By Rob Colville on March 10, 2017 in
Last week, in Part 1, we began to look at various strong technical signals by examining the hammer formation, a single-bar chart pattern that can make for a fine trade signal in down markets. Now today, we’ll shift gears slightly, focusing on the smash bar formation, which has been proven most reliable when trading range-bound markets.
Together, a sound working knowledge and understanding of these signals (and others, of course) will help the trader develop a well-rounded arsenal of trading tools that perform well in both trending and non-trending markets. So use the insights you’ll find here, but be sure to heed our earlier advice and take a slow and methodical approach when learning new trading tools and techniques such as these. You can trade strong technical signals like these for your entire career, afterall, so whatever you do, don’t rush to put these or any method into play before you’ve become fully knowledgeable and proficient.
By definition, a smash bar is a sign of exhaustion that occurs at known price extremities and will often signal a high-probability reversal trading opportunity. But there are a couple of important distinctions to know about smash bars right up front:
What Does a Smash Bar Formation Look Like?
It would be fair to say that the smash bar gets its distinctive name because the bar itself—not the candle’s “wick,” mind you—is being “smashed” up against a key price extremity like a 2-year or 5-year range boundary, or perhaps even an all-time high or low.
It’s actually this price relationship that qualifies a smash bar, because if the opening or closing price didn’t interact precisely with the price extremity, then we might simply have a classic pin bar.
Notice also how price action during the bar’s lifespan does manage to surpass the key support or resistance level. But its failure to sustain that price into the close is what signals capitulation, or a reversal in momentum between bulls and bears. And that’s what creates the worthwhile trading opportunity we’ll discuss in just a moment.
What Does a Smash Bar Tell about Price Action?
Regardless of their colour (green or red), smash bars represent strong technical signals that favour a high-probability reversal trading opportunity starting as soon as the next bar. And here’s why:
The pin bar nature of the candle body, coupled with the relatively wide price range represented by the wick, indicates a disappearance of either the bulls needed to take out resistance overhead (bearish smash bar) or bears needed to break through key support (bullish smash bar).
Do keep in mind the “counterintuitive” nature of smash bars, however. Once again, were it not a smash bar closing directly on or very close to key support/resistance, the candle might otherwise signal a trend continuation, not a reversal, and we’d trade it differently.
Regardless, our smash bar trading strategy utilises the candle itself to plan and execute the trade. And because we’re only triggered into the trade once the subsequent price action provides confirmation and a reversal formally occurs, the trader gains a degree of protection and confidence in the position.
How to Use a Smash Bar as a Trade Signal
We trade smash bars exactly the same way we do pin bar reversals with regards to entry, stop loss and target placement, and risk management, keeping in mind of course, that a bearish pin bar is taken in this case as a buy signal, and vice versa. So the rules for trading are as follows:
Shown graphically, this strategy would be as follows:
Please note that smash bars should be traded end of day only, and just like with any risk-minded trading strategy, no single trade should risk more than 1-2% of available account capital. In addition, once triggered into a smash-bar-inspired trade, we recommend using a trailing stop to preserve profits and guard against downside risk. To do so, trail a stop just below the low of every second buyer bar (if long), and just above the high of every second seller bar (if short).
And, to help you master this and a variety of other trading tools and techniques, access a wealth of training videos, interactive workbooks, and more inside The Lazy Trader member portal. From pin bars and smash bars to pivots, inside bars, and more advanced strategies, it’s all just a click away anytime. Use the banner below to activate your no-risk trial subscription today!