The reversal bar can very often occur in the area of resistance or support, e.g. in the area of old highs or old lows. Let’s take a look at a few chart examples:
The reversal bar at the end of an upward movement
On the EUR-USD daily chart we can see that the market formed a large reversal bar (downward reversal) on May 8, 2014. During the course of the day, it crossed the March 13th high of 1.3967 and then slumped sharply. The large reversal bar ended the previous upward movement and initiated a downward movement, which is still active at this time.
A reversal bar at the end of an upward movement has the characteristic of a relatively high opening and a low closing price.
Next, let’s look at an example of an upward reversal.
The reversal bar at the end of a downward movement
In the daily chart of the AUD-CAD currency pair, we see a classic reversal bar that formed on 2 January 2014. This reversal bar (upward reversal) had its daily low just below the December low, and during the day there was a sharp rise in price and the currency pair almost closed at the daily high. A sharp rise then followed.
Summary on reversal bars:
- Reversal bars, which end a longer-term movement and start a larger new movement, very often have relatively high volatility.
- Frequently, there is a false breakout in the previous trend direction before the price reversal, as was the case with the two examples shown here.
- It is also a good sign for the relevance of the reversal if the closing price is in the area of the daily low (in the case of the downward reversal) or in the area of the daily high (in the case of the upward reversal).