Identifying Reversal Candles – With Auction Bars

In this post we discuss reversal candles that line up with higher timeframe ranges, pivot and VWAP levels, deliver potentially high probability setups. To learn more about the about the possibilities offered by the Auction Bars indicator, have a look at this webinar recording:

The webinar features a introduction to the general concept of the Auction Bars and also discuss our Session Pivot and VWAP indicator packages. There’s also information on Bloodhound, a strategy development tool offered by Shark Indicators.

Characteristics of Reversal Candles:

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 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-Candle-Up-close-Down-close

Reversal-Candle-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 candle 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 Candles:

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

Next, if we see a reversal bar 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 reversal bars at key resistance, and bullish reversal bars 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 candidate. The stop is placed right below the low of this bar. For bearish reversal bar it’s the opposite; entry just below the low of the reversal bar and stop loss right above that bar’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-Candles-Pivot-Confluence

To read more about our premium suite, please follow this link. For additional trading resources, you may review our Indicator Library at LizardIndicators.com. The Auction Bars indicator is available for for NinjaTrader 7 and 8.