Every trader should be aware of one day patterns. However, because of their simplicity, traders often overlook them. By using these patterns, traders have a clearer picture of the direction that the market may be moving. Among the several one day patterns, I will discuss two specific patterns that relate to the chart gaps that I discussed in previous articles.
The most uncommon of these two patterns is called the key reversal day pattern. The criteria for this pattern is not as flexible as the criteria for the simpler reversal day pattern. The difference between one and the other is small, yet significant. When your candlestick reaches a lower low and a higher high accompanied by a higher close an upward reversal is developed. Conversely, when a higher high and a lower low accompanied by a lower close, the reversal candlestick is considered to be downward.
Key reversals show significant market moves in the opposite direction of current trends. Not only do they show the inability of the market to keep the upwards/downwards move to new highs/lows, but also the development of new lows/highs in the opposite direction.
The reversal days are very common. In the simplest of terms, when a candlestick reaches new highs and closes at a new low a downward reversal is developed. On the other hand, when a candlestick reaches a new low and closes higher than the previous day, an upward reversal is developed.
The rules for the reversal days are somewhat flexible, but can be extremely valuable. On a bull market, the new low closing may mean that the bullish trend is coming to an end and that the buyers are ready to take profits. The opposite is true for a bear market, where a new high closing may mean that the sellout is about to end and a reversal of trend may develop. These moves are important as you, obviously, don’t want to be caught in the opposite side of a trend reversal.
Neither of the key reversal days or reversal days should be used as your only indicator. You should use them with other indicators to confirm reversal in market trends. When you look at patterns over one or two days, that may greatly assist you with your trades. You should always look for indications of changes in market sentiment and both kinds of reversal days should assist you with determining these changes. When used with the different gaps, whether it is the exhaustion, the runaway, or the breakaway, these two indicators can certainly help you with your decision of whether to trade the market moves.