1. Lecture - 19
Bar Chart Reversal
Patterns
CMT LEVEL - I

2. CMT LEVEL - I
Learning Objectives
 One-Bar Reversal
- Reversal Bar
- Climax, Top or Bottom
- Reversal Bar
- Key Reversal Bar
 Two-Bar Reversal
- pipe formation
- Horn Pattern
- Inside Bar
- Hook Reversal Day
- Naked Bar Upward Reversal
- Hikkake

3. CMT LEVEL - I
Learning Objectives
Two-Bar Reversal
- pipe formation
- Outside Bar
- Knockout Pattern
- Oops!
- Shark
- Narrow-Range Bar (NR)
- Wide-Range Bar
- VIX
- Opening range breakout
(ORB)

4. Reversal Bar Pattern
• A bullish reversal bar pattern goes below the low of the previous bar before closing
higher.
• A bearish reversal bar pattern goes above the high of the last bar before closing
lower.
• What does it mean?
• For the bullish pattern, the market found support below the low of the previous bar.
Not only that, the support was strong enough to push the bar to close higher than
the previous bar. This is the first sign of a possible bullish reversal.
• For the bearish pattern, the market met resistance above the high of the previous
bar. Furthermore, the resistance was powerful enough to cause the current bar to
close lower.
• How do we trade it?
• Buy above the bullish reversal bar in an uptrend
• Sell below the bearish reversal bar in a downtrend

5. Reversal Bar Pattern

6. Key Reversal Bar Pattern
• What does it look like?
• A key reversal bar is a particular instance of a reversal bar that shows clearer signs of a reversal.
• A bullish key reversal bar opens below the low of the previous bar and closes above its high.
• A bearish key reversal bar opens above the high of the previous bar and closes below its low.
• By definition, key reversal bars open with a price gap. As gaps within intraday time frames are rare,
you will find most key reversal bars in the daily and above time-frames.
• What does it mean?
• A down gap is a powerful down thrust. When the market rejects such a strong bearish move with
certainty, it might have reversed its sentiment to bullish.
• On the other hand, when a gap upwards bumps into clear resistance, the market might have turned
bearish.
• Essentially, a key reversal bar is a violent display of strength that hints at a change of market
sentiment.
• How do we trade it?
• Buy above a bullish key reversal bar (If uncertain, wait for the price to close above it before buying.)
• Sell below a bearish key reversal bar (If unsure, wait for the price to close below it before selling.)

7. Key Reversal Bar Pattern

8. Exhaustion Bar
• What does it look like?
• A bullish exhaustion bar opens with a gap down. Then, it works its way up to close
near its top.
• A bearish exhaustion bar opens with a gap up before moving down to close as a
bearish bar.
• In both cases, the gap remains unfilled. Also, high volume should occur with the
exhaustion bar.
• What does it mean?
• Its name explains it all. It represents exhaustion and a failed last-ditch attempt.
• After the bears are exhausted, the bulls will take over, and the market will rise.
• After the bulls are exhausted, the bears will take the market down.
• How do we trade it?
• Buy above a bullish exhaustion bar
• Sell below a bearish exhaustion bar

9. Exhaustion Bar

10. Pinocchio Bar (Pin Bar)
• What does it look like?
• It resembles the nose of Pinocchio. It has a long and distinct tail.
• For bullish pin bars, the lower tail takes up most of the bar. For bearish pin bars,
it is the upper tail that dominates.
• What does it mean?
• Paraphrasing Martin Pring, the pin bar lies like Pinocchio.
• With its long tail, a pin bar breaks a support or resistance momentarily to trick
traders into entering the wrong direction. These traders are trapped, and there
is often money to be made when you find trapped traders.
• How do we trade it?
• Buy above a bullish pin bar that is rejected from support level
• Sell below a bearish pin bar that is rejected from a resistance level

11. Pinocchio Bar (Pin Bar)

12. Two-Bar Reversal
• What does it look like?
• The two-bar reversal pattern is made up of two strong bars closing in opposite
directions.
• The bullish variant consists of a strong bearish bar followed by a bullish bar.
Reverse the order to get its bearish counterpart.
• What does it mean?
• Every reversal pattern works on the same premise. A clear rejection of a
downward thrust is a bullish reversal, and a clear rejection of an upthrust is a
bearish reversal.
• In this case, the first bar represents the first thrust, and the second bar
represents its rejection.
• How do we trade it?
• For bullish reversals, buy above the highest point of the two-bar pattern.
• For bearish reversals, sell below the lowest point of the two-bar pattern.

