The 2 bar reversal

[TinGull]

In this thread : http://www.traderslaboratory.com/for...html#post18174

brownsfan019 was asking about the 2 bar reversal. It's an old school strategy that my coach taught me about. Potent? Sure is.

By its name you can tell it's a reversal strategy. Alone, it's a fine reversal indicator, but coupled with VOLUME it's a fabulous one.

When you have a bar that is DOWN and then it is followed by a bar that is UP and closes inside the upper 2/3 of the range of the previous bar, you've got a 2 bar reversal on your hands. What you want to be sure of is that this reversal is happening at the bottom of a down trend (be it a micro trend or macro trend) and then if volume increases on the UP bar you've got yourself a fabulous signal.

Here are a couple of pictures from a few days back on a 5min YM chart. This sort of thing can be seen on many charts on many time frames.



All it is showing us is that there is more attraction to the higher prices than there was to the lower prices, there for the path of least resistance is....drumroll please....UP!

[markd85]

Hello TinGull
Thanks for posting this nice setup. What would your entry be...close of up candle, stop above the up candle or maybe a limit order slightly below the close of the up candle? Thanks again.
Mark

[Anonymous]

I do not want to steal this thread, but since TG uses VSA, I would just point this out.

The first bar in this 2 bar reversal pattern has volume less than the previous two bars, closes lower, closes on its low and has a narrower range than the previous bar. Simply, It is No Supply.

Note two other points:

1. This No Supply is in the range of a High Volume Candle. That is within the body of a high volume WRB to be exact.

2. The close of the No Supply candle is supported by the opening range.

Understanding volume and support/resistance are keys to successful market trading. As price moved down towards that area (opening range) it becomes a good time to pay attention. It does not make much sense to go long, or short, just because price is moving towards an possible support/resistance area, but it does make sense to start looking for Smart Money involvement, or lack thereof.

[TinGull]

Very nice, PP. I always love your analysis. You're the reason I started to pay attention to volume and then see what price is doing

[TinGull]

Here's a 2 bar reversal that just popped up. I am not in this trade as it's not part of my strategy, but wanted to note one as close to real time as i could. This would be a long at 390.

[TinGull]

Note the lack of follow thru. On a 2 bar reversal you expect to see immediate action. When the next bar didn't show conviction to the upside, the trade could be cut loose.

[Soultrader]

Hi Tin and brownsfan,

I do enjoy your posts very much using candles and volume. This is one of the things I have been studying and adding to my strategies lately as well.

Regarding the 2 bar reversal, what is the difference between the 2 bar and a bullish englufing pattern? Is it due to the addition of volume analysis?

The chart brownsfan showed brings up a question I have been pondering for some time. "Tests" on low volume or no supply bars are extremely powerful. However, there are times when a no supply bar will fail. In other words, volume will show no supply but price will drift lower causing a rush of stop orders causing further decline. Do you have any filters that you add when playing a long or short at a key S&R level on a "test"?

[TinGull]

The 2 bar reversal may not always engulf the previous bar...thats the only real difference.

[Soultrader]

	Quote:	TinGull
	Note the lack of follow thru. On a 2 bar reversal you expect to see immediate action. When the next bar didn't show conviction to the upside, the trade could be cut loose.

Tin,

On your chart here, what is your criteria regarding entries? Im a little mixed up with what constitutes a confirmation signal. If the first bar is on low supply volume and the second bar pierces the upper 2/3rd range, this would indicate a long signal.... so basically the third bar is not necessary for a setup? If so, what makes a no follow through on the third bar a indication of further sell-off? Wouldnt there be cases where the third bar may be enclosed within the range of the second bar but then price lifts? Im trying to figure out when you would cut your position loose, because from my observation in these situations I find it hard to tell and prefer price to let it do its thing or stop me out under the low of the first bar.

[TinGull]

As for filters...I guess sometimes the pattern can fail. I dont have filters per sé on setups like that. If I see volume come in as a pivot is broken, then I know price should follow thru on that momentum. If there's no follow thru on the following bar when price should...then it can be a reverse trade.