2 Bar Reversal
The 2 bar reversal is highly reliable reversal signal. The 2 bar reversal set up is similar to the Engulfing bar set ups. With the 2 Bar reversal, the second bar does not need to fully engulf the previous bar.
In fact, if you were to overlay the 2 bars in the pattern, and take one away from the other, you would be left with something resembling a Pin bar. This would be a Pin bar that has formed over a period of 2 (whatever timeframe you are looking at)
Where the Pin bar set up shows price reversing in one bar, the 2 Bar reversal set up shows price reversing in the 2nd bar of the 2 Bar set up, taking the price back close to the opening level of the 1st bar.
The anatomy of a 2 Bar reversal:
- A bullish 2 Bar reversal is also referred to as Tweezers bottom.
- A bearish 2 Bar reversal is also referred to as Tweezers top.
A bullish 2 bar reversal occurs when the 1st candle in the pair, which is a good size with a large body, closes near the session low and the 2nd candle opens and reverses all of the previous candles movement. This candle then closes near to the session high having taking out stop losses as it goes. Having completed the 2 bar set up, we would expect price to continue going up in the next session.
A bearish 2 bar reversal occurs when the 1st candle in the pair, which is a good size with a large body, closes near the session high and the 2nd candle opens and reverses all of the previous candles movement. This candle then closes near to the session low having taking out stop losses as it goes. Having completed the 2 bar set up, we would expect price to continue going down in the next session.
An example of a 2 Bar Reversal:
You can see in the GBP/USD daily chart above there are a couple of nice examples of this price action signal. The first one shown occurs when price reaches an area of resistance with bar one and then the following day most of the previous days gains are reversed. Similarly in the second example of a 2 bar reversal, this occurs at another key level as price approaches an area of support, the 2 bar reversal here indicates to us that price is likely to reverse.
Already with this trade at the time of writing, a 1:1 risk:reward would have been achieved and with sensible risk management, this profit could be locked in and there is a chance here of further gains.
In Summary:
So just as for the Pin bar and the Engulfing bar price action signals, it is when the 2 bar reversal pattern occurs at areas of confluence, that we should consider taking these trades.
Entry and placing your Stop loss:
Note:
Despite being one of the more reliable high probability Price Action signals, nothing is guaranteed, markets can reverse sharply due to events happening around the world and data releases etc. Sometimes your trade will close you out for a loss and others you will win.
However, being patient and trading only the high probability price action signals that form at an area confluence, we are going to dramatically increase the number of winning trades and cut the number of losing trades. Combining this with a strictly followed risk management technique and you will have a very powerful tool in your toolkit.
Important:
Risk management is the key to growing your account, without it, no matter how much luck shines on you, eventually your account will be wiped out.
There are 3 things here that will dramatically change the outcome of your trading decisions, they are:
1. Only take the high probability trades, the ones we discussed earlier where the Pin bar has formed at an area of confluence.
2. Use risk management to manage the amount you are prepared to lose on any trade. This amount should be a small percentage of your account size, generally no more than 1 to 2 %. It is something that should be adhered to no matter how promising a trade set-up is looking. I intend to add trade size calculator in due course.
3. Have respect for money! – Draw some cash out of the bank, just 5 or 10 notes and look at it once in a while. It is too easy to forget the monetary value of the numbers on your spread bet account. What might look like a relatively small amount to you on your screen, could actually be the weeks shopping or a tank of gas.
Remember:
There is no need to lose large sums of money when learning to trade forex, so practice on a demo account until you can consistently grow that account before thinking of going live with a real account.