Pivot patterns: "Rails" and "Outer Bar"
Hello, dear colleagues. In this lesson I will continue to talk about reversal patterns used in Price Action. Today we'll look at two of their variety, the Rails and the Outer Bar.
Rails pattern
Rails pattern - two-bar formation, that is, in order to say that the pattern is complete, you need 2 bars - not more, but also not less.
Pattern Identification: This pattern consists of two adjacent differently directed bars. For example, if the first bar is bullish, the second should be bearish. Preferably, the opening and closing prices of both bars should be close to the highs and lows.
Figure 1 shows the classic "Rails" pattern. As you can see from this example, its location, namely on the "Swing Low", strengthens the significance of the pattern.
Reinforcing and aggravating factors
As with any other Price Action pattern, there are factors, that significantly improve its reliabilitynamely:
- The pattern was formed in the direction of the prevailing trend.
- The second bar entering the pattern closes near the minimum/maximum.
- Important price level.
- The formation of a pattern on a "swing-high" or "swing-low".
Accordingly, there are also factors that significantly that reduce its effectiveness:
- The pattern emerged against the prevailing trend (Although the pattern is considered a reversal pattern, it is recommended, at least at the initial stage of mastering, not to play against the trend).
- The second bar of the pattern closes near the middle or closer to the opening.
- Next to the arisen pattern is the support level/.resistance or PPZ.
Trading on the "Rails" pattern
As an example of trading on the "Rails" pattern, I will take a bullish pattern. A bearish pattern will work out exactly the opposite. An entry order is placed just above the pattern's maximum and a stop is placed just below the pattern's minimum.
Another important detail should be noted. Quite often after the occurrence of the pattern the price rolls back from the opening level towards the stop and this rollback can be very, very significant. However, a pattern is considered valid as long as the rollback does not exceed 50% of the pattern height.
If, on the other hand level is exceededIf you have a position, you should close it without waiting for the main stop to trigger - the market will always give you the opportunity to re-enter. On the other hand, this property, namely rollbackYou can use it to enter with reduced risk by placing a stop behind the high or low.
Outside Bar pattern
The next pattern I want to talk about in this article is the "Outer Bar". Just like the previous one, this pattern is reversal and has two kinds - bovine and bearish.
In the methods of trading Price Action adopted this abbreviation of their designation:
- Bullish pattern - BUOVB (BUllish Outside Vertical Bar).
- Bear pattern - BEOVB (BEarish Outside Vertical Bar).
The appearance of the pattern: This set-up consists of two bars, of which, the first bar is entirely within the range of the second bar.
Figure 3 shows an example of a bearish pattern located on a "swing-high". This pattern is considered to be working until its maximum (for a bearish pattern) is broken, unlike the "Rails" pattern.
Reinforcing and aggravating factors
Similar to the previous pattern, let's look at the factors, that increase its reliability:
- The pattern is formed in the direction of the prevailing trend.
- The second bar included in the pattern, closes near the minimum/minimum.
- Important price level or PPZ.
- The pattern is formed on a swing high or swing low (for bear and bull markets, respectively).
Let us also comment accordingly on the factors that weaken the pattern:
- The pattern appeared against the main trend.
- The second bar of the pattern closes near the middle or closer to the opening.
- The pattern rests on a support/resistance level or PPZ.
Entry rules for the pattern
Figure 4 shows an example of an entry for a bearish pattern (BEOVB). The opposite is true for a bullish (BUOVB) signal. Warrant is set just below the minimum of the second bar, and stop - behind his maximum.
And that's all I wanted to tell you today about the patterns used in Price Action trading methods. See the next issues of ForTrader.org for more.