Appearance of the 2 bar reversal price action set up primarily indicates a fight between bulls and bears or buyers and sellers
With regard to the discussion on short term patterns, we will be discussing about reversal patterns.
The appearance of the 2 bar reversal price action set up primarily indicates a fight between bulls and bears or buyers and sellers.
It is often signified by large bearish and bullish bars and when they occur next to each other, the 2 bar reversal pattern often signifies a rejection of lower or higher prices by the markets where the preceding price action candle shows the market sentiment.
There are two types of patterns i.e 2 Bar Reversal Patterns. They are: Bearish 2 Bar Reversal and Bullish 2-Bar Reversal
a) Bearish 2-bar reversal pattern:
For a Bearish 2 bar reversal, the first bar must go up and the second candlestick must then open and snap back lower. Likewise, when the bearish bar appears in the second bar reversal method, it indicates a bearish market sentiment. Bearish 2 bar reversal patterns are also useful for retracements.
For example, the appearance of a 2 – bar reversal pattern, a bullish candlestick followed by a bearish candlestick can be seen as a signal of the end of the retracement especially when this price action pattern occurs at a previously identified resistance zone.
b) Bullish-2 bar reversal:
For Bullish-2 bar reversal, the first bar must do down and the second candlestick must then open lower and take the price higher. When a bullish bar appears on the 2-bar reversal, method the sentiment is in the direction of the bullish candlestick pattern and thus indicative of a bullish market sentiment. Such patterns are really useful to trade within the trend especially for retracements.
For e.g. The appearance of a 2 – bar reversal pattern, which is a bearish candlestick followed by a bullish candlestick, can be seen as a signal to the end of the retracement, especially when this price action pattern occurs at a previously identified support zone.
(The Author is Associate Vice President, Analyst-Derivatives at Motilal Oswal Financial Services.)Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.