Euro / Dólar AmericanoEducacional
An introduction to Bar or Candlestick patterns
Bar patterns consist of one, two or few bars. Their usefulness lies in the fact that they can trigger signals at a relatively early stage in the development of a new trend and usually offer good benchmarks for traders to place low-risk stops. Overall, when considering these patterns, one key factor in determining their significance is the size of the pattern. Note this please because it is very important. Among other characteristics, this helps one to distinguish a high probability from low probability pattern. But size is measured relative to the preceding bars.
These patterns are quite impressive to study because although they act short-term in influencing or moving price, they are quite reliable in their ability to signal short-term trend reversals. Even when a trend is long-term, they can develop at the final points in the trend just when it wants to reverse.
One fact you should note is that not all of these patterns are created equal. By evaluating the criteria for the validity of these patterns, you should be able to distinguish between high probability signals from low probability ones. Only take high probability valid signals when you see them on a chart.
General principles of bar pattern interpretation: Some of the general principles for interpreting these patterns are outlined below:
1. For these formations to be effective there must be something for them to reverse. That means top reversals should be preceded by a meaningful rally, and bottom formations should be preceded by a sharp selloff. As a general rule, the stronger the preceding trend, the more powerful the effect of the bar price pattern. This chart, a EURGBP chart, shows an example.
2. The formations generally reflect an exhaustion point. In the case of an uptrend, such patterns develop when buyers have temporarily pushed prices up too far and need a rest. In the case of a downtrend, there is little if any supply because sellers have liquidated their positions. That is why these patterns are always associated with a reversal in the prevailing trend. In the EURGBP chart above, notice how the momentum of the sell-off has dropped significantly and each bar had low volatility before the pattern appeared.
3. Not all patterns are created equal. The presence of one of these patterns on a chart does not necessarily guarantee a quick, profitable price reversal. Some patterns show some of the characteristics in a very strong way while others in a mild way. Therefore, you need to apply common sense to their interpretation. Take only patterns that show a high probability which some have called 5-star patterns. The USDCHF chart below shows a bullish pin bar that failed because it was trading into a barrier, resistance, when it should be trading away from a barrier.
4. Occasionally, it is possible to observe some form of confirmation closely following or even during the development of these patterns. Some examples could be the pattern being a large pattern, the violation of a trendline, or its formation at a support and resistance zone. These increases the odds that the pattern is a valid signal as well as significant.
Relationship to Japanese candlestick patterns: Although these patterns were discovered when bar charts were widely used and hence the name, you could use candlestick charts for their analysis since bar charts and candlesticks share the same data presentation which is the same open, high, low, and close (OHLC) of price within a specified time. They also share a relationship to traditional Japanese candlestick patterns that are widely used for centuries. Anyone familiar with Japanese candlestick patterns would readily see the similarities and be able to use these bar patterns quickly. If you want an overview of Japanese candlesticks patterns you can read the classic book by Steve Nison on the subject titled “Japanese candlestick charting techniques.” So, when you see bar in subsequent notes, you can replace it with candlestick.
Note: Make sure these patterns form tops and bottoms, that is, swing highs and swing lows, before trading them.
These patterns are quite impressive to study because although they act short-term in influencing or moving price, they are quite reliable in their ability to signal short-term trend reversals. Even when a trend is long-term, they can develop at the final points in the trend just when it wants to reverse.
One fact you should note is that not all of these patterns are created equal. By evaluating the criteria for the validity of these patterns, you should be able to distinguish between high probability signals from low probability ones. Only take high probability valid signals when you see them on a chart.
General principles of bar pattern interpretation: Some of the general principles for interpreting these patterns are outlined below:
1. For these formations to be effective there must be something for them to reverse. That means top reversals should be preceded by a meaningful rally, and bottom formations should be preceded by a sharp selloff. As a general rule, the stronger the preceding trend, the more powerful the effect of the bar price pattern. This chart, a EURGBP chart, shows an example.
2. The formations generally reflect an exhaustion point. In the case of an uptrend, such patterns develop when buyers have temporarily pushed prices up too far and need a rest. In the case of a downtrend, there is little if any supply because sellers have liquidated their positions. That is why these patterns are always associated with a reversal in the prevailing trend. In the EURGBP chart above, notice how the momentum of the sell-off has dropped significantly and each bar had low volatility before the pattern appeared.
3. Not all patterns are created equal. The presence of one of these patterns on a chart does not necessarily guarantee a quick, profitable price reversal. Some patterns show some of the characteristics in a very strong way while others in a mild way. Therefore, you need to apply common sense to their interpretation. Take only patterns that show a high probability which some have called 5-star patterns. The USDCHF chart below shows a bullish pin bar that failed because it was trading into a barrier, resistance, when it should be trading away from a barrier.
4. Occasionally, it is possible to observe some form of confirmation closely following or even during the development of these patterns. Some examples could be the pattern being a large pattern, the violation of a trendline, or its formation at a support and resistance zone. These increases the odds that the pattern is a valid signal as well as significant.
Relationship to Japanese candlestick patterns: Although these patterns were discovered when bar charts were widely used and hence the name, you could use candlestick charts for their analysis since bar charts and candlesticks share the same data presentation which is the same open, high, low, and close (OHLC) of price within a specified time. They also share a relationship to traditional Japanese candlestick patterns that are widely used for centuries. Anyone familiar with Japanese candlestick patterns would readily see the similarities and be able to use these bar patterns quickly. If you want an overview of Japanese candlesticks patterns you can read the classic book by Steve Nison on the subject titled “Japanese candlestick charting techniques.” So, when you see bar in subsequent notes, you can replace it with candlestick.
Note: Make sure these patterns form tops and bottoms, that is, swing highs and swing lows, before trading them.
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