This is a five pattern that starts with three strong white . The uptrend continues with the fourth higher close. The next day gaps lower and closes much lower than the previous day or two. This may imply a reversal.
1. The market is characterized by a prevailing uptrend.
2. Three strong white occur much like the pattern.
3. The fourth white closes also higher but has a long lower shadow.
4. The fifth day is a strong black with an open below the previous day’s body.
Pattern Requirements and Flexibility:
The first three days of the Ladder Top are strong white with consecutive higher opens and higher closes. The fourth day is a short white , but it opens lower and trades lower, leaving a long lower shadow, then closes making a new high. The fifth day is a strong black that makes a body gap with the fourth day.
There is a considerable uptrend for some time and the bulls are happy. Then we see a good upward move. Prices start trading below the opening price and almost reaching to the new low of the previous day, but then they close at another new high. This action is a warning for the bulls telling them that the market will not go up forever. The bulls may then be forced to reevaluate their positions and they may start taking profits. This act is the reason behind the downward gap we see on the last day of the pattern and also the close is considerably lower. A trend reversal has probably occurred. However, a confirmation will still be required on the next day.
Sell/Stop Loss Levels:
The confirmation level is defined as the last close. Prices should cross below this level for confirmation.
The stop loss level is defined as the last high. Following the signal, if prices go up instead of going down, and close or make two consecutive daily highs above the stop loss level, while no is detected, then the stop loss is triggered.