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How a Key Reversal Bar Pattern Can Alert You to a Potential Trade

Learn to trade this high-confidence setup

by Vadim Pokhlebkin
Updated: September 11, 2014

Senior Analyst Jeffrey Kennedy is the editor of our Trader's Classroom service and one of our most popular instructors. This article is part 5 in our 6-part series, Find Trading Opportunities in Any Market. You can browse all articles here. In this lesson, you will learn how a popular chart pattern can identify a trade setup and what will turn the setup into an actionable trade.

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Too often, people take a "ready-fire-aim" approach to trading -- which is obviously a backwards way of doing it. A trade setup is different from a trade trigger. Today, we'll talk about what turns a setup into a trigger.

A trade setup that I'm always on the lookout for is a double close key reversal outside bar combination.

A double close key reversal forms when prices make a new extreme, yet close above or below the prior two closes. The outside bar portion of this formation is self-explanatory: The current bar's high and low are above and below the previous price bar's high and low.

It is important to remember that this bar pattern is a setup only -- and not a signal to immediately take a trade. For this formation to become tradable, it must prove itself by trading beyond the key reversal bar's high or low. If the high of the key reversal bar is penetrated, then the low of the key reversal bar may act as an initial protective stop for longs and vice versa for shorts.

By employing these guidelines, your trading style becomes one of ready-aim-aim-aim-fire. Watch this video for more:

Watch Introduction to the Wave Principle Applied

In this free 15-minute video, EWI Senior Analyst Jeffrey Kennedy explains how to take the Wave Principle and turn it into a trading methodology. You'll learn the best waves to trade, where to set your protective stop, how to determine target levels, and more.

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