Extreme Reversal Setup

The basic setup occurs when an extremely large candle forms about twice the size of the average candlestick. While this candle may indicate that a continuation will be seen, the second bar of the pattern does not confirm a continuation and, instead, is an opposing candle that signals an upcoming reversal. When this occurs, you have a fantastic opportunity to buy below value or sell at a premium.

If you are trading a market with extremely low volatility, then you will likely need to see a larger extreme candlestick to qualify this candle properly. Conversely, in markets with high volatility, you may need to adjust the size of the extreme bar downward. The extreme reversal setup shines when it has developed in the direction of an existing trend. When a market is trending, this pattern can form during the “pull-back phase” of a trend, thereby allowing you to enter the market at a better value alongside smart money. One interesting fact about this pattern is how it consistently forms at the beginning of the day, especially in the first thirty minutes of the session.

PATTERN SUMMARY

The first bar of the pattern is about two times larger than the average size of the candles in the lookback period.

The body of the first bar of the pattern should cover more than 50 percent of the bar’s total range, but usually not more than 85 percent.

The second bar of the pattern opposes the first. If the first bar of the pattern is bullish, then the second bar must be bearish. If the first bar is bearish, then the second bar must be bullish.