Ladder Top Candlestick Pattern: Backtest Findings
Candlestick charts, introduced by Japanese traders in the 18th century, are very useful in technical analysis due to the recognizable patterns that often have predictive outcomes. The ladder Top pattern is a rare but unique candlestick pattern, known for its bearish effect. Let’s find out what the Ladder Top pattern is and how it works.
The Ladder Top pattern is a bearish reversal candlestick pattern that forms at the top of an upward price swing. It consists of five candles: the first four are bullish candlesticks, in line with the ongoing upswing, while the fifth one is a bearish candle that gaps below the fourth candle. The pattern shows a progressive weakness on the part of the bulls and the likelihood of a bearish reversal.
In this post, we take a look at the Ladder Top candlestick pattern.
Understanding the Ladder Top Candlestick Pattern
The Ladder Top candlestick pattern is a bearish reversal formation that occurs at the top of an upward price swing. It consists of five candles, starting with three consecutive long bullish candlesticks that resemble the three white soldiers formation. The opening and closing prices of these three candlesticks are progressively higher, in line with the existing upward price swing.
The fourth candlestick, which is also bullish, has a small body and a sizeable lower shadow. This candlestick shows that the upward momentum is losing strength. The fifth candlestick is bearish and gaps below the body of the fourth candlestick. The gap and the bearish fifth candle indicate a potential reversal in the direction of the price.
The Ladder Top pattern is an early sign of the end of an upward move and the beginning of a new downward swing. But since the pattern is not very common, it should not be relied upon as a sole basis for trading decisions. It may be necessary to confirm the pattern with other indicators before taking any trading actions.
How to Identify a Ladder Top Pattern in Trading
Identifying the Ladder Top candlestick pattern can be challenging, as the pattern is quite rare and consists of multiple candlesticks. However, there are some clues that can help you to recognize this pattern. Here are what to look for:
- An upswing: The Ladder Top pattern forms at the upper end of an upward swing, which can be an uptrend or a pullback (rally) in a downtrend. So, you must look for the pattern in a swing high.
- Three white soldiers candles: The pattern’s first three candlesticks are consecutive long bullish candles, with each opening and closing above the previous day’s open and close, in line with the ongoing upswing. So, they look like the three white soldiers formation, with successive higher opens and close.
- A small bearish candle: The fourth is also a bullish candlestick but with a short body and a sizeable lower shadow, indicating weakness in the upswing.
- A bullish candle: Finally, the fifth candlestick is a bearish candle that opens below the real body of the previous candle, completing the pattern.
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The Significance of Ladder Top in Technical Analysis
The Ladder Top candlestick pattern is typically considered a bearish reversal pattern, and price action traders use it to predict a potential reversal to the downside. The pattern signifies a potential end to the buying pressure and the beginning of a new downward swing.
The pattern forms at the top of a down move and shows a weakening of the bullish momentum. The last candle in the pattern, which is bearish and gaps to the downside, signals the potential beginning of a new bearish move. So, the pattern has a bearish significance, indicating a potential downward reversal.
The significance of the pattern is higher if it occurs at a resistance level in a downtrend. That is, if the pattern forms around a resistance (even a downward trendline or a long-period moving average) at the end of a rally in a downtrend, it could signal the beginning of the next downward impulse wave.
Ladder Top vs. Other Bearish Candlestick Patterns
The Ladder Top pattern is a multiple-candle pattern with five unique candlesticks. This makes it quite complex and different from other bearish patterns. The pattern is expectedly very rare, owing to its complex multi-candle nature.
As a result, it is difficult to identify on the price chart, unlike other bearish patterns like the shooting star and bearish engulfing which consist of only one or two candles, as the case may be, and are easy to spot.
Apart from these structural differences, the pattern can be used as any other bearish candlestick pattern — to spot short-selling opportunities at key resistance levels in the market. As with other bearish patterns, it works better in combination with other technical tools like trendlines, moving averages, and momentum indicators.
Trading Strategies for Ladder Top Pattern
You can use the Ladder Top pattern to formulate trading strategies. The pattern gives a bearish reversal signal, but it may not be wise to use it to anticipate a reversal of a full-blown uptrend.
The two strategies you can formulate with this pattern are as follows:
- Short the upthrust of the resistance level in a range-bound market
- Short the rally at a key resistance level in a downtrend
In both cases, the fifth candle in the pattern indicates the beginning of the next downswing. Let’s give an example with shorting the rally in a downtrend. Here is how to use the Ladder Top pattern to short a rally in a downtrend:
- Identify a downtrend with a trendline or a long-period moving average.
- Mark key resistance levels in the market.
- Wait for the price to rally to a key resistance level or the trendline or moving average line.
- Look for the Ladder Top pattern.
- If the pattern form around a resistance level, enter a short position on the opening of the next candle after the fifth candle of the pattern.
- Place your stop loss above the high of the rally and your profit target just above the next support level.
Understanding the Psychology Behind Ladder Top Pattern
The ladder Top pattern has four bullish candlesticks, in line with the ongoing bullish swing where it forms. However, the fourth candlestick has a small body and a significantly long lower shadow, indicating that the buying pressure is weakening. In other words, the upward momentum is losing strength.
