Reversal bars trading is a pre-computer trading technique that has not lost a single step of its vitality or usefulness with age. One of the great benefits of reversal bars is their universality. Reversal bar techniques can be used in every publicly traded market like stocks, commodities and forex, and in every time frame. The same principles apply to all these markets without modification. Once you master the basics of reversal bar trading by practicing in one time frame, you completely own the technique in all markets and in all time frames…forever.

Reversal bars are most commonly used with bar charts that show the open, high, low and close. The bars must show both the open and the close. Candlestick charts also show the open, high, low, close and work equally as well as properly configured bar charts for reversal bar trading. A few candlestick patterns are very similar to reversal bar patterns but reversal bars are not a subset of candlesticks. The primary advantage of learning to master reversal bars over candlestick patterns is that there are far fewer reversal bar patterns and, they all share some common characteristics. The learning curve is very flat.

The shared characteristic of reversal bars is that with every variation, prices make a new swing high (or low) but close opposite the direction of the open and the trend. The reversal bar is telling you that the trend for that time frame may have run out of gas and that no new buyers or sellers are coming into the market - in that time frame. A fifteen minute reversal bar may have no effect on the daily trend but a daily reversal bar will almost always effect the primary direction of the fifteen minute trend for at least some period of time.

Pure computer system traders have largely ignored reversal bars, despite their time tested usefulness, because back-testing stand-alone reversal bar systems will not show consistent profitability. This is generally true but, it’s a big mistake for the non black box traders (most of us) to fall into the same trap. Reversal bars shine as a trend changing indicator when they are used to complement, not replace, your favorite technical analysis technique. For example, a reversal bar that showed very early in the trading after a high probability change in trend would be dismissed by the technical trader but would crash the black box system.

When your regular technical analysis techniques shows a suspected major change in trend and, you hesitate while wondering if the prior trend will continue against the new position you are considering, a reversal bar can be the objective trigger to prompt you to take action. There is no trade sweeter than hitting on the very bar that changed the trend. Enter a bull trade on a bullish reversal bar and exit a bull trade on a bearish reversal bar. Enter a bear trade on a bearish reversal bar and exit a bear trade on a bullish reversal bar.

The main difference in the Signal Bar variation from what you’ve seen so far is that the Signal Bar close does not have to be lower than the previous bar close. The bearish Signal Bar close must be lower than the Signal Bar open, however. A bullish Signal Bar, which can occur only at swing lows, would close higher than the Signal Bar open. The other distinguishing Signal Bar characteristic is that the bullish Signal Bar must open in the top 1/3 of the bar and close in the bottom 1/3. Buyers took price to a new swing high from the opening but were not able to hold on to the gain. Sellers came in and dominated the closing process.