Matching High Candlestick Pattern: Backtest Findings

Candlestick charts are instrumental in identifying potential changes in short-term trends, which can be signals for potential trading opportunities. Among the various candlestick patterns, the matching high pattern is very unique. Want to learn about the matching high candlestick pattern?

The matching high pattern is a bearish reversal candlestick pattern that is seen in an upward price swing. It consists of two candles: the first candlestick is a long bullish candle, while the second candlestick is a small bullish candle. Both candlesticks have identical closes, suggesting that the price may have found resistance and is likely to reverse on the next candlestick.

In this post, we take a look at the Matching High candlestick pattern.

What is a matching high candlestick pattern?

The matching high pattern is a bearish reversal candlestick pattern that is seen in an upward price swing. It consists of two candles: the first candlestick is a long bullish candle, while the second candlestick is a small bullish candle. Both candlesticks have identical closes, suggesting that the price may have found resistance and is likely to reverse on the next candlestick.

The pattern indicates that the buying pressure of the upswing is losing its momentum, and the bears may take control of the market. Traders and technical analysts use the pattern to anticipate a trend reversal and to position themselves for bearish moves. However, the pattern may not always be reliable as a reversal pattern.

In theory, the pattern signals a potential end to the buying pressure when two consecutive bullish candlesticks close at or around the same price level, and it is confirmed by the price declining following the pattern. However, the matching high pattern can also act as a continuation pattern for a strong uptrend.

Understanding the basics of candlestick patterns

Basically, a candlestick represents the price movement during a trading session, and it displays the opening, closing, high, and low prices of the session. The body of the candlestick represents the price between the opening and closing prices, while the wicks or shadows above and below the body represent the movement to the high and low prices of the session. Both the body and the shadows are color coded to indicate the overall direction of the price movement during the session.

Candlestick patterns refer to visually recognizable shapes and patterns formed by one or more candlesticks that are used to identify potential trend reversals or continuation patterns. Some of the most common candlestick patterns include doji, hammer, hanging man, engulfing pattern, and the matching high pattern. These patterns are used to identify potential trading opportunities, such as a trend reversal or continuation, as well as to determine the entry and exit points for a trade.

Traders, especially price action traders use candlestick patterns for technical analysis. They analyze the price charts looking for patterns that can predict future price movements. Candlestick patterns give the best results when combined with other technical analysis tools, such as trendline, support/resistance levels, and technical indicators.

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How to identify a matching high pattern

The matching high candlestick pattern is a bearish reversal pattern that consists of two candlesticks and occurs over two trading sessions. It appears in an upward price swing, which could be a rally (pullback) in a downtrend or an impulse wave in an uptrend. To identify the pattern, look for the following characteristics:

  • An upswing: The matching high pattern is a bearish reversal pattern, so it must occur in an upward price swing, which can be a pullback in a downtrend or an impulse wave in an uptrend. The former is preferable.
  • Bullish first candle: The first day must have a long bullish candlestick, in line with the ongoing upswing.
  • Another bullish candle: This candlestick is much smaller than the first one, but it must open lower than the closing price of the previous day.
  • Same closing price: The second candlestick must have a closing price equal to or extremely close to the closing price of the first day.
  • Shadows: Both of the candlesticks can have upper shadows that end differently. What matters is the closing prices.
Matching High candlestick pattern
Matching High pattern backtest

The significance of the matching high pattern in technical analysis

The matching high candlestick pattern is typically considered a bearish reversal pattern, and technical analysts use it to predict a potential reversal to the downside. The pattern consists of two consecutive bullish candlesticks that close at the same level in an upward price swing.

The pattern signifies a potential end to the buying pressure when two consecutive bullish candlesticks close at or around the same price level. This is especially true if the pattern is confirmed by the next candlestick — it must close below the pattern.

The significance of this pattern is based on the premise that the failure of the second candle to close above the first candle’s close generates a resistance level that can cause the price to reverse. Bears are likely to push the price down from there, leading to a bearish swing.

However, in a strong uptrend, the matching high pattern may act as a continuation pattern, especially if the next candle breaks above the high of the pattern.

Interpreting the bullish and bearish signals of a matching high pattern

Generally, the matching high pattern is considered a bullish reversal pattern. The reason is that the second candle failed to close above the first candle’s close, making the level become resistance that could force the price down. As a result, sellers are likely to attempt to push the price lower from there.

If you want to use this pattern to find bearish signals, look for the one that forms around a key resistance level in an already existing downtrend. In this case, the bearish signal is confirmed if the price falls following the matching high pattern. That is, the third candle must be bearish and fall below the low of the first or second candle.

On the flip side, the pattern can give a bullish continuation signal if it forms in the upward impulse wave of an uptrend. In this case, the existing uptrend signifies a strong upward momentum that is likely to continue after the matching high pattern. For this bullish signal, the candle following the pattern must be bullish and close above the close of the two candles that make up the matching high pattern.

