Chapter 5
Signal Bars: Reversal Bars
Areversal bar is one of the most reliable signal bars, and it is simply a bar that reverses some aspect of the direction of the prior bar or bars. If you look at smaller time frame charts, you will see that every bull reversal bar is made up of a bear trend bar and then a bull trend bar, but they don't have to be consecutive. The market had a sell climax followed by a bull breakout (remember, all trend bars are simultaneously spikes, breakouts, and climaxes, but the context determines which property is dominant at the moment). The opposite is true of a bear reversal bar, where there is a smaller time frame bull trend bar, indicating that a buy climax took place, followed by a bear trend bar, indicating that the market broke out to the downside.
Most traders want a reversal bar to have a body in the opposite direction of the old trend, but that is not necessary and there are many other components of a reversal that should to be considered.
The best-known signal bar is the reversal bar and the minimum that a bull reversal bar should have is either a close above its open (a bull body) or a close above its midpoint. The best bull reversal bars have more than one of the following:
- An open near or below the close of the prior bar and a close above the open and above the prior bar's close.
- A lower tail that is about one-third to one-half the height of the bar and a small or nonexistent upper tail.
- Not much overlap with the prior bar or bars.
- The ...
