Candlestick III: Reversal Days

A reversal high day is a day in which the high price reaches a level higher than the previous high, and then reverses to close below the previous close. Like spike days, a reversal high day's mirror image is a reversal low day, in which the market sets a new low before reversing to close above the previous close. Also like spike days, the significance of reversal days increases when there is a preceding up trend (for reversal high days) or a preceding downtrend (for reversal low days).

While reversal days are widely watched and hence warrant attention from all traders, they are still prone to yielding many false trade signals. As a result, many traders who rely heavily on candlestick patterns prefer to see a reversal high day reverse to close below not just the preceding day's close, but also the preceding day's low. This signifies a strong reversal in the market, suggesting that sellers have taken control and that now may be a time to enter a short position.

The chart below illustrates how reversal day can be identified and what they can signal for traders who choose to incorporate them into their trading arsenal.