How to Use the Two-Bar Reversal Trading Pattern to Trade Profitably

What is the Two-Bar Reversal Trading Pattern?

The two-bar reversal trading pattern, as the term ‘two-bar’ suggests, is a two candlestick pattern.

The candlesticks of the pattern close in opposing directions, hence the term ‘reversal’ in the pattern’s name.

Therefore, this is a trading pattern made up of two candlesticks that close in opposing directions.

Wondering how a bullish or a bearish two-bar reversal trading pattern would look?

Well, a bullish two-bar reversal trading pattern would first have a bearish candlestick followed by a bullish one.

On the flip side, a bearish two-bar reversal trading pattern would have a bullish candlestick followed by a bearish one which completes the pattern.

In essence, when the market has been on a trend, then an opposing candlestick that meets specific reversal criteria appears, then the trend is highly likely to significantly reverse soon.

Now that I mentioned ‘specific criteria’, it means we will not just pick any two opposing candlesticks and brand them ‘two-bar reversal trading pattern’.

The candlesticks which will take the name of this pattern must meet certain specific contextual and technical criteria.

Selection Criteria of a two bar reversal pattern.

Here are the specific criteria that a candlestick pattern must meet to take the name two-bar reversal trading pattern:

• The first candlestick of the pattern must stick out and not hide within a congested price zone.
• There must be a significant overlap between the two bars of the pattern.
• Each of the two candlesticks of the pattern must show a strong push in its respective direction.

If you are groping in the dark for the meanings of the highlighted terms, then hold on a minute, I will do a thorough explanation.

What is to stick out?

What is a significant overlap, and what are strong pushes?

Let us deal with each term exhaustively.

Sticking Out.

To stick out means to be prominent, having distinguished self from the crowd.

To explain sticking out of the price, we will have to introduce a new term here – the typical price.

The typical price of an asset is the average of the asset’s Highest, Lowest, and Closing price; {(H+L+C)/3}.

Just get the values and calculate, then mark the price value you get with horizontal lines on the candlesticks.

So how do you use the typical price of an asset to tell if a candlestick sticks out?

Remember you are doing everything in the context of the two-bar reversal pattern, so we will refer to the pattern to explain.

Where you anticipate a bullish two-bar reversal trading pattern, the first candlestick will be bearish.

That bearish candlestick’s typical price must be below the low of the candlestick immediately before it.

That way, that first candlestick sticks out of the general price and is worth considering as a potential bullish two-bar reversal pattern.

On the other hand, where you anticipate a bearish two-bar reversal trading pattern, the first candlestick will be bullish.

That bullish candlestick’s typical price must be above the high of the candlestick immediately before it.

That way, that first candlestick sticks out of the general price and is worth considering as a potential bearish two-bar reversal pattern.

 

Significant Overlap.

Overlap means that something extends over another to cover it partly.

To explain the overlap of a price, we will also use the typical price of an asset.

You already know how to calculate the typical price of an asset, don’t you? {(H+L+C)/3}.

Calculate the typical price and mark it on the candlesticks in question using horizontal lines.

Wondering how you can use the typical price of an asset to establish whether there has a significant overlap or not?

It’s simple.

Where you expect a bullish two-bar reversal trading pattern, a bearish candlestick will form, followed by a bullish one.

The typical price of the first or the bearish candlestick must be within the range of the second or the bullish one.

Also, the typical price of the second or the bullish candlestick must be within the range of the first or the bearish one.

That way, there is a significant overlap between the first and the second candlestick of the pattern, and such criterion is met satisfactorily.

On the flip side, do you expect a bearish two-bar reversal trading pattern? Then a bullish candlestick will form, followed by a bearish one.

The typical price of the first or the bullish candlestick must be within the range of the second or the bearish candlestick.

The typical price of the second or the bearish candlestick must also be within the range of the first or the bullish one.

In that case, there is a significant overlap between the two candlesticks of the pattern.

Strong Push.

A strong push means that something is moving in one direction with a strong force.

To explain this, we won’t need the typical price of the asset.

To establish whether there is a strong push in any particular direction within a candlestick, such candlestick needs to be a trend bar.

But what is a trend bar really?

A trend bar is any candlestick that has a body greater than 50% of the entire candlestick range.

That means that most of the candlestick is made up of a body with only a smaller proportion made up of wicks.

