Candle Pattern Works in FX and Beyond

04/18/2012 6:00 am EST

Focus: FOREX

Johnathon Fox, contributor to DailyForex.com, explains how a simple candle pattern can help any currency trader spot reversals in price action.

The two-bar reversal is a price action formation that can be found on any time frame and in most markets. This price action signals is, as its name states, a reversal signal. Being a reversal signal, it’s key that traders look it to form at pullbacks to enter and not as a continuation play.

A two-bar reversal is basically just a pin bar reversal, but it is formed over two sessions’ worth of data. The psychology behind both the two-bar and the pin bar are both the same: with both signals, we are looking for price to go in one direction before faking traders out and snapping back quickly in the opposite direction.

Two-Bar Reversal Structure

The two-bar reversal is made up of two candles, or bars. For a bearish two-bar reversal, the first bar must go up and close near the session’s highs. The second bar must then open and snap back lower, showing rejection of those previous highs and faking traders out. The candles below show what this description will look like on a chart.

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Here is an example of a bearish two-bar reversal in the context of a currency chart:

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NEXT: The Best Two-Bar Reversals to Trade

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The best two-bar reversals are normally found when the market is in a strong trend and a pullback occurs to a logical area of support or resistance. It is at these logical areas of supply and demand that traders can look for the two-bar reversal as entry signals with the trend.

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Two-bar reversals can be traded in all sorts of markets, and because they are reversal signals, you will often find they are the signal that changes the direction of the trend.

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All traders should be able to spot this very easily identifiable price action signal on their charts.

Just because a trader spots a two-bar reversal, however, it does not mean they should trade it. Not all two-bar reversals are created equal, and some have much better chances of working out than others.

By Johnathon Fox, contributor, DailyForex.com

Johnathon Fox is a professional forex and futures trader who also tutors and mentors aspiring traders worldwide. Johnathon teaches a very useful method of price action trading and has a knack for helping traders become consistently profitable. Learn more at Forex School Online.

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