13. Two-Bar Reversal

14. Three-Bar Reversal
• What does it look like?
• In sequence, the three bars of the bullish pattern are:
• A bearish bar
• A bar has a lower high and lower low
• A bullish bar with a higher low and closes above the high of the second bar
• Accordingly, the bearish pattern is made up of:
• A bullish bar
• A bar has a higher high and higher low
• A bearish bar with a lower high and closes below the low of the second bar
• What does it mean?
• A three-bar reversal pattern shows a turning point. Compared to the other reversal patterns,
the three-bar reversal pattern is the most conservative one as it extends over three bars,
using the third bar to confirm that the market has changed its direction.
• How do we trade it?
• Buy above the last bar of the bullish pattern
• Sell below the last bar of the bearish pattern

15. Three-Bar Reversal

16. Three-Bar Pullback
• What does it look like?
• This bar pattern is easy to identify.
• Three consecutive bearish bars form a bullish pullback pattern, and three
consecutive bullish bars form a bearish pullback pattern.
• What does it mean?
• When the market is trending, it is hard to sustain a counter-trend pullback.
Hence, after a pullback of three bars, the trend is ready to resume.
• How do we trade it?
• Within a bull trend, wait for three consecutive bearish bars. Then, buy above
the next bullish bar.
• Within a bear trend, wait for three consecutive bullish bars. Then, sell below
the next bearish bar.

17. Three-Bar Pullback

18. Inside Bar
• What does it look like?
• An inside bar must stay completely within the range of the bar immediately before it.
In other words, the second bar must have a lower high and a higher low.
• What does it mean?
• An inside bar is a contraction in price range/volatility. Within the same unit time, the
market covers less ground and stays completely within the range of the previous bar.
• It is a pause in price action and does not show clear strength in either direction.
• How do we trade it?
• Place bracket orders around it to trade its breakout in either direction. (A buy stop
order above its high, and a sell stop order below its low. Once one order is triggered,
cancel the other.)
• Place only one order (buy or sell) according to the market trend.
• Wait for a breakout of the inside bar and trade its failure.

19. Inside Bar

20. Outside Bar
• What does it look like?
• An outside bar pattern is the polar opposite of an inside bar.
• Its range must exceed that of the previous bar with a higher high and a lower
low.
• What does it mean?
• It is a short-term expansion in price range/volatility. It shows strength in both
directions.
• In most cases, it is uncertain if the bulls or the bears have won. The only
certainty is the increased volatility.
• How do we trade it?
• Wait for a break-out of the outside bar and fade it. (Especially for outside bars
that look like dojis, or those that go against the trend.)
• Trade its break-out, especially when the outside bar closes near its top or
bottom. (e.g., Popgun Pattern)

21. Outside Bar

22. N7 Bar
• What does it look like?
• This bar pattern requires seven bars. If the last bar has the smallest bar range within the
sequence, it is an NR7 pattern.
• To clarify, bar range refers to the difference between the high and the low of a bar.
• What does it mean?
• Like the inside bar, it indicates decreasing volatility.
• As the lower volatility comes within the context of seven bars, instead of a single bar like in
the case of an inside bar, the NR7 pattern is a stronger sign of decreasing volatility.
• However, while the inside bar shows no strength in either direction, the NR7 pattern might
drift upwards or downwards. In such cases, the NR7 represents a price thrust with
decreasing volatility.
• As the market alternates between range contraction and range expansion, the NR7 alerts us
to standby for explosive moves.
• How do we trade it?
• Buy break-out of the high of the last bar if the trend is up
• Sell break-out of the low of the last bar if the trend is down

23. NR7

24. Two-Bar Reversal (Also Pipe Formation)
• Bukowski describes the horn pattern as being almost
identical in behavior to the pipe except a smaller bar
separates the two lengthy bars.
• The two long bars become the “horns” of the formation
• two-bar reversal, the formation is more reliable with
weekly bars and otherwise has the same characteristics as
the pipe.
• It is not as effective as the pipe at bottoms and tops, and
its failure rate increases when the trend preceding the
pattern is short.

25. Horn Pattern
• In the bottom pattern, the first bar usually closes in the
lower half of the bar, and the second bar close ends near its
high. Usually high volume is seen on both bars. In its
extreme and more reliable version, it consists of two side-
by-side spikes, but it can also be above-average length side-
by-side bars of roughly equivalent length, peaking or
bottoming at close to the same price, and occurring after a
lengthy trend.
• It is preferable for the second bar to be slightly longer than
the first bar, and volume is preferably higher on the left bar
than on the right.
• Many pipes occur at the end of the retracement of a
longer-term move. The directional clue is the direction of
the breakout from it.

