Price Action Reversals - Part 3 - The Strong Reversal Candle - by Nigel Price

Price Action Reversals – The Strong Reversal Candle – By Nigel Price

In the last part we looked at how to identify preceding trends in the market.

Now we are going to look at the first of three candle patterns we like to see at the end of a preceding trend. The first one is the Strong Reversal Candle.

When we trade the PAST Strategy we like to look for evidence that a market is going to turn around and change direction. A Strong Reversal Candle is a great example of such a sign, and very often delivers us a good trading opportunity.

If the market is thinking of changing direction, we should be seeing clear signs that the balance of power between buyers and sellers is shifting. If the market is in an uptrend, there is no point in even thinking about selling unless we see other sellers in the market that we can join in with. We are never going to turn the market around by ourselves; we always need some help!

A bearish Strong Reversal Candle occurs when a bearish candle closes below the open price of the previous bull candle. Like below:

Key Reversal

 

You can see that the close price of the bearish candle (red arrow) is below the open price of the previous bull candle (blue arrow). This tells us that the bears have shown enough strength to completely wipe out the gains made by the previous up candle.

When the sellers see this, they become bolder and more confident that they can push the market down. The buyers are becoming uneasy at the show of bearish strength and are considering taking profit and selling their positions.

Does this candle mean that the bears have enough strength to turn the market around completely? We don’t know for certain yet, but a sign like this should definitely get us interested in the possibility that the market is going to change course.

[notify_box font_size=”15px” style=”blue”]Consider looking for Reversal candles with a body size (open to close) at least 50% of the total candle size.  Thus, if the high of the candle is 15500 and the low is 15100 (a difference of 400 PIPs) then look for a body size (open to close) of at least 200 PIPs or more.[/notify_box]

Take some time now to browse through your charts and put the last two parts together – try to identify some preceding trends with Strong Reversal Candles in them.

Observe the ones that led to new trends forming, and also those that didn’t. Once you practice looking for these on your chart, it will become like second nature to you – like riding a bike.

Good trading!

Now lets look at The Long Wick Reversal Candle