August 28, 2014

The 2-Bar Reversal Trade Setup

The 2-bar reversal trade setup is very similar to the pin bar, they both act as a reversal signal and show a rejection of price. The difference between them is that a 2-bar reversal trade setup needs 2 candles to form the setup instead of just one for the pin bar. Many traders do not trade the 2-bar trade setup mostly because they do not know how. It is a very effective trade setup to have if you master it. The 2-bar reversal trade setup is a very good trade pattern to add to your tool box and we will cover everything you need to know about them. By the end of this article you should be able to start testing this setup out for yourself in a demo account and you will see just how powerful this setup can be.

What a 2-Bar Reversal Trade Setup Looks Like

Just like it was sated above a 2-bar reversal setup acts like a pin bar but it does not look like one, pin bars are very easy to spot on a graph while a 2-bar reversal trade setup can sometimes hide in the chart. Knowing what it looks like and how to identify it will make it so you are able to spot a 2-bar reversal trade setup easily on a chart.

In the diagram below you can see what a bullish and bearish 2-bar reversal looks like

2-Bar Reversal Trade Setup Diagram

Below is an example on a chart, you can see how there was a strong bullish candle up then the next candle was a strong bearish candle down. This is a perfect setup for a 2-bar reversal trade.

2-Bar Reversal Trade Setop on Chart

The reason why a 2-bar reversal trade setup is treated like a pin bar is because it is, it just doesn’t look like it. If you were to morph the two candles together you would get a pin bar. It is just a pin bar that take two candles to form and that is why they are treated as if it was a pin bar.

Let’s look at an example that has just formed recently of how it would look if the two candles were morphed together:

Below you can see a nice looking 2-bar trade setup which has formed on the 4H chart

2-Bar Trade Setup 4H Chart

Then you can see on this 8H chart that it actually morphs into a pin bar, this is why a 2-bar reversal trade is so powerful

2-Bar Trade Setup 8H Chart

As you can see a 2-bar trade setup is actually a pin bar disguised behind two bars. It is just as effective as a normal pin bar and it gives you more opportunities to enter a trade. You can’t make any money if you aren’t in any trades right?

Characteristics of a 2-Bar Reversal:

The characteristics aren’t as strict as other trade setups, that’s because as long as when the two bars are morphed together they form a pin bar it counts as a 2-bar trade setup. There are some things that you can look for that will make one trade setup better than another. Below you will see those things:

  • The bigger the two bars are the better, just like bigger the pin bar the better
  • For a bullish setup it is better if the 2nd bar is more bullish than the 1st candle is bearish. So that means that the 2nd candle closes above the 1st candles open price (Better explained below)
  • Short wicks on the side you want to the trade to go and long wicks on the side you don’t want it to go (Also explained better below)

That is pretty much all of the characteristics of a 2-bar reversal trade setup, there aren’t very many characteristics. But to better explain the characteristics I will go into more detail about them.

The first characteristic is pretty straight forward, the bigger the two candles are the better. The reason behind this is because the bigger the two bars are the bigger the wick would be if the two bars were morphed into one. Just like the bigger the wick on a pin bar the better the trade setup is.

Two big bars on a 4H chart that form a 2-bar reversal trade setup

Big Bar Characteristic

The two big bars that formed on the 4H chart makes a pin bar with a long wick on a 8H chart

Long Wick Formed From Two Big Bars

The second characteristic is a little more difficult to explain and hopefully a picture will better explain it. Basically what it means is that the 2nd bar has a bigger body than the 1st bar

Bullish 2-bar reversal trade setup below, the 2nd bar closes above the 1st bars open price

Bullish 2-Bar Reversal

This will make the trade setup more effective and more likely to work out in your favor. That is because it shows that the 2nd bar has more power than the 1st bar and is overpowering it.

The last characteristic is also hard to explain with words and will be better explained with a picture. In general you want the wick to be short on the side you want the trade to go and the wick long on the side you don’t want the trade to go.

On the chart below you can see that with this bullish 2-bar reversal trade setup the longer wicks are on the bottom and the shorter wicks are on top. 

Long Wicked 2-Bar Reversal

The reason you want long wicks on the bottom for a bullish setup and on the top for a bearish setup is because it shows a rejection of the prices. The more rejection it shows the better. The same goes for wanting short wicks on top for a bullish setup and on bottom for a bearish setup, you don’t want to see any rejection of the prices in the way you want the trade to go.

How to Trade The 2-Bar Reversal Trade Setup

Like it was mentioned earlier the 2-bar reversal trade is traded as if it were a pin bar. That means that you want to trade them with the trend and on either a support or resistance zone.

When looking to see if it is on a support or resistance zone you need to imagine where the wick would be since it is not shown like it would be with a pin bar. As long as the two bars are close to or actually go through a support or resistance zone then you are good.

On the chart below there is a 2-bar reversal trade setup and you can see how the two bars touched the support zone. This shows rejection of that support zone.

2-Bar Reversal on Support Zone

Below is a great example of a 2-bar reversal trade setup, it is with the overall trend and is right on a solid resistance zone.

2-Bar Reversal With Confluence

It is pretty straight forward when trading 2-bar reversal trade setups, make sure they are with the overall trend and that it prints on a solid support or resistance zone. If you do those things then the trade will have a high probability of being successful.

Entry and Stop Loss Placement

Placing the entry and stop loss is very simple for a 2-bar reversal trade setup. For a bullish 2-bar reversal you want to place the entry at the highest high of the two bars and the stop loss at the lowest low of the two bars. Then for a bearish 2-bar reversal you want to place the entry at the lowest low of the two bars and the stop loss at the highest high of the two bars.

Entry and Stop Loss Placement

This is a very conservative entry and stop loss but you will win more trades with this placement. You can be more aggressive but be careful because the more aggressive you are on your entry and stop loss placement the more trades you will lose.

Conclusion

In conclusion the 2-bar reversal trade setup is a trading pattern that is very underrated and a lot of traders don’t trade them. I have traded this setup very successfully and I personally love this trade pattern. It is a 2-bar pin bar basically and it is just as effective as a normal pin bar. If you are willing to test the 2-bar reversal trade setup in a demo account and take the time to master this setup you will find that is a very solid trading pattern. If you have any questions place a comment below.

Comments

  1. Ferry D.M says:

    Excellent explanation about 2-bar reversal and the reason why it should be treated like a pin bar. Thanks a lot for the nice article and keep up the excellent work.

  2. thanks you !

  3. Thanks Joshua, I really like your posts.
    As a newbie, I would like know If the 2-Bar looks like a perfect reversal setup but there is time before the candle close, Should I place the entry ?

    • Trading With Price Action says:

      Hi Thacha,

      You should wait for the candle to close before you place your entry since prices can change dramatically in a short period of time. For example, you could see a perfect 2-bar reversal setup forming but there is still an hour left before the candle is done forming. Then in that last hour prices skyrocket and it isn’t a 2-bar reversal anymore. See why it is important to wait for the candles to close before setting the entry? Hope this helps

      -Joshua

  4. http://clip2net.com/s/6lsC3W
    This looks like a classic 2 bar reversal to me
    Any thoughts??
    Tim

  5. Thank’s for the great article.
    What about take profit?

    Red

  6. Thanks about that.
    I would like to aske where to set the take profit?

    Smadar

  7. Timothy,Abeokuta says:

    Thank you so much for this article.
    It is an eye opener and you really aided me to add a tool to my arsenal
    More grease to your elbow.Grateful
    I am Timothy,Nigeria

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