Common uses of the matching high pattern in stock trading

In stock trading, the matching high pattern can be used in different ways. Some of the common ways traders use the matching high pattern when trading stocks include:

  • To identify the potential end of a rally in a downtrend: As a bearish reversal pattern, the matching high pattern is best used to identify the potential end of a rally (pullback) in an uptrend. If the next candlestick after the pattern is bearish and breaks below the low of the pattern, it could signify the beginning of the next impulse wave for the downtrend.
  • To identify the continuation of an uptrend: In a strong uptrend, the matching high pattern occurring in an upward impulse wave only marks the continuation of the uptrend. This is especially true if the next candlestick is bullish and breaks above the close of both candlesticks that make up the pattern.
  • To spot entry and exit points: Some traders use the matching high pattern to determine entry and exit points, depending on the market context.
  • For placing stop-loss orders: Traders can also use the matching high pattern to mark where to place their stop-loss orders. Typically, for a short position in a downtrend, the stop loss is placed a level above the high of the pattern.

How to use the matching high pattern in conjunction with other technical indicators

You can use a matching high pattern in combination with other technical analysis tools and indicators. It is necessary to use other tools to confirm the pattern, even if the pattern occurs in the right setting and the third candlestick breaks below it.

Some of the technical tools and indicators you can use with the matching high pattern include trendline, support and resistance level indicators, moving averages, Bollinger Bands, and momentum oscillators. In a downtrend, use a trend line or a long-period moving average to indicate the downtrend and the descending resistance levels of the trend, which are where you can look for the matching high patterns.

You can use momentum oscillators like stochastic or RSI to confirm the bearish reversal signal. An RSI descending from an overbought region following the formation of a matching high pattern around a resistance level confirms the bearish reversal signal.

In an uptrend, use a trendline or a long-period moving average to indicate the trend. Since the pattern can give a trend continuation signal in a strong uptrend, you can use the MACD to confirm the increasing momentum when the price breaks above the pattern. For example, the MACD line crossing above the zero level when the third candlestick breaks above the matching high pattern confirms that the upward momentum is very strong.

Mistakes to avoid when interpreting matching high pattern

When interpreting the matching high pattern, certain mistakes can happen and lead to inaccurate predictions with unnecessary losses. You should be aware of these mistakes and avoid them when interpreting the pattern. Here are some of them:

  • Ignoring the trend where the pattern forms: The matching high pattern is best traded in a downtrend when it forms at the end of a pullback. This is where it has an effective bearish reversal effect. If it forms in a strong uptrend, you may watch out for a bullish continuation signal if the price breaks above that common closing price.
  • Not confirming the pattern: It is necessary to wait for confirmation before entering a short position based on the matching high pattern. If not, you may encounter too many losing trades.
  • Not using other analysis tools: The matching high pattern should not be used in isolation. Combine it with other technical analysis tools and indicators to confirm the potential reversal and identify the best entry points.

Real-life examples of successful trades using matching high pattern

In the Tesla, Inc chart (TSLA) below, you can see a matching high pattern that formed in a young downtrend. The next candle after the pattern is bearish and closed below the low of the pattern, confirming the bearish reversal signal. Trade entry should be at the open of the next candle after the confirmation. Note the location of the stop loss and profit target. The profit target should be at least 2x the stop loss.

Matching High pattern trading rules

Tips for improving your accuracy in identifying matching high pattern

As a trader, you always have to improve your accuracy in identifying patterns. Here are some tips that can help you identify the matching high pattern:

  • Make use of multiple timeframes: When you identify the pattern, analyze the chart in other timeframes. This can help you to understand the market context where the pattern forms.
  • Understand the psychology behind the pattern: The matching high pattern is formed when buyers lose momentum and sellers enter the market to push the price down. If you understand this, you must wait for the third candlestick to confirm the action of the sellers before making a trade. That is, the price must close below the pattern to signify that sellers are in control.
  • Confirm the pattern with other technical analysis tools: It is necessary to confirm the matching high pattern with other technical analysis tools like trendlines, moving averages, or volume indicators to get a better understanding of the price action.
  • Use a demo account to practice: Practice identifying and trading the matching high pattern with a demo trading account. This can help you to gain experience and confidence without risking real money.

FAQ:

How does the matching high pattern indicate a potential trend reversal?

The matching high pattern is a bearish reversal candlestick pattern occurring in an upward price swing, consisting of two candles with identical closes. The pattern suggests a potential end to buying pressure, signaling a likely reversal to the downside, especially when confirmed by a subsequent candle closing below the pattern.

How can one identify a matching high pattern in a price chart?

Candlestick patterns represent price movements, and traders use them to identify potential trend reversals or continuations, alongside other technical analysis tools. The pattern consists of an upswing, a long bullish first candle, a smaller second bullish candle opening lower, and both candles having identical closing prices.

What is the significance of the matching high pattern in technical analysis?

The pattern is typically considered a bearish reversal signal, anticipating a trend reversal to the downside based on the failure of the second candle to close above the first. The pattern is generally a bearish reversal, but it can give a bullish continuation signal in a strong uptrend, depending on the market context.

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