Matching Low Candlestick Pattern: Backtest Findings

The Japanese candlestick chart is very popular among traders because it is easy to visualize and see shapes and patterns that can give a clue about how the price might move in the future. One rare pattern that tells a cool story about the price action is the Matching Low pattern. Let’s find out what this Matching Low pattern is.

The matching low candlestick pattern is a bullish reversal pattern that forms in a downward price swing. It consists of two candles: the first day’s candlestick is a long bearish candle, and the second day’s candlestick is a small bearish candle. Both candlesticks have identical closes, suggesting that there may be short-term support soon and the market trend is likely to reverse on the next candlestick.

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

What is the matching low candlestick pattern?

The matching low candlestick pattern is a bullish reversal pattern that emerges during a downtrend. It consists of two candles: the first day’s candlestick is a long black candle, and the second day’s candlestick is a small black candle. Both candlesticks have identical closes, suggesting that there may be short-term support soon and the market trend is likely to reverse on the next candlestick.

The pattern indicates that the selling pressure of the downtrend is losing its momentum, and the bulls may take control of the market. Traders and technical analysts use the pattern to anticipate a trend reversal and to position themselves for bullish moves. But the pattern may not be reliable as a reversal pattern.

In theory, it serves to signal a potential end to the selling pressure when two consecutive bearish candlesticks close at or around the same price level, especially if it is confirmed by a price move higher following the pattern. However, in reality, the matching low pattern acts as a continuation pattern to the downside more often. To serve as a bullish reversal pattern, other technical tools and the market condition must support a bullish move. For instance, it is more likely to behave as a bullish reversal if there is an uptrend and it forms at a support level after a pullback.

Understanding the basics of candlestick patterns

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.

As you know, 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. Candlesticks are color coded to indicate the overall direction of the price movement during the session.

Candlestick patterns are formed by one or more candlesticks that indicate how the price might move in the nearest future. Some of the most common candlestick patterns include doji, hammer, hanging man, engulfing pattern, and the matching low 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.

Candlestick patterns are widely used by traders of all levels and are an essential tool for technical analysis. But they perform best 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 low candlestick pattern is a bullish reversal pattern that consists of two candlesticks and occurs over two trading sessions. It appears in a downward price swing, which could be a pullback in an uptrend or an impulse wave in a downtrend. To identify the pattern, look for the following characteristics:

  • A downswing: The matching low pattern is a bullish reversal pattern, so it must occur in a downward price swing, which can be a pullback in an uptrend or an impulse wave in a downtrend. The former is preferable.
  • Bearish first candle: The first day must have a long black candlestick, in line with the ongoing downswing.
  • Another bearish candle: This candlestick is much smaller than the first one, but it must open higher 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 lower shadows that end differently. What matters is the closing prices.
Matching Low candlestick pattern
Matching Low candlestick pattern backtest

The significance of the matching low pattern in technical analysis

The matching low candlestick pattern is generally considered a bullish reversal pattern and is used by technical analysts to predict potential trend reversals. The pattern consists of two consecutive bearish candlesticks in a downward price swing that closes at the same level.

The pattern signifies a potential end to the selling pressure when two consecutive bearish candlesticks close at or around the same price level. This is especially true if it is confirmed by the next candlestick if it closes above the pattern.

The significance of this pattern is based on the premise that the failure of the second candle to close below the first candle’s close generates a support level for a bullish reversal. With that, bulls are likely to attempt a rally using the support level as a springboard, which would lead to a new bullish swing.

However, in reality, the matching low pattern, more often than not, acts as a continuation pattern to the downside. The bullish reversal effect is only likely to happen if the pattern forms around a key support level in an uptrend.

Interpreting the bullish and bearish signals of a matching low pattern

The matching low pattern is often considered a bullish reversal pattern. The reason is that the failure of the second candle to close below the first candle’s close generates a support level for a bullish reversal. As a result, buyers are likely to attempt a rally using the support level as a springboard, creating a new trend higher.

If you want to use this pattern to find bullish signals, look for the one that forms around a key support level in an already existing uptrend. In this case, the bullish signal is confirmed if the price rebounds following the matching low pattern. That is, the third candle must be bullish and rise above the high of the first or second candle.

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

Common uses of the matching low pattern in stock trading

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

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

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

You can use a matching low pattern in combination with other technical analysis tools and indicators. In fact, you should use other tools to confirm the pattern, even if the pattern occurs in the right setting and the third candlestick breaks above the pattern.

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

You can use momentum oscillators like stochastic or RSI to confirm the bullish reversal signal. An RSI rising from an oversold region following the formation of a matching low pattern around a support level confirms the bullish reversal signal.

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

Mistakes to avoid when interpreting matching low pattern

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

  • Not paying attention to the trend where the pattern forms: The matching low pattern is best traded in an uptrend when it forms at the end of a pullback. This is where it has a bullish reversal effect. If it forms in a strong downtrend, you may watch out for a bearish continuation signal.
  • Not waiting for confirmation: It is necessary to wait for confirmation before entering a long position based on the matching low pattern. If you do otherwise, you may encounter too many losing trades.
  • Not using other analysis tools: The matching low pattern should not be used in isolation. You should use other technical analysis tools and indicators to confirm the potential reversal and identify the best entry points.
  • Relying too much on the pattern: Relying too much on the pattern can lead to many losses and low profitability. You should combine it with other strategies.

Real-life examples of successful trades using matching low pattern

The image below shows the WBA price chart. You can see the matching low pattern that formed when the price pulled back toward a support level. Although the two candlesticks that immediately followed the pattern were bullish, they did not confirm the bullish reversal. It wasn’t until the fifth candle that we had a close above the high of the second candle in the pattern, confirming the intent of the bulls to push the price higher. 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 Low pattern trading rules

Tips for improving your accuracy in identifying matching low pattern

It may be quite necessary to improve your accuracy in identifying the matching low pattern. Here are some tips that can help:

  • Use multiple timeframes: Check the matching low pattern across multiple timeframes to confirm its validity. This can help you to understand the market context where the pattern forms.
  • Understand the psychology behind the pattern: The matching low pattern is formed when sellers lose momentum, and buyers enter the market, pushing the price higher. If you understand this, you must wait for the third candlestick to confirm the action of the buyers before making a trade.
  • Confirm the pattern with other technical analysis tools: Confirm the matching low pattern with other technical analysis tools like trendlines, moving averages, or volume indicators to get a better understanding of the price action.
  • Practice with paper trading: Practice identifying and trading the matching low pattern with a paper trading account. This can help you to gain experience and confidence in your trading decisions without risking real money.

FAQ:

How does the Matching Low pattern indicate a potential trend reversal?

The Matching Low pattern is a bullish reversal pattern that appears in a downward price swing, characterized by two consecutive candles with identical closes. The pattern suggests a potential end to the selling pressure in a downtrend, anticipating a bullish reversal, especially if confirmed by a subsequent candle closing above the pattern.

What are the basics of candlestick patterns and their significance in trading?

Candlestick patterns, including the Matching Low, visually represent price movements and are crucial for identifying potential trend reversals or continuations in trading. While generally considered a bullish reversal pattern, the Matching Low can act as a continuation pattern to the downside. Its reliability depends on market conditions and supporting technical tools.

How can one identify a Matching Low pattern in a price chart?

Generally considered a bullish reversal, the pattern signifies a potential end to selling pressure, creating a support level for a bullish reversal. The Matching Low pattern, a bullish reversal, consists of an initial downswing, a long bearish candle, a smaller bearish candle opening higher, and both candles having identical closing prices.

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