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Counterattack candlestick patterns are important indicators that signal a potential price reversal after a prolonged trend. They display a change in trend, momentum, and direction, opposite to the previous trend. It can be either a bullish counterattack or a bearish counterattack pattern.
The article explains the counterattack candlestick pattern, including its types, advantages and disadvantages, and how to identify a trend reversal.
Key Takeaways
- The counterattack candlestick pattern indicates a potential trend reversal in the market.
- It is a two-candle figure that displays movements in two different directions.
- A bullish counterattack pattern appears after an extended market downtrend.
- A bearish counterattack pattern appears after a prolonged uptrend.
- Traders must always confirm the movement before making a trading decision.
What is a Counterattack Candlestick Pattern?
A counterattack candlestick pattern, also known as counterattack lines, is a two-candle formation that may indicate a reversal in market momentum. The first candle follows the existing trend with a large body. The second candle opens with a sharp gap in the same direction but then reverses during the session, closing at or near the previous candle’s closing price.
Why Does a Counterattack Pattern Happen?
The formation tells a compelling story of shifting market control. For example, in a bullish counterattack, sellers initially maintain control, gapping the price down sharply at the open. However, aggressive buyers suddenly step in during the session, absorbing all the selling pressure and completely neutralizing the day's early losses by driving the price back up to close right at the previous day's close. This sudden shift signals that the previous trend's momentum is exhausting.
Types of Counterattack Candlestick Patterns
The two types of counterattack candlestick patterns are bullish and bearish.
- Bullish counterattack pattern: When the reversal pattern appears after a downward trend, it is called a bullish pattern. This indicates a potential upward trend in the next market.
- Bearish counterattack pattern: When the reversal pattern occurs after an extended upward trend, it is called a bearish pattern. It indicates a potential downward trend in the prevailing market.
Bullish vs Bearish Counterattack Pattern
| Basis | Bullish pattern | Bearish pattern |
| Candle pattern | Bearish to bullish | Bullish to bearish |
| Possible indicator | Reversal towards uptrend | Reversal towards downtrend |
| Market pressure | Buyers counter sellers | Sellers counter buyers |
| Second candle position | Opens with a gap down, then rallies to close at or near the exact close of Candle 1. | Opens with a gap up, then declines to close at or near the exact close of Candle 1. |
How Counterattack Lines Differ From Similar Two-Candle Setups
It is easy to confuse counterattack patterns with other reversal formations like Dark Cloud Cover/Piercing Lines or Kicker patterns:
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vs Piercing Line / Dark Cloud Cover: In those patterns, the second candle pierces deeply into the body of the first candle (usually retracing 50% or more). In a Counterattack pattern, the second candle does not necessarily penetrate deep into the body; instead, it matches the closing price of the first candle precisely after opening with a gap.
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vs Kicker Patterns: While both feature an opening gap, a Kicker pattern shows an even more aggressive gap where the second candle opens beyond the entire range (open and close) of the first candle. A Counterattack pattern only requires the second candle to open with a gap in the direction of the trend and then close at the prior close.
How to Identify Counterattack Candlestick Pattern
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Identify the current trend: Investors must understand the stock's current trend and whether it is an uptrend or a downtrend.
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Understand the first and second candles: Investors must understand the candle patterns. For a potential bullish counterattack pattern, the first candle should show a strong bearish candle, while for a bearish counterattack reversal, the first candle must be a bullish candle. In both cases, the second candle must be opposite the first candle.
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Determine the Close: Investors must note that Candle 2 must close at the same price level (or very close to it) as Candle 1’s closing price, forming a matching close with the previous candle.
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Confirmation of reversal: Before deciding, investors must confirm the shift. Stock markets often experience temporary shifts that can mislead traders and lead to wrong decisions. Investors should wait for confirmation followed by similar candle patterns.
Note: Candle 2 must open with a gap in the direction of the existing prevailing trend (gapping down in a downtrend for a bullish pattern, or gapping up in an uptrend for a bearish pattern) before reversing. Without this gap, it is not a true Counterattack pattern.
How to Trade the Counterattack Candlestick Pattern
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Enter the market: Once investors confirm the bullish or bearish reversal, they can enter the market. In a bullish reversal, investors can enter at the closing price of the confirmation candle, as prices are expected to move higher than the previous resistance level. In a bearish reversal, investors must enter after the confirmation candle closes below the previous support level.
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Set a stop-loss: They must set a stop-loss to reduce potential losses if the reversal proves to be a fluke. It should reflect the investor’s risk appetite.
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Establish a profit target: They must determine a profit target based on the previous support and resistance level and risk-reward ratio. They should aim for a reward slightly higher than the risk profile of the price reversal.
Advantages of Counterattack Pattern
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Simple pattern: Recognising a candlestick reversal pattern is simpler than recognising other patterns. It simply includes two candles in opposite directions, indicating a reversal.
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Useful indicator: This is a vital indicator that reflects potential changes in momentum and changing pressure between buying and selling.
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Applicable across the market: This pattern indicator can be used across different financial instruments to understand their movements during a specific period.
Disadvantages of Counterattack Pattern
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Not guaranteed: Although the pattern shows significant shifts in opposite directions, it does not guarantee a reversal. Investors must wait for confirmation before deciding.
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Overdependence: Relying solely on candlestick patterns may not capture overall price movement and may lead to poor trading decisions.
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Misleading: Study reversals and movements carefully, since they depend on time and market conditions. Making decisions without market knowledge may lead to poor trading.
Counterattack Pattern Mistakes to Avoid
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Misinterpreting a two-candle pattern as a counterattack pattern and making decisions based on it.
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Ignoring the trend prior to the price shifts and making decisions against the macro market.
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Avoiding confirmation and making decisions based on temporary shifts may lead to poor trading results.
Conclusion
The counterattack pattern provides an indication of the end of a prolonged trend with a change in movement towards the opposite direction. It can be categorised into two types, i.e., bullish and bearish counterattack candlestick patterns. A stock in a bullish market may counter a reversal towards a bearish market, while a stock in a bearish market may move towards a bullish market. This indicates a change in pressure and trend. It does not guarantee a reversal. Therefore, investors must confirm the shift before deciding.
