What is a Counter Attack Line?
A bullish counter attack line happens in a downtrend when a black candlestick is followed by a white candlestick that opens at a new low but then closes back at the close of the black candlestick. For this to happen, the market must gap sharply lower at the open but then rally to regain ground and close again at the same level.
A bearish counter attack line is the precise opposite. They appear in uptrends when a white candlestick is followed by a black candlestick where the black gaps sharply higher at the open but closes at the same level as the last close. A bearish counter attack can only form when the market gaps significantly higher at the open.
Reliability of a Counter Attack Line
A counter attack line is seen as stronger if the candles producing the pattern are long relative to the others around them. This is especially important for the second or counter move candle.
Counter attack patterns with small, doji-type candles are routinely filtered out as noise.
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Normally counter attack lines only appear when there’s a time interval between the close of the first candle and the open of the second. Though they can appear when a price is moving quickly, for example on the publication of relevant news.
Trend indicators, like moving averages, and oscillators don’t analyze open and close price action. For this reason counter attack lines are easily missed without the use of candle analysis software. On first sight a counter attack can look like it is moving in the direction of trend .
Market Psychology
Both types of counter attack line can suggest a sudden change in sentiment; this is why traders take careful note of them when looking for signs of trend reversals.
The opening move means that there’s a strong wave of buying or selling, which is enough to gap the opening level significantly higher (or lower). But this creates an equally strong counter move on the sell-side (or buy-side).
In this pattern, the counter move, or counter attack line is suggestive of the new trend direction.
This is because the initial move, in the direction of the trend, is assumed to have been initiated by less informed traders who’re buying at the top, or selling at the bottom of a trend. The “counter attack” or fading is presumed to be from more informed traders, who’re selling the top or buying the bottom.
A counter attack signal is more relevant if it coincides with other signals that show the trend is overbought or oversold, for example when divergences are present.
How to Trade a Counter Attack Line
Bullish example
This first example is of a bullish counterattack line that’s developing in GBP/USD.
The counter attack candle is marked with the green up arrow. The signal triggers when the bearish, black candle is followed by the “gapping” white candle. At that point the trend is bearish.
This counter attack also agrees with a bullish divergence that appears either side of it and is marked on the chart. This gives additional support that sentiment is turning from bearish to bullish.
To trade a bullish counter attack:
- Wait for a counter attack line in a down trend
- Use the length of the candle pair to measure strength
- Check for other bullish confirmations, such as divergences
- Once identified, enter a pending buy order to open at or below the open of the black candle
Place the stop loss below the low of the white candle, and at least far enough away not to be triggered by whipsaw that’s likely to appear at a trend bottom. See this page for calculating an appropriate stop loss distance.
If the bullish trend develops further, increase the position size, within due risk limits. If appropriate, trail the take profit higher and stop loss higher as the trend progresses higher.
Bearish counter attack example
To trade a bearish counter attack:
- Wait for a counter attack pair in a bullish trend
- Use the gap distance to get an idea of counter strength
- Look for other bearish confirmations like divergences
- Enter a pending sell order to open at or above the open of the white candle
Figure 4 highlights a bearish counter attack line emerging in Brent crude oil. In the daily chart a bearish trend is already establishing. A short-lived bullish retracement lifts the market higher for a time.
The rally ends with the counter attack signal, marked on the chart with the red down arrow.
This counter attack presents a lower risk trade because the bearish trend is already established and therefore the sell occurs in the direction of the trend.
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