Via Forexop

Last updated on August 26th, 2020

A high wave candlestick is considered a price reversal but is not associated with a specific direction. As a standard rule if the body is black it is taken as bearish, while if it is white it is treated as bullish.

However this rule is weak because of the small size of the body.

High wave

The trend appearance, and other factors, should be used for further confirmation.

If the pattern is at a local high, it is taken as a bearish reversal, whilst at a trend low, it can be a sign of a bullish reversal.

Appearance

A high wave candle is easily identified by its long upper and lower shadow. The color of the candlestick can be either black or white, and is less important than shadows. The candle body is narrow, however if it is completely flat, or if the shadows are short, the pattern is better classified as a doji or possibly a spinning top (see list).

As a general rule, the body size should be greater than zero while the wicks (shadows) should be at least twice the body size.

The shadows do not need to be the same size. The upper shadow can be bigger or smaller than the lower.

High waves can appear in clusters, especially in trend reversal areas.

Meaning

The high wave is usually associated with a change in sentiment and indecision. Although, this change might be just a brief correction in the main trend.

The small candle body means that bulls and bears are nearly evenly matched. The long shadows indicate strong volatility during the open and close of the session but with a lack of clear direction.

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It is worth checking if the candle’s shadow has tested support or resistance lines and has been rejected at those levels. This can add weight to either the bullish or bearish reversal stance.

Figure 2: High wave patterns in rising trend

Figure 2: High wave patterns in rising trend © forexop

The above chart shows three high wave patterns in a rising trend, followed by a cluster of three at the local top.

High wave can also occur in consolidation areas and these cases sometimes precede a breakout. The chart below for Bitcoin shows a high wave in a consolidation area. Following the breakout, another cluster of three patterns appears as the trend enters another consolidation stage.

Figure 3: High wave consolidation before breakout

Figure 3: High wave consolidation before breakout © forexop

Performance of high wave

We tested high wave with EUR/USD daily candle charts over a twelve year period. We examined the price over the 15 bars following each pattern. A bullish pattern was classified as correct if the price high-watermark over that period was greater than the price low-watermark. A bearish pattern was classified as correct when the low-watermark was greater than the high.





EUR/USD daily


True bullish positives 57.25% True bearish positives 53.47%
False bullish positives 42.75% False bearish positives 46.53%
Avg profit 0.35%

0.02%
Total 414

331

As the data shows, out of 414 bullish cases, the pattern was correct 57.3% of the time. For the bearish patterns, the ratio was slightly lower at 53.5% of the time. In each case, the pattern returned a small average profit of 0.35% and 0.02%.

The test results for GBP/USD were roughly the same.





GBP/USD daily


True bullish positives 51.41% True bearish positives 53.11%
False bullish positives 48.59% False bearish positives 46.89%
Avg profit 0.05%

0.14%
Total 389

354

The bearish patterns were slightly more reliable, but in both cases the profits were marginal.

For Bitcoin, we tested the pattern over a three year period on the daily candle chart. The bullish pattern was correct in 55% of occurrences. The bearish pattern was correct in 49.4% of occurrences.





BTCUSD daily


True bullish positives 55.00% True bearish positives 49.37%
False bullish positives 45.00% False bearish positives 50.63%
Avg profit 0.96%

-1.79%
Total 80

79

The bullish patterns returned an average profit of nearly 1%. The bearish pattern returned an average profit of minus 1.8%. The reason for this may be that Bitcoin had some strong rallies during the test period.

Trading high wave

Despite high wave being a weak pattern, it does show some promise on several daily candle charts. The tests show that the trading profits to be gained are typically quite low. This might be due to the reversals, when they occur, being short lived.  For that reason, looking for additional confirmations is the best approach to trading the high wave.

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