As of 03/25/2025
Indus: 42,588 +4.18 +0.0%
Trans: 14,807 -119.45 -0.8%
Utils: 993 -16.16 -1.6%
Nasdaq: 18,272 +83.27 +0.5%
S&P 500: 5,777 +9.08 +0.2%
|
YTD
+0.1%
-6.9%
+1.0%
-5.4%
-1.8%
|
 40,000 or 43,500 by 04/01/202514,400 or 16,400 by 04/01/2025 1,050 or 970 by 04/01/202516,200 or 19,000 by 04/01/20255,300 or 5,900 by 04/01/2025 |
As of 03/25/2025
Indus: 42,588 +4.18 +0.0%
Trans: 14,807 -119.45 -0.8%
Utils: 993 -16.16 -1.6%
Nasdaq: 18,272 +83.27 +0.5%
S&P 500: 5,777 +9.08 +0.2%
|
YTD
+0.1%
-6.9%
+1.0%
-5.4%
-1.8%
| |
|
40,000 or 43,500 by 04/01/202514,400 or 16,400 by 04/01/20251,050 or 970 by 04/01/202516,200 or 19,000 by 04/01/20255,300 or 5,900 by 04/01/2025 | ||
Initial release: 2/19/25. Fixed hold time error: 2/25/25.
This article discusses the bullish 2-step reversal chart pattern, including what to look for and how it behaves in stocks and exchange traded funds. It's rare to find it in ETFs and cryptocurrency.
The pattern underperforms the benchmark in stocks by a wide margin, and due to few samples, the ETF results are exceptional. I would not trust the ETF trades to be a reliable indication of how this pattern will behave in actual trading.
The following table shows the identification rules, and are self-explanatory. Also refer to the adjacent chart.
| Characteristic | Discussion |
| Five Bars | This pattern is five price bars long. |
| Bar 1 | Any price bar. |
| Bar 2 | Price makes a low below bar 1 with a lower close, too. |
| Bar 3 | Price has a low below bar 2 but a close above bar 1 (which will also be above bar 2's close). Bars 1 to 3 form a 2-close reversal pattern. |
| Bar 4 | Makes a close below bar 3's close. |
| Bar 5 | Has a low below bar 4 but closes above bars 3 and 4. |
| Breakout | Breaks out upward 79% of the time in stocks. |
For tests in stocks, ETFs, and cryptocurrency, I used these rules.
The chart shows an example trade in 3M. The red box highlights the 2-step reversal pattern.
An upward breakout triggers a buy stop to enter the trade. However, the move higher doesn't take the stock far enough to reach the target exit before the stock tumbles and triggers the stop loss order.
| Metric | 2-Step In Uptrend | Uptrend Benchmark | 2-Step in Downtrend | Downtrend Benchmark |
| Trades | 430 | 5,672 | 376 | 5,053 |
| Average profit/loss per trade | $15.27 | $102.71 | $64.58 | $131.16 |
| Win/loss ratio | 36% | 41% | 41% | 42% |
| Average hold time (days) | 25 | 33 | 24 | 35 |
| Winning trades | 155 | 2,335 | 154 | 2,142 |
| Average gain of winners | 9% | 10% | 9% | 11% |
| Average hold time of winners (days) | 34 | 42 | 30 | 46 |
| Losing trades | 275 | 3,337 | 222 | 2,911 |
| Average loss | -5% | -5% | -5% | -6% |
| Average hold time of losers (days) | 20 | 26 | 20 | 28 |
The 2-step pattern significantly underperforms the benchmark, but it's also rare. Additional samples might boost performance but other small patterns based on this type of reversal (a lower low but a higher close) do not test well. Don't trade using this pattern.
I show a sample trade in iShares U.S. Aerospace & Defense ETF (exchange traded fund, ITA).
The pattern shows an upward breakout when the security clears the top of the pattern. That happens a day after the pattern ends.
A stop loss is in place to capture any adverse moves.
A target exit set at twice the height of the pattern added to the top of it triggers as shown, capturing a win for the trade.
The following table shows the results of 94 exchange traded funds (ETFs) instead of common stocks, using the same testing methodology.
| Metric | 2-Step In Uptrend | Uptrend Benchmark | 2-Step in Downtrend | Downtrend Benchmark |
| Trades | 37 | 5,821 | 28 | 4,622 |
| Average profit/loss per trade | $153.63 | $99.79 | $158.36 | $90.88 |
| Win/loss ratio | 46% | 43% | 54% | 43% |
| Average hold time (days) | 37 | 37 | 15 | 42 |
| Winning trades | 17 | 2,508 | 15 | 1,975 |
| Average gain of winners | 7% | 8% | 5% | 8% |
| Average hold time of winners (days) | 57 | 50 | 13 | 56 |
| Losing trades | 20 | 3,313 | 13 | 2,647 |
| Average loss | -3% | -4% | -3% | -5% |
| Average hold time of losers (days) | 19 | 28 | 17 | 31 |
The results are probably not representative of how this pattern behaves in ETFs. I didn't find enough samples to really put this pattern through its paces. However, the few trades that happened performed exceptionally well.
This pattern is too rare to appear much in cryptocurrencies. There were not enough trades to discuss.
-- Thomas Bulkowski
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