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Developed by experienced trader Rob Smith, TheStrat is a multifaceted trading strategy that incorporates a variety of candlestick patterns to decipher market trends and potential reversals. This guide will focus on five key patterns within TheStrat methodology: the 2-2 Reversal, 3-1-2 Reversal, 2-1-2 Reversal, 1-2-2 Rev Strat, and 1-3 Rev Strat.
What are TheStrat Candlestick Patterns?
TheStrat Candlestick Patterns include a set of distinct multi-candle patterns that provide indications of market movements. Here are five of the main patterns:
- 2-2 Pattern: This can be either a continuation or reversal pattern. A 2-candle takes out the previous candle’s high or low. Then another 2-candle takes out the previous candle’s high or low.
- 3-1-2 Reversal Pattern: This pattern starts with a 3-candle, which engulfs the previous candle. An inside bar comes next, suggesting consolidation, and then a 2-candle takes out the high or low of the inside bar.
- 2-1-2 Reversal Pattern: This pattern features first a 2-candle which takes out the high or low of the previous candle. Next comes an inside bar, and then another 2-candle which takes out the high or low of the inside bar.
- 1-2-2 Rev Strat: This reversal pattern starts with an inside bar, followed by a 2 candle which takes either the high or low of the inside bar, and then reverses with another 2-candle which takes either the high or low of the previous 2-candle.
- 1-3 Rev Strat: This reversal pattern begins with an inside bar, which is then followed by an outside bar. This pattern forms a broadening range.
How to Trade TheStrat Candlestick Patterns
Trading these patterns involves understanding their structure and being able to identify them within the larger market context. Here are the steps to trade these patterns:
- Pattern Recognition: Familiarize yourself with the structure of each pattern and practice identifying them on your charts.
- Contextual Analysis: Always analyze the patterns within the context of the broader market trend.
- Confirmation: Use other technical indicators to confirm the signal provided by the pattern before executing a trade.
Trading Tips for TheStrat Candlestick Patterns
These tips can enhance your trading effectiveness:
- Patience: Wait for the pattern to fully form before making a trading decision.
- Risk Management: Always use stop-loss orders to limit potential losses.
- Multiple Time Frames: Analyze the patterns across different time frames for better accuracy, and specifically look for timeframe continuity to confirm the direction of the pattern.
Example scanners based on TheStrat Candlestick Patterns
TheStrat Candlestick Patterns can be used in Scanning the market. To see how exactly they can be used in these ways, we provide the following samples. Both scanners search the market for stocks using these patterns.
Examples of TheStrat Candlestick Patterns
Let’s delve into some examples to understand how each pattern can provide trade opportunities:
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- 2-2 Pattern: This pattern can represent either a continuation or a reversal. Continuation patterns are those in which the two candles break in the same direction, so either two 2-up candles or two 2-down candles in a row. A reversal would go either 2-up, 2-down or 2-down, 2-up. If this pattern occurs, consider a trade in the direction of the second candle in the pattern. Set a stop-loss above the highest point of the pattern and a take-profit target according to your risk/reward ratio or at a prior support level.
- 3-1-2 Reversal Pattern: This pattern begins with an outside bar that engulfs the candle before it, followed by an inside bar, followed by a directional bar that either breaks the high or low of the inside candle. If this pattern occurs, consider opening a position on the break above or below the inside bar, placing a stop-loss above the pattern’s highest or lowest point. Your take-profit could be set at a previous support or resistance level or based on your preferred risk/reward ratio.
- 2-1-2 Reversal Pattern: This pattern begins with a directional candle that takes either the high or low of the candle before it. Next comes an inside bar, suggesting consolidation, and then another directional candle that breaks either the high or low of the inside bar. If you identify this pattern, consider taking a position on the break of the inside bar. Set a stop-loss above the highest or lowest point of the pattern and a take-profit at a prior support or resistance level or determined by your risk/reward ratio.
- 1-2-2 Rev Strat: This pattern begins with an inside bar. Next, a directional bar takes either the high or low of the inside bar. Finally, another directional candle causes a reversal and takes the opposite side of the previous directional candle. Your stop-loss above the high or low of the first directional bar. Take-profit targets could be at a prior level of support/resistance or based on your risk/reward ratio.
- 1-3 Rev Strat: This is a simple pattern that begins with an inside bar and ends with an outside bar. In essence, this is a broadening range. After identifying this pattern, traders can draw diagonal lines connecting the tops and bottoms of the range and consider trades against both sides of the range. Take-profit targets can be set at the opposite side of the range from your trade, or based on your preferred risk/reward ratio.
Remember, these examples and guidelines are for illustrative purposes and real-world trading involves considering a variety of other market factors. Trading carries risk and it is essential to use risk management strategies and conduct thorough analysis before executing any trade.
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