A strong push is evident where both candlesticks of the two-bar reversal trading pattern are trend bars.

Meaning, whether a bullish two-bar pattern or a bearish one, if it will be considered a potential pattern by that name, the bodies of both candlesticks of the pattern must belong, over half of the whole range of the candlestick.

Using the Two-Bar Reversal Trading Pattern to Trade.

So we have gone through the ins and outs of the two-bar reversal trading pattern.

You now know which criteria must be met for a pattern to take the name ‘two-bar reversal trading pattern’.

But what you need here isn’t knowledge that can’t make you money but instead, knowledge that you can easily cash out.

In this guide, I will teach you exactly how to use the two-bar reversal trading pattern to trade profitably in 2021.

1. Identify the Market Context and a Possible Two-Bar Reversal Trading Pattern.

To trade this two-bar reversal trading pattern, you must first know how to spot the pattern. Spotting this pattern is not too difficult.

The secrete is to identify a possible two-bar reversal trading pattern, not necessarily to mean that it will result in a good or perfect two-bar reversal set-up.

So how do you spot a potential two-bar reversal trading pattern?

By just observing if the first criterion has been met.

The first criterion we mentioned was the first candlestick of the pattern sticking out and not hiding in a congested price zone.

Do the calculations and make sure the candlestick sticks out.

But wait, there is something very important that you must note.

The two-bar reversal trading pattern is just like any other chart pattern, and will most times be used to pick entry points after establishing the general price trend or after considering other setups.

This is in order to know whether to expect a bullish or bearish two-bar reversal set-up.

Meaning, you have to consider the context where the pattern occurs.

Contexts are such as trends identified with price action or moving averages, trend reversals identified with price action or breaking of trend lines, and support/resistance levels among others.

In brief, let other knowledge inform which direction you should place your trades, then look for a bullish or bearish two-bar reversal trading pattern accordingly.

If the directional bias is upwards, you will look for bullish two-bar reversal patterns, and if downwards, bearish two-bar reversal patterns will do.

2. Allow the Two Bar Reversal Pattern to Meet the Other Criteria.

Has the first criterion for a viable two-bar reversal trading pattern been met in the first step?

Then what you do next is to allow all the other two criteria to be met in this step.

Let there be a significant overlap between the two candlesticks of the pattern.

This is by calculating and marking the typical price in each candlestick, to ensure that the typical price of the first candlestick falls within the range of the second one.

Ensure also, that the typical price of the second candlestick falls within the range of the first one.

That is for both bearish and bullish set-ups.

The last criterion is having a strong push for both candlesticks of the pattern. That way, ensure that both candlesticks of the pattern have bodies long enough to be over 50% of the whole candlestick range, whether bullish or bearish two-bar reversal set-up.

If any of the two next criteria are not met, then the signal becomes invalid.

All three criteria must be met for a perfect signal here.

3. Enter Buy or Sell Position.

Have all the two-bar reversal trading pattern criteria been met?

Then you can consider placing buy or sell positions depending on the trading bias you have established and the type of two-bar reversal pattern you have identified.

Here, you have two options:

• Enter immediately the two-bar reversal pattern is complete.
• Enter when the price breaks out of the second bar of the pattern.

Upward directional bias + bullish two-bar reversal pattern meeting all 3 criteria = Buy position.

Downward directional bias + bearish two-bar reversal pattern meeting all 3 criteria = Sell position.

4. Adjust Stop Loss and Take Profit.

Where you place your Stop Loss here may vary depending on the set-up which gave you the market directional bias.

Usually, you may want to place the Stop Loss for buy position just below the low of the second candlestick of the pattern if you choose to trade immediately the pattern is complete.

You would place it just below the breakout candlestick if you choose to trade the upward second bar breakout.

For a sell position, place the Stop Loss just above the second candlestick of the pattern if trading immediately after the pattern forms.

Further, place it just above the breakout candlestick if trading the downward second bar breakout.

The Take Profit Order needs to be set obeying a reasonable risk-to-reward ratio of at least 1:2.        

Risk less as you target multiple times what you risk because it is the only way the risk would be worth taking.

Wrapping Up

Are you looking for a simple candlestick pattern to trade and make money in 2021? Then look no further than on the two-bar reversal trading pattern.

It is the simple pattern you have been looking for to take your trading to the next level. 

Happy Trading!