Hello, friends! Welcome to today’s podcast by Angel One.
Today we are following the story of Kajal and how she was able to save an investment from losses- not just her own, but her sister Bhumi’s as well. During the dinner treat Bhumi set up for Kajal, she was able to ask how Kajal figured out at the right time that an underlying asset was going to crash.
Kajal began by testing Bhumi’s memory about Candlesticks patterns-- a popular tool and key part of trading. They learnt about it quite early on their journey of learning technical analysis.
Bhumi promptly answered that a candlestick is a tool that represents price action for a certain period of time. It consists of a body, an upper wick and a lower wick. It is able to represent 4 elements: opening price, closing price, highest point and lowest price in the asked period.
The body represents the range of opening and closing price of a period, typically a day. The lower dips are represented by the lower wick extending downwards from the body. The upper wick vertically extends from the top of the body and represents the highs. A closing price higher than the opening price is shown by a green or light candle, and the reverse by a red or dark candle. The body becomes long or short depending on the range of price difference.
Kajal was impressed because Bhumi was right on point. She explained that she was able to cap her losses by interpreting candlestick patterns. While there exist many types of candle patterns, Kajal used the 2 bar reversal. It is a common pattern when it comes to price reversals.
Let’s hear Kajal's explanation of it. The 2 bar reversal occurs when the market makes a strong move in a specific direction but then another strong move follows in the opposite direction.
What does the pattern look like?
A 2 bar reversal looks like a pair of candlesticks with evenly-sized bodies but in opposite directions. The clearest and strongest 2 bar reversal pattern is one which doesn’t get lost in a congested area in the chart and clearly sticks out.
A 2 bar reversal can be bearish or bullish.
In a bearish reversal, the first bar would need to be green and close near the session’s highs. The second bar must close lower,rejecting the earlier highs. The second bar opening price must be higher than that of the first bar. But it must close lower than the closing price of the first bar.
A bullish reversal happens when the low of the 2nd bar is lower than that of the 1st bar, and the 2nd closing price is higher than the earlier close.
When a bullish bar is followed by a bearish one at the top, it means the markets will see a bearish move.
When a bearish bar is followed up by a bullish one at the bottom, this 2 bar reversal indicates a bullish price action.
When the charts of her asset indicated that the market was about to plunge, Kajal spotted the bearish reversal from the longer red 2nd bar and placed a stop-loss order. She was able to sell the stock before the price continued to plummet, and immediately asked her sister to do so, too. When Bhumi was not convinced, she promised to explain the technical analysis that led to this decision.
She mentioned that the 2 bar reversal pattern is absolutely crucial when it comes to price action formations. She told Bhumi that if she wants to develop trading expertise, she needs to understand price action reversals and why they matter. Reversal patterns indicate when a market movement is drawing to a close. The presence of the 2 bar reversal shows that there is a tug of war between the bulls and the bears, ie, between buyers and sellers.
According to Kajal, there are some points to consider while using the 2 bar reversal pattern.
Number 1, is that the pattern is a sign that the previous market sentiment has been rejected because the trend has turned in the opposite direction.
Number 2, this pattern is much more valid when it shows up right at the top or the bottom of a trend.
Number 3, when a 2 bar reversal also reflects an engulfing pattern, it symbolizes extremely strong market sentiment. Engulfing candlestick pattern means there are 2 bars indicating market reversal, and the 2nd candle is long enough to engulf the first candle’s length. Engulfing candlesticks can be either bearish or bullish. Clubbed with a 2 bar reversal pattern, it signifies a reversal in the market.
Bhumi already knew about the engulfing candlesticks. She wondered how it was different from a 2 bar reversal. Kajal explained that the key difference between the two is that in the 2 bar reversal pattern, the second bar does not have to engulf the previous one.
2 bar reversals can be spotted in all time frames and markets but they may not always be tradeable. If Bhumi wants to trade with them, there should be a strong ongoing trend and she should look for reversal signals at swing points. Swing points are value areas where one can buy at low prices or sell at high values.
Summing up the discussion, Kajal mentioned that the 2 bar reversal pattern is a price action formation that should be considered along with other technical indicators and parameters to get an accurate picture. Bhumi was impressed that a simple indicator could be used as such a powerful tool in trading. She was excited to now be on a lookout for market reversal by spotting a 2 bar pattern, and saving the day, exactly like Kajal!
Thanks for tuning in and watch out for new podcasts by Angel One!