Candlestick patterns are an important aspect of trading. They are popular because of their simplicity and reading patterns is among the basic steps for a trader who wants to have a better grip over technical analysis. Typically, a candlestick has a body, an upper shadow and a lower shadow, with four elements: the opening, closing, high and low price movements per day.
While the low represents the lower protrusion of the body, the vertical line that extends downwards, the high represents the vertical line that extends from the top of the body. Depending on whether the open or close are higher than each other, the body changes shape. There are different patterns of candles and one important category is the two bar reversal pattern.
The 2 bar reversal pattern or double candle reversal is among the most common patterns while talking about reversals. The two bar reversal signifies a scenario wherein the market has made a very strong move in a specific direction and follows it up by another such move but in the opposite side.
So, how does a two bar reversal pattern look like?
- – A two bar reversal looks like a pair of trend bars or candlesticks which have evenly-sized bodies but are in opposite directions, as mentioned earlier. The clearest and strongest two bar reversal pattern is one which doesn’t get lost in an area of congestion and clearly sticks out.
- – A 2 bar reversal pattern can be bullish or bearish. In a bearish two bar reversal, the first bar would need to rise and close at the session’s highs or near the highs. The second bar must open and come down lower, rejecting the earlier highs. A bearish bar reversal happens when the present bar’s high is higher than that of the earlier bar but it closes lower than the close of the earlier bar. A bullish bar reversal happens when the low of today is lower than its earlier day low and today’s close is higher than the close of the earlier day close.
- – When a bullish bar is followed up by a bearish one at the top, it signifies that the markets will see a bearish move. When a bearish bar is followed up by a bullish one at the bottom, this two bar reversal is indicative of a bullish price action.
- – Understanding how a two bar reversal pattern works is a key aspect of learning about price action formations. If you wish to be a trader with expertise in price action, you would need to understand price action reversals and why they matter. Reversal patterns give you an indication of a market movement drawing to a close.
- – The presence of the two bar reversal shows that there is a tug of war between the bulls and the bears, ie, between buyers and sellers.
Here are some points to consider when you trade the 2 bar reversal pattern:
- – A two bar reversal pattern is a sign that the previous market sentiment has been rejected because the trend has turned in the opposite direction.
- – This pattern gains greater validity when it appears at the top/bottom of a trend.
- – When a two bar reversal is also reflecting an engulfing pattern (be it bullish or bearish), it is symbolic of an extremely strong market sentiment. An engulfing candlestick pattern means there are two bars indicating a reversal of markets. The second candle is larger than the first one ensuring that it engulfs the first bar’s length. There are both bullish and bearish engulfing candlesticks. In association with a two bar reversal pattern, it signifies that the market is showing a reversal.
- – So, what’s the difference between a 2 bar reversal pattern and an engulfing candlestick pattern? The key difference between these two patterns is that in the two bar reversal pattern, the second bar doesn’t have to engulf the previous one.
- – Two bar reversals can be spotted in all time frames and markets but they may not be tradeable. For you to trade them, there should be a very strong trend in play and you would have to look for reversal signals at swing points. Swing points are value areas where you can buy at cheap prices or sell at high/expensive values.
Two bar reversals are a key aspect of price action trading. The 2 bar reversal pattern is one such price action formation that signals a reversal of a trend. It is made up of two candles or bars, and can be a bullish or bearish pattern.