Bar charts were the most popular way of depicting price movements until Japanese candlestick charts invaded Western technical analysis during the 1970s, but are still as useful as they’ve ever been.
They depict the same information as candlesticks, merely presented in a different way. They have their own terminology, and are most commonly used in conjunction with classical chart patterns like the Head and Shoulders and Triangle (though candlesticks are equally adept at displaying these).
In this article we’ll take a look at some bar patterns and see how they compare to the candlestick patterns you’ll find in our daily reports.
First, the basics: what do they look like? The show the day’s range with a vertical line connecting the high and the low. A little bar to the left of this line is shows where we opened, and another little bar to the right shows the close. Graphically:
With this understood, let’s compare how the same information looks in bars and candlesticks:
It should be clear that the only difference is in the presentation. Any pattern in bars or candlesticks can be expressed equivalently in the other format. Now for some patterns:
Ringed Highs and Lows
These are simple reversal patterns used to identify entry points. The Ringed High is formed when a sequence of higher lows is broken with a lower low, whilen the Ringed Low is the converse: a sequence of lower highs is broken with a higher high. They work across any timeframe.
Example of a Ringed Low:
We buy when the latest “lower high” is broken to the upside.
Example of a Ringed High:
We sell when the latest “higher low” is broken to the downside.
Note that the open and close (little bars on either side of the vertical line) are irrelevant when it comes to this pattern. We’re only looking at the highs or lows.
There are competing definitions for this term, but we’ll accept the one found in Technical Analysis of the Financial Markets by John J. Murphy (New York Institute of Finance). A top reversal day is formed in an uptrend when we get a bar with a higher high but a lower close. The bottom reversal day is formed in a downtrend when we get a lower low but a higher close.
Here’s an example of top Reversal Days in Bobl futures. The first one wasn’t followed by an immediate change in trend, only a day of weakness. The second one, though, was fully confirmed (demonstrating this this pattern, like all others, is not infallible!)
The pyschology behind this pattern is fairly simple: market participants saw the trend continuing intraday with an expansion of the range in the direction of that range. This wasn’t followed through, though, and the close was actually lower than the previous day’s (or higher, in a downtrend).
Key Reversal Day
This is a more extreme version of the Reversal Day mentioned above.
In passing, let’s say what the Outside Day is. This is a session whose range completely surrounds the range of the previous day, i.e. we have a higher high and a lower low. Similarly, the Inside Day has a range entirely within the previous one.
The Key Reversal Day is an Outside Day with a lower close when we’re in an uptrend, or a higher close when we’re in a downtrend.
Equivalently for a downtrend: the open is lower than the previous day’s close, but the close is higher than the previous day’s high.
(Note: some sources have slightly different requirements for the Key Reversal Day, but let’s leave this confusion to one side!)
The following 2-bar pattern would a be a Key Reversal bottom in a downtrend:
The idea is that the market started out in line with the prevailing trend (the above second candle even gapped lower than the first one). This early positivity is reversed, though, and we end up closing the day in the opposite direction, finishing past the extremes of the previous session.
The Key Reversal Day is related to the Bearish Engulfing candlestick pattern and it wouldn’t be very far wrong to say that the Engulfing Pattern was the candlestick analysis equivalent of the Key Reversal Day.
This market topped out with a Bearish Engulfing Pattern that also qualifies as a Key Reversal Top.
Let’s summarise all of the patterns explained in this article:
Ringed High: sequence of higher lows, broken by a lower low.
Ringed Low: sequence of lower highs, broken by a higher high.
Reversal Day (Top): day with a higher high but a lower close (in an uptrend).
Reversal Day (Bottom): day with a lower low but a higher close (in a downtrend).
Outside Day: a higher high and a lower low than the previous day.
Inside Day: a lower high and a higher low than the previous day.
Key Reversal Day (Top): Outside day that closes lower (in an uptrend).
Key Reversal Day (Bottom): Outside day that closes higher (in an uptrend).
We mostly focus on candlestick analysis in our research, but also try to take note of significant bar chart patterns formed in the markets we cover. As with all techniques, bar charts are not infallible but, with some experience, domake it easier to read the markets To read our daily research of the futures and FX markets, please sign up for a free trial.
Graham Neary MSTA (firstname.lastname@example.org)