The rejection formation is also known as a pin bar, an inverted hammer or a hammer. Many traders prefer to trade using this pattern given that they are very versatile, easy to recognize and they create many great trading opportunities. Do you want to learn how to use the bearish rejection pattern in binary options trading?
The Bearish Rejection Pattern
Traders use the rejection pattern to enter the market alongside the trending momentum. When pin bars form, it is not uncommon for the markets to undergo a reversal.
What makes up a pin bar?
The pins that form the rejection pattern are easily identifiable. The pin bars feature a large wick that protrudes through one side of the body, whereas the body is two times smaller compared to the wick.
A bearish rejection pattern features a long wick at the upper part of the body. This is an indication that when the prices of the underlying asset attempt to rise, they encountered a resistant and the market rejected the move toward higher prices.
At the other end of the spectrum is the bullish rejection pattern, which features a longer wick on the lower part of the body. Contrary to the bearish pattern, this bullish pattern forms when prices attempt to move toward a lower trend and encounter a support level that causes the markets to reject the price move. In effect, the prices are pushed back toward the opening price.
The bearish rejection pattern is an excellent signal for impending weaknesses in price movements and it offers an opportunity to enter into short positions.
Here’s how one can summarize the bearish rejection pattern:
The formation occurs when the markets reject low or high price movements. As such, the prices will move in a single direction and then reverse to end the session close to or past the opening price.
The pattern is characterized by open and close prices that are very close to each other. Both the close and the open are also usually nearer to the end of the pin bar.
Ideally, the rejection bar tail should be longer than the body—this is an indication of a more significant rejection of high or low price movements. In a bearish formation, the head of the rejection embodies the highest price on the candle.
Trading the bearish rejection pattern
The most important factor to look out for when trading rejection pin bars is their location on the charts. Trading pin bars randomly without taking into consideration their location could result into a potential for low-rewards and high-risk trade. What you really want to look out for are the reversal points in the market, in terms of the location of the pin bars. The support and resistance levels are common reversal points that can be mapped out using weekly or daily durations.
Say you opt to trade within a weekly period, when the price movement heads toward the support and resistance levels within this time frame, a substantial price action is expected. The support and resistance levels create a lot of buzz in the market and they are worthwhile paying attention to.
To make the most of bearish pin bars, it is recommendable to trade along with the trend unless the pattern forms as a result of a significant reversal point in the market caused by an encounter with support or resistance levels.