2 Bar Reversal

Explanation: 
A two bar reversal occurs when two long body candles of opposite colors print consecutively. This is indicative of a reversal because a long body candle implies strength in the direction of the candle (i.e. bullish if green, bearish if red). If a second candle prints of similar size, it means the number of shares traded on the opposite side of the stock has now equaled or exceeded the number of shares traded in the direction the trend was originally moving. In other words, if a bearish two bar reversal candle appears it would mean that a long body green candle is followed by a long body red candle. Therefore we assume that the bullish sentiment is now be outmatched by bearish sentiment and the trend may reverse.  Click here for an illustrative example.

What to look for:  

  • 2 long body candles in opposite colors and similar size appearing next to each other at the end of a trend.

    • e.g. a green candle followed by a red ​candle at the top of a bullish trend, or a red candle followed by a green candle at the bottom of a bearish trend.

    • It is best if the second candle makes a higher high in bullish reversals and a lower low in a bearish reversal.

  • Above average volume on both candles, or at least the second candle.​

    • It is best if there is higher volume on the second candle in the 2 bar pattern compared to the first candle.

  • Decreasing volume coming into the 2 bar pattern reversal. In other words, volume in the overall trend is dying down which indicates weakness in the trend's ability to continue.​

Timeframe(s): 5-minute or higher. 2 bar reversals appear too often in timeframes smaller than 5-minutes and don't resolve with high probability.

When to enter:

  • Bullish reversal - As soon as a green candle (the third candle in the series) prints a higher high than the green candle that was part of the 2 bar reversal.

  • Bearish reversal - As soon as a red candle (the third candle in the series) prints a lower low than the red candle that was part of the 2 bar reversal.

Profit Target: 
Take profits at 2% and 5% on the way to the next level of support or resistance (either from a price line, trendline or moving average).

Stop Loss: 

  • Bullish reversal - Just below the low of the green candle in the 2 bar candle pattern.

  • Bearish reversal - Just above the high of the red candle in the 2 bar candle pattern.

Examples:

SQ - 2 Bar Reversal
SQ - 2 Bar Reversal

Bullish (5-minute)

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INO - 2 Bar Reversal
INO - 2 Bar Reversal

Bullish reversal (5-minute)

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AAPL - 2 Bar Reversal
AAPL - 2 Bar Reversal

Bullish (5-minute)

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TWTR - 2 Bar Reversal
TWTR - 2 Bar Reversal

Bullish then bearish (5-minute)

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