks.
In case these participants decide that prices will continue to decline, and as there will be no more large buyers, the market may indeed slide for a number of bars until a support level is reached, where these players eventually consider to go long once again. However, if a strong buy setup does not appear, they will not buy, but continue to wait instead.
The bar marked as R has probably been considered as a signal bar, so many market participants probably went short below its low price. This bar was probably an entry bar as well, thus, other traders probably went short during it, as it moved below the low price of the preceding bar and as it extended downwards. This was probably so, because they thought the breakout above the trading range of the past 28 bars was losing strength. Therefore, the bar in question can be considered also as a breakout bar, as it breached that trading range to the downside.