26. Hook Reversal Day
• Hook is a common term for a quick loss when a profit was expected. It
comes from the fishhook that the fish bites thinking that the bait is a free
meal.
• a hook reversal occurs after a series of upward thrust bars, called run bars
when they occur right after each other
• a narrow range bar occurs with specific characteristics. The narrow-range
bar must open at above the previous high and close below the previous
close
• This signals that the momentum built up during the run has reached a
climax. A downward break would be an action signal.
• The action signal is when the price breaks back above the close of the first.
It also works in reverse.
• a Naked bar is one that closes below a previous low and is a down bar
(close less than open).
• It is the most bearish close possible. If an inside bar follows a naked bar
with open greater than naked bar close, it is a sign that the downtrend is
reversing.
• An upward break from the inside bar would suggest the bears are caught.

27. Hikkake
• The hikkake is an inside bar signal that fails and
becomes a signal itself
• “hikkake” is a term meaning to trap, trick, or
ensnare. It is a pattern that starts with an inside bar.
• When prices break one way or the other from an
inside bar, the conventional belief is that they will
continue in the same direction.
• The hikkake pattern occurs when the breakout fails
to continue and prices in the following bars return to
break in the opposite direction through the previous
inside bar extreme.
• The reversal and opposite breakout must occur
within three bars after the first breakout; the open
and close of each bar seems to be unimportant

28. Knockout Pattern
• The knockout (or KO) pattern is another trend correction
method, used by David Landry
• The first requirement for this pattern is that an
extremely strong and persistent trend must be present
• if we think about a linear regression line, the bars should
have a small deviation from that line, not wide swings
back and forth.
• At some time, the stock will develop a throwback of two
to five days in which two prior lows will be exceeded.
• Place a buy entry stop at the high of the bar with the
second low. If the next bar is lower, move the buy stop to
its high until the position is executed.
• Place a protective stop below the last low, or use any
reasonable stop method.
• According to Landry, the reverse is equally as successful
in a downtrend using the criteria in reverse.

29. Oops!
• Oops! to name an opening range pattern that profits from a
sudden change in direction
• The setup for this pattern occurs when the opening price on
today's bar is outside the previous day's range.
• Assume, for example, that a stock opens today at a price
below yesterday's range.
• A buy stop is then placed just inside yesterday's range in case
the market closes the gap, indicating a reversal.
• This pattern depends on other traders acting in the direction
of an opening gap and being caught when prices reverse.
• The pattern is for the first day to have a close within 10% of
the low. The second day must
• Open on a downward gap. If these conditions are met, place a
buy stop at the first day's low with a sell stop near the second
day's opening. A sell pattern is just the reverse on a day when
the close is within 10% of its high.

30. Shark
• The shark pattern is a three-bar pattern. The most recent
bar high must be lower than the previous high and the
recent low above the previous low. In other words, the
recent bar is an inside bar. The previous bar must also be
an inside bar.
• In effect, it is a small triangle or pennant. The name “shark”
comes from the pattern's finlike shape.
• Symmetry was measured by determining the amount by
which the center of the final inside day range, called the
apex, deviated from the center of the base day range.
• if the symmetrical variance of the apex midrange was
within 12% either side of the center of the base day range,
the trend continued in the same direction as
• The prepattern direction 91% of the time, strengthened in
36% of the instances, and increased in momentum 34% of
the time within 30 days. Volatility

31. Opening Range Breakout (ORB)
• A horizontal line is drawn at the opening range high
and low on the intraday bar chart as a reference for the
rest of the day. Other lines from the opening price, the
close yesterday, the range yesterday, and so forth may
also be drawn. These lines often become support or
resistance levels during the day.
• The opening range breakout (ORB) is a popular method
of entering a position once a setup has been
established from a previous short-term pattern.
• Crabel found that the use of ORBs worked well with
NR4, NR7, inside days, and hook days. He found that
the earlier in the day the ORB was penetrated, the
better the chance for success.
• By analyzing the action around opening range levels, a
good trader can find ways to take advantage of the
tendency for these levels to act as support and
resistance. One method of accomplishing this is called
the ACD method,

32. Volatility Patterns
Wide Range
Bar
Narrow-Range
Bar (NR)
VIX

33. Volatility Pattern
• A wide-range bar is a bar in which the range is “considerably” wider than the
normal bar. The bars are relatively long compared with the previous bar
• Wide-range bars indicate high volatility; narrow-range bars indicate low
volatility . Determining narrow-range bars is useful because the low volatility
will eventually switch to high volatility. The common narrow days of this type
are the NR4 and NR7 day
• VIX is a reflection of anxiousness in the market. Traders and investors
become anxious when the market declines and become complacent when the
market advances. Thus, VIX becomes a sentiment indicator. bottoms are more
reliably signaled by the VIX than tops.