How to Identify Simple Single-Day Trading Patterns
The goal of chart reading is determining whether buyers or sellers are in control of the trading price. In a bull market, stockowners may be willing to sell, but only if they can coax higher prices from buyers. In a bear market, buyers are able to negotiate a better price when sellers are more eager to sell than buyers are to buy.
You’re trying to infer the market’s underlying psychology by looking at the history of price movements. You can infer that as prices rise, buyers are more interested in buying than sellers are in selling. In a rising market, buyers must continue bidding prices higher to convince sellers sell. Rising prices attract additional buyers, who must continue to bid prices higher to convince more reluctant sellers to part with their shares.
The most bullish thing that a market can do is go higher. Although technicians typically view each bar within the context of its neighboring bars, each individual bar has something to tell the careful observer. In this case, you see a bullish single-bar pattern.
Buyers bid prices higher throughout the day. The opening price of $10 also is the lowest trade for the day. The daily range shown on the bar is $2, and the stock closed at $12, the high for the day.
If you’re keeping score, the bulls gained ground and clearly are ahead for the day. Bears holding short positions were hurt where it hurts the most — in their pocketbooks. A trader takes a short position by borrowing shares of stock and selling them in the hope of making money if the stock price falls.
This trade loses money if the stock’s price rises. Even though the stock opens at the extreme low and closes at its extreme high, the pattern nevertheless is just as bullish when the stock opens near its low and then closes near its high.
This is a bearish single-bar pattern. The stock opened at $11.75; traded to $12, the high for the day; fell to $10, the daily low; and then closed at $10.25. The stock doesn’t have to close at the low for the day for it to be bearish. Closing near the low is good enough.
These single-day patterns are helpful to the trader who’s trying to understand the underpinnings of the markets. Whether these patterns present a trading opportunity depends on the stock’s recent history and whether its trading volume confirms the pattern.
A reversal bar is another single-bar pattern that shows a stock opening and closing at the same end of its trading range. This is a bullish single-bar reversal where the stock opens at the high, trades lower through part of the day, and by the close, the stock regains all its losses and closes at its highest intraday price.
During the early part of the trading sessions depicted in the bullish reversal pattern, buyers were willing to buy only if sellers lowered their offering prices. By the end of the day, the tide had turned and roles were reversed, with sellers willing to sell only at higher prices. This situation is another win for the bulls, because they were able to stop the price slide and recover intraday losses.
Here, you can see a bearish reversal pattern. In this case, the stock opens at $10.25, rallies during the day to $12, but closes at the $10 low.
Reversal patterns often represent a powerful single-bar trading pattern. Whenever a bullish reversal bar is preceded by several periods of falling prices, for example, its pattern often represents a buying opportunity. On the other hand, when a bearish reversal bar is preceded by a rising trend, it may be a signal to close a long position or initiate a short position.
Not all price bars, however, present specific trading opportunities. Some bars are neutral by themselves but add to a stock’s history when viewed in context. Through charts, you can use a stock’s visual historical record to develop your trading plan.