Three Types of Reversal Bars

This post will explain differences between reversal bars and spike bars. We’ll also outline the characteristics of three types of reversal bars and look at how to best use them together with key support/resistance levels.

Characteristics of Reversal Bars

As with spike bars, reversal bars show us price rejection at a certain level. However, whereas spikes mainly are about the geometric makeup of one bar, a reversal bar pattern looks at the current close, compared to the previous bar. We therefore require two bars to find this pattern and it’s not as visually obvious as spike bars. The following 3 comparisons are all valid reversal down patterns (up reversals will be the opposite):

  • Type A, a bar with a higher high, and a close below the close of the previous bar
  • Type B, an outside bar with a close below the close of the previous bar
  • Type C, an outside bar with a close below the low of the previous bar

Outside bars have high and low points that eclipse the previous bar. Whereas type B only needs a lower close, type C requires a close below the low point of the previous bar.

Reversal-Bar-Up-close-Down-close

Reversal-Bar-Outside-Bar

As with spike bars, we’ll want to differentiate between high and average probability setups. We can for example qualify that the reversal bar pattern should:

  • mark a higher high / lower low than the last N bars
  • have a significant average range compared to the last N bars
  • have a significant average volume compared to the last N bars

Trading Reversal Bars

We’ll essentially use the same approach that was outlined in our post on spike bars. We distinguish between high and average probability reversals depending on the above listed characteristics.

Next, if we see a reversal bar pattern form at or near a pivot or VWAP level, the probability that we’ll see a price reversal is increased. We’ll sell resistance and buy support to be in sync with institutional traders that enter and exit positions at these levels. We’re looking for bearish reversals at key resistance, and bullish reversals at key support.

By adding higher timeframe ranges and pivot/VWAP levels, we can improve our expectancy of success. Below we see a situation where price first tried to break the first pivot resistance level, then retraced back to the main pivot where it bounced off with a reversal bar. The market then rallied up to the second pivot resistance level.

 

Trade entry and stop loss

As for spike bars, the entry for a bullish reversal bar will be just above the high of the reversal bar, whereas the stop is placed right below the low of this bar. For bearish reversals it’s the opposite; entry just below the low of the reversal bar and stop loss right above that candle’s high. As can be seen above, a short signal was triggered by a reversal down at the second pivot resistance level. The stop was then hit within 2 bars, taking out the high of the signal bar.

Reversal-Bar-Pivot-Confluence

Auction Bars

We are very excited about the possibilities offered by the Auction Bars indicator. Spike and reversal bars that line up with higher timeframe auction ranges, pivot and VWAP levels, deliver high probability setups. To learn more, join us on Wednesday, April 13th, 2016 at 2:00-3:30 EST for the launch event.

There’ll be a introductory offer on the Auction Bars as well as on our Session pivot and VWAP indicator packages. For those who are not yet a Bloodhound owner, there’ll be an opportunity to get an Bloodhound Ultimate license with the purchase of our indicator package. Register Here!