Bars Signaling Reversal – Basic Features

Signals, which can be of high relevance, are usually provided by the so called reversal bars. A reversal bar is an element on a price chart, that reverses to some extent the direction of the preceding bar or a number of bars.

Every bull reversal bar on larger time frames, consists of a smaller time frame bear trend bar and a smaller time frame bull trend bar, which are not necessarily successive. As all trend bars can represent breakouts, climaxes and spikes, depending on the context, we can define a bull reversal bar in the following way – first, price action reached a sell climax, after which a breakout to the upside occurred.

In the case with a bear reversal bar, at first price action reached a buy climax (marked by a bull trend bar on a smaller time frame), after which a breakout to the downside occurred (marked by a bear trend bar on a smaller time frame).

Usually traders are willing to see a reversal bar with a body in the opposite direction of the prior trend, but that is not strictly necessary.

Features of a bull reversal bar

A minimum requirement for a bull reversal bar is the appearance of a bull body (a close price above the open price) or at least a close price above the midpoint of the bar. The most reliable bull reversal bars need to have more than one of the following features:

1. An open price, which is near or below the close price of the previous bar and a close price, which is above the open price and also above the close price of the previous bar

2. A lower wick, which is between one third and one half the height of the bar and a small or none upper wick

3. The bar needs to show little overlap with the previous bar or bars

4. The bar, following it, is not a doji inside bar, but is instead a bull trend bar with a large body and small wicks. The latter may be considered as a strong entry bar.

5. The close price of the bar is above the close and high prices of more than one bars preceding it.

Features of a bear reversal bar

A minimum requirement for a bear reversal bar is the appearance of a bear body (a close price below the open price) or at least a close price below the midpoint of the bar. The most reliable bear reversal bars need to have more than one of the following features:

1. An open price, which is near or above the close price of the previous bar and a close price, which is below the open price and also below the close price of the previous bar

2. An upper wick, which is between one third and one half the height of the bar and a small or none lower wick

3. The bar needs to show little overlap with the previous bar or bars

4. The bar, following it, is not a doji inside bar, but is instead a bear trend bar with a large body and small wicks. The latter may be considered as a strong entry bar.

5. The close price of the bar is below the close and low prices of more than one bars preceding it.

The fifth feature is valid for any strong trend bar (a strong breakout bar, entry bar etc.). Let us define what strong in this case means. If we are at the low of a downtrend and we spot a bull reversal bar, which has a close price above the closing prices of the past, say six bars, while its high price is above the high prices of the past, say three bars, we can admit that this reversal bar is stronger than another reversal bar, which would have a closing price above the closing price of the prior one bar only, while not exceeding the high price of any of the bars preceding it.