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When 5 successive candles move in the same direction, and a 6th candle moves in the opposite direction, it is called the 5 Bar Reversal Indicator, which signals a potential trend reversal.
It relies only on candle direction and closing levels, with no complex calculations, making it easy to spot on almost any chart.
This article decodes the 5 Bar Reversal Indicator in detail for both bullish and bearish scenarios.
Key Takeaways
- When 5 straight same-direction candles are followed by an opposite-direction candle in the 5 Bar Reversal Indicator, it signals a potential reversal.
- A bullish setup forms after a decline; a bearish setup forms after a rally.
- The pattern is confirmed only when the 6th candle closes beyond the 5th candle's extreme.
- It works best on short-term charts and alongside support and resistance, volume, or momentum indicators.
- Like any counter-trend signal, it can produce false reversals in strongly trending markets.
What is the 5 Bar Reversal Indicator?
The 5 Bar Reversal Indicator is a short-term price action pattern used to identify possible turning points on a price chart. It is centered on 5 successive candles moving in the same direction, followed by a 6th candle that reverses course and closes past the fifth candle's extreme.
It uses no external formula, relying purely on candle direction, sequence, and closing levels.
There are two setups of this indicator:
| Parameter | Bullish Setup | Bearish Setup |
| The five successive candles are | Bearish | Bullish |
| The sixth candle is | Bullish | Bearish |
| The sixth candle closes | Above the high of the 5th candle | Below the low of the 5th candle |
| Trend | Shift from downward to upward trend | Shift from upward to downward trend |
How Does the 5 Bar Reversal Indicator Work?
The pattern unfolds in 4 broad stages, and the same logic applies whether it appears at the bottom of a decline or the top of a rally.
Step 1: Identify 5 consecutive candles
Start by scanning the chart for 5 candles moving in the same direction: 5 falling candles for a bullish setup, or 5 rising candles for a bearish one. Some traders accept 5 or more, as long as the direction stays consistent.
Step 2: Watch the 6th candle
Once the 5-candle run is in place, attention shifts to the very next candle, which should move opposite the run: higher for a bullish setup, lower for a bearish one.
Step 3: Wait for confirmation
The sixth candle confirms the reversal only if it closes beyond the 5th candle's extreme: above its high for a bullish setup, or below its low for a bearish setup. Some traders apply a stricter filter, requiring the close to surpass the high or low of the entire five-candle sequence for added reliability.
Step 4: Assess the broader market context
Before acting, check the pattern against the broader trend, key support and resistance zones, and other indicators. A bullish setup near support, or a bearish setup near resistance, carries more weight than the same pattern appearing mid-trend.
Practical Scenario & Calculation
Consider a hypothetical setup on a 15-minute timeframe:
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Scenario: A stock forms five consecutive bearish candles, pushing the price to ₹500. The 5th candle has a high of ₹508 and a low of ₹498.
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Reversal: The 6th candle closes at ₹510, breaking above the 5th candle’s high of ₹508.
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Entry: Long at ₹510.
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Stop-Loss: ₹496, placed ₹2 below the sequence low of ₹498.
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Risk per Share: ₹510 − ₹496 = ₹14.
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Target: Using a 1:2 risk-to-reward ratio: ₹510 + (2 × ₹14) = ₹538.
Target = Entry + (2 × Risk) = ₹510 + (2 × ₹14) = ₹538
How to Trade Using the 5 Bar Reversal Indicator?
The points below explain how to trade using a 5 Bar Reversal Indicator:
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Entry rules: When the sixth candle closes above the high of the 5th candle, confirming the reversal, place a long position for a bullish setup. For a bearish setup, take a short position.
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Stop-loss placement: In a bullish trade, the stop-loss usually sits below the low of the sixth candle, or below the lowest point of the 5-candle decline for a wider buffer. In a bearish trade, it sits above the high of the 6th candle, or above the highest point of the 5-candle rally.
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Profit target and exit: A common approach is to set a target using a fixed risk-reward ratio, measured from the entry and stop-loss levels. Others exit near the next visible support or resistance zone, or use a trailing stop that locks in gains as price moves further in the trade's favour.
Since this is a counter-trend trade, it helps to tighten the stop or book profits as soon as signs of the next reversal appear.
How to Improve the Reliability of the 5 Bar Reversal Indicator?
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Use support and resistance: A bullish setup carries more weight near a known support zone, and a bearish setup near resistance, since the pattern then aligns with a level where price has reversed before.
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Confirm with volume: A rise in traded volume on the 6th candle adds weight to the signal, pointing to genuine participation behind the move rather than a temporary blip.
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Use momentum indicators: When RSI moves out of oversold territory alongside a bullish setup, confidence rises. Tools like the RSI and MACD can help confirm whether momentum is actually changing.
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Consider the broader trend: A reversal that lines up with the broader trend on a higher timeframe tends to be more reliable than one that goes directly against a strong, established trend.
Advantages of the 5 Bar Reversal Indicator
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Simple to identify: It relies only on candle direction and closing levels, with no complex formula or settings to configure.
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Useful for short-term trading: The pattern works well for short-term swing and intraday trading, where fast and rule-based signals are useful.
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Clear confirmation mechanism: The requirement for the 6th candle to close beyond the fifth candle's extreme gives an objective trigger for action.
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Applicable across markets and timeframes: The same logic applies to equities, indices, commodities and currencies, across timeframes from a few minutes to daily charts.
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Can complement other technical tools: It works well alongside support and resistance, volume, and momentum indicators to build a fuller trading view.
Limitations of the 5 Bar Reversal Indicator
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False reversal signals: Particularly in turbulent markets, not every 5-candle sequence followed by an opposing candle results in a true reversal.
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Can fail in strong trends: In a powerful, established trend, price can resume its original direction even after a brief counter-move.
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Counter-trend trading carries higher risk: The pattern's chances of success are often lower than trend-following trades because it trades against the current short-term trend.
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No guarantee of a long-term reversal: The pattern does not indicate that the overall trend has altered. Rather, it suggests a temporary change in momentum.
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Should not be used in isolation: Relying on it alone increases the chance of a false signal without volume, momentum confirmation, support, and resistance.
Conclusion
The 5 Bar Reversal Indicator is a simple, rule-based method for identifying possible short-term turning points on a price chart. Since no pattern alone ensures success, it functions best when paired with volume and momentum indicators, support and resistance, and a well-defined risk management strategy. The 5 Bar Reversal Indicator may be a helpful addition to a trader's short-term toolset if used with discipline and a predetermined stop-loss.
