A key reversal bar is a particular instance of a reversal bar that shows clearer signs of a reversal.
A bullish key reversal bar opens below the low of the previous bar and closes above its high.
A bearish key reversal bar opens above the high of the previous bar and closes below its low.
By definition, key reversal bars open with a price gap. As gaps within intraday time frames are rare, you will find most key reversal bars in the daily and above time-frames.
What does it mean?
A down gap is a powerful down thrust. When the market rejects such a strong bearish move with certainty, it might have reversed its sentiment to bullish.
On the other hand, when a gap upwards bumps into clear resistance, the market might have turned bearish.
Essentially, a key reversal bar is a violent display of strength that hints at a change of market sentiment.
How do we trade it?
- Buy above a bullish key reversal bar (If uncertain, wait for the price to close above it before buying.)
- Sell below a bearish key reversal bar (If unsure, wait for the price to close below it before selling.)