By the time the fifth candlestick opens with a gap below the body of the fourth candlestick, the bears are already exerting their dominance in the market. The fifth candle closing bearishly indicates that the bears are in control and a potential bearish reversal may be about to take place.
In essence, the Ladder Top pattern is an early sign of the end of the bullish swing and the beginning of a new downward swing.
How to Confirm a Ladder Top Pattern
To confirm a Ladder Top pattern, you need to use other technical analysis tools and indicators to ascertain the market trend, the presence of a resistance level, and whether the market is already overbought when the pattern formed. These can suggest the likelihood of a bearish reversal.
Some of the technical tools and indicators you can use to analyze the Ladder Top pattern include trendline, support level indicators, moving averages, Bollinger Bands, and momentum oscillators.
In a downtrend, use an uptrend line or a long-period moving average to indicate the trend and show descending resistance levels where you can look for the Ladder Top patterns. The pattern is more effective if it forms at a resistance level in a down-trending market
You can also use momentum oscillators like stochastic or RSI to confirm the bearish reversal signal. If the RSI is descending from an overbought region when a Ladder Top pattern forms around a resistance level, it helps to confirm the bearish reversal signal.
Real-life Examples of the Ladder Top Pattern in the Market
The Ladder Top pattern is very rare to see on a price chart. But when you are able to see it, it should be traded like any other bearish reversal pattern.
In the image below, you can see that the pattern formed when the price went to retest the resistance it encountered earlier. Notice the three bullish candles and then the large bearish candle that gapped below the fourth candle. A trade entered at the close of that candle would have yielded a good profit.
Avoiding False Signals in Ladder Top Pattern
To avoid false signals when trading the Ladder Top pattern, you must only trade patterns that form in the right market condition. The pattern works best if it forms at the end of a rally in a downtrend. This is where its bearish reversal effect is strongest, as it aligns with the downward momentum of the downtrend.
Another thing you can do to reduce false signals is to wait for confirmation before entering a trade. The confirmation can come from analyzing the market with other technical analysis tools, such as trendlines and resistance levels. Overbought levels in momentum oscillators like the RSI can also be used to confirm the potential reversal and identify the best entry points.
Final Thoughts on Ladder Top Candlestick Pattern
The Ladder Top candlestick pattern is a very rare candle pattern that can be used to anticipate a downward reversal in a temporary or short-term uptrend. The nature of the candlesticks that make up the pattern shows that the upward trend is getting exhausted, giving way to a downward move.
It is a complex pattern and is difficult to identify. But price action traders who can spot it use it to find short-selling opportunities in the right market conditions. The pattern works best when shorting a rally in a downtrend or shorting from the resistance level of a range-bound market.
What is a ladder top?
The ladder top pattern is a bearish reversal candlestick pattern that forms at the top of an upward price swing. It consists of five candles: the first four are bullish candlesticks, in line with the ongoing upswing, while the fifth one is a bearish candle that gaps below the fourth candle.
The pattern shows exhaustion in the bullish momentum and the likelihood of a bearish reversal. It is considered a bearish reversal signal when it forms in the right setting.
What is the most powerful candlestick pattern?
No candlestick is more powerful than the others. It all depends on the market context in which a candlestick pattern forms. Nonetheless, the hammer, shooting star, morning/evening stars, and engulfing patterns are most commonly used by price action traders.
But it is not that they are more powerful, but that they are more common and easier to identify. In price action trading, what matters the most are the market conditions and having a confluence of many factors that can give high-probability trades.
What is the most powerful bearish candlestick pattern?
There is no most powerful bearish candlestick pattern, as no bearish candlestick pattern is more powerful than others. The effectiveness of any bearish candlestick depends on the market context where it forms. A bearish pattern that forms at a key resistance level in a downtrend is a more powerful bearish signal than another that forms in a strong uptrend with strong upward momentum.
Having said that, price action traders most commonly use the shooting star, evening star, and bearish engulfing patterns. However, it is not necessarily that these ones are more powerful but they occur more commonly on the chart.
What is a ladder pattern?
The ladder pattern is a multi-candlestick reversal pattern that can form at the end of an upswing or a downswing. There are two types — the ladder top pattern and the ladder bottom pattern. Both consist of five candlesticks. The ladder bottom is considered a bullish reversal pattern, while the ladder top is considered a bearish reversal pattern.
FAQ:
How is the Ladder Top pattern identified in trading?
Identifying the Ladder Top candlestick pattern involves recognizing three consecutive long bullish candlesticks, followed by a bullish candle with a small body and a significant lower shadow, and concluding with a bearish candle that opens below the fourth candle.
How does the Ladder Top pattern differ from other bearish candlestick patterns?
The Ladder Top pattern is a bearish reversal candlestick pattern consisting of five candles, indicating a potential reversal in the price direction. The Ladder Top pattern is a complex, multiple-candle pattern with five unique candlesticks, distinguishing it from other bearish patterns like the shooting star and bearish engulfing, which are simpler and easier to spot.
How can I confirm a Ladder Top pattern?
The Ladder Top pattern is typically considered a bearish reversal pattern, signifying a potential end to buying pressure and the beginning of a new downward swing. Confirming a Ladder Top pattern involves using other technical analysis tools and indicators, such as trendlines, support levels, moving averages, Bollinger Bands, and momentum oscillators, to ascertain the likelihood of a bearish reversal.