Hi friends and welcome to this podcast by Angel Broking.
Today, we will be discussing a very unique candlestick pattern that occurs in rare and specific cases. It is called the counterattack candlestick pattern or counterattack lines candlestick pattern. This pattern can help you predict trend reversals with a considerable accuracy.
But before we discuss that, check out this disagreement between Aditya and his friend Shantanu about the stocks of a company that they worked at together.
Aditya worked at the company as a software engineer while Shantanu was a Product Manager. Shantanu is also an avid investor and he has been trading on the stock market for the last five years. Aditya told Shantanu how the company is reporting considerable growth and how he is confident about his career at this company. Shantanu told Aditya to hold on to his high hopes because according to him, the stocks of the company were going to take a downturn. While Aditya was merely speculating based on the current trend, Shantanu had something else going on in his mind. Before we find that out, let’s come back to the candlestick pattern we were discussing.
The counterattack candlestick pattern is a trend reversal indicator as we had discussed before. This also means that if you are trying to spot this pattern, you must look for an existing uptrend or downtrend. Got it?
Cool. Now that we got the basics out of our way, let's discuss the appearance of this pattern.
In the counterattack candlestick pattern, you have to focus on two candlesticks - yep, that’s right. Now, if this pattern appears along a bullish trend, then it’s first candlestick will be a bullish one.
In other words, the first candle of this pattern will be a white candle along a previous string of white candles.
The next candle will open considerably above the first candle and close somewhere around a previous day’s close. Simple, isn’t it?
Now let’s see what’s actually happening in the market behind the two candles of this pattern.
The first bullish candle is basically a confirmation of the fact that the bulls are in control of the market. Now, the buying sentiment continues to push the prices up further, even after the markets have closed. This is why the second candle opens much above the first one in the bearish counterattack pattern.
Oh wait, did we not mention that? A counterattack candlestick pattern that appears along an uptrend and signals a bearish reversal is called a bearish counterattack pattern.
The counterpart of this is the bullish counterattack pattern, and it appears along a downtrend.
Okay, that was simple.
We were discussing the second candle. So the second candle opens with a gap up - basically, it means that the markets opened abruptly higher than the previous day’s close.
However, the second candle is a bearish one, which indicates that the bears took control of the market despite the higher opening than the previous day’s close. After a negatively ending session, the prices close around the previous day’s close. This is what actually happened in the market behind the two candles of the bearish counterattack pattern.
Now, we could go into the details of the bullish counterattack pattern, since you know the market dynamics that drive this pattern, let’s save some time to understand how you can use this indicator’s signal to actually augment your trading in the market.
Only two things to quickly summaries the bullish counterattack pattern - The second candle in this pattern is a bullish one, which opens with a gap down, and closes around the previous day’s closing price. And the more obvious second point is that this pattern appears along a downtrend, and predicts a bullish reversal.
Now to trade with this pattern, you must understand that the second candle should close precisely around the previous day’s close. This condition, including the ones that we discussed earlier, must be satisfied together in order for this pattern to form. Otherwise, you will merely be capturing noise in the market.
A good idea is to wait for a day after the pattern has formed, to confirm the validity of the signal. So, if you are considering a long position after a bullish counterattack pattern, you should wait for a bullish candle after the pattern has formed, so as to minimize the risk of trading along a false signal.
Similarly, if you are considering a short position after a bearish counterattack pattern, the wait for a bearish candle to form after the pattern completion.
In fact, Shantanu had spotted a counterattack pattern on the price charts of his company’s stocks, but he was waiting for confirmation before forecasting the reversal of prices, against Aditya’s speculation!
Since this pattern appears in very rare cases, it is crucial to confirm the reversal signal by making use of some other technical indicators. In addition, being aware of the market conditions and staying updated with the latest developments is also a prerequisite for placing an informed trade.
The counterattack candlestick pattern is very easy to understand and spot, but trading correctly on the basis of this pattern can take you on a completely different level of confidence in the market.
Visit www.angelbroking.com today to see how easy it is to trade in these markets. And for more knowledge on markets and trading strategies, don’t forget to check out our other podcasts. Until then, goodbye from Angel Broking and happy investing!