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 — двухбаровая формация, то есть для того, чтобы сказать, что паттерн завершен, необходимо 2 бара — не больше, но и не меньше.
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:
— Паттерн образовался в направлении преобладающего тренда.
— Второй бар, входящий в паттерн, закрывается рядом с минимумом/максимумом.
— Важный ценовой уровень.
— Образование паттерна на «свинг-хай» или «свинг-лоу».
Accordingly, there are also factors that significantly that reduce its effectiveness:
— Паттерн возник против преобладающего тренда (Хотя паттерн считается разворотным, рекомендуется по крайней мере на начальном этапе освоения не играть против тренда).
— Второй бар паттерна закрывается рядом с серединой или ближе к открытию.
— Рядом с возникшим паттерном находится уровень поддержки/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:
— Бычий паттерн — BUOVB (BUllish Outside Vertical Bar).
— Медвежий паттерн — 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:
— Паттерн образован в направлении преобладающего тренда.
— Второй бар, входящий в pattern, closes near the minimum/minimum.
— Важный ценовой уровень или PPZ.
— Паттерн образуется на свинг-хай или свинг-лоу (для медвежьего и бычьего рынка соответственно).
Let us also comment accordingly on the factors that weaken the pattern:
— Паттерн возник против основного тренда.
— Второй бар паттерна закрывается рядом с серединой или ближе к открытию.
— Паттерн упирается в уровень поддержки/сопротивления или 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.