How to identify trend reversals: the blow-off bottom


How to identify a blow-off bottom? 

It's always a three-candle sequence, that's all there is to it, the first two declining, the second candle's volume greater than the first, the third candle closing up with a higher low than the second candle.

  1. The first candle in the sequence closes down. Volume doesn't matter

  2. The second candle in the sequence close down If it rebounds as shown below, it is a stronger formation than just going above and closing at the lows of the range. But it doesn’t have to rebound

  3. The volume for the second candle in the sequence must be greater than the previous candles volume. This is a key factor, it is what you should always look for in a declining price formation. The bottom is almost always signalled by a strong rise in volume.

  4. The third candle in the sequence must close up

  5. The low of the third candle in the sequence must be higher than the low of the second candle in the three candle sequence.

The buy point is after the third candle is formed and finished, we prefer weekly candles as the longer time frame is more accurate for analysing larger trend reversals, however it works on every time scale. Then if a blow-off bottom has occurred it's time to buy, the exit is up to the individual trader.