Understanding candlestick patterns is crucial for technical analysis because they provide insight into the price movements of securities. In this article, we will explore the significance, creation, and trading techniques associated with the ladder top pattern among the various candlestick patterns available.

This pattern helps traders determine the trajectory of security. This enables them to identify favourable entry and exit points and develop effective trading strategies.

Ladder Top Candlestick Pattern – Definition

The Ladder Top candlestick pattern is a rare and complex bearish reversal pattern that forms at the end of an uptrend. It consists of five candles: three consecutive long green(bullish) candles, a fourth green candle with a short body and a lower wick, and a fifth red(bearish) candle that gaps down and closes below the fourth candle. 

This pattern indicates a weakening of the bullish momentum and a potential transition to a downtrend.

Ladder Top Candlestick Pattern – Formation

The ladder top pattern indicates a reversal after an uptrend. This candlestick pattern comprises the following candles:

1. The first three candles are green candles, with each closing above the prior candles
2. The Fourth candle is a short-bodied green candle with a long lower wick.
3. The fifth candle is a large red candle that opens gap-down and closes below the fourth candle.

The formation of this pattern suggests that the buyers have been exhausted and, hence, has allowed the sellers to take control of the security.

Ladder Top Candlestick Pattern – Psychology

The psychology behind the Ladder Top pattern is rooted in the idea that the bulls are losing control and the bears are gaining strength. 

The first three long red candles show a strong uptrend, but the fourth candle with a short body and a lower wick indicates that the bulls are struggling to maintain their momentum. This weakening of the uptrend is a sign that the bears are gaining strength and the market is about to reverse. The fifth red candle then confirms the reversal, signalling that the bears are taking control and a new downtrend is beginning.

The Ladder Top pattern is a valuable clue for timing short positions, as it can signal the end of the uptrend and the start of a new downward trend.

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Ladder Top Candlestick Pattern – Trading Ideas

Once the Ladder Top pattern is formed, traders can find entry opportunities to enter a short position in a security.

Entry:- Entry is always preferred after the confirmation of the pattern, it can be set at the closing price of the fifth candle of the ladder top pattern formed.

Stop loss:- The stop loss to the position can be placed above the high of the ladder top pattern. As a part of risk management, trading with stop loss is important.

Profit target:- For the short position entered in a ladder-top pattern, a target can be based on the risk-to-reward ratio or on the next levels of support in the market.

Chart of Infosys showing the formation of valid ladder top candlestick pattern with entry and stop loss levels.

With the confirmation of the ladder top chart pattern formed in the above chart an entry at Rs 1478.35 and stop loss at Rs 1481 can be placed.

Key factors of ladder top candlestick Pattern

• The prior trend should be an uptrend.

• The first three candles should be green.
• The fourth candle should be a short-bodied green candle with a lower wick.
• The fifth candle should open gap down.
• The fifth candle of the pattern should close below the body of the fourth candle which validates the pattern.

Conclusion

After learning from the above information, it is evident that the emergence of a ladder-top pattern indicates a strong downward reversal trend, and traders can devise various strategies to take a short position in a security.

Prior to identifying the pattern, traders must adhere to the criteria for a valid pattern formation and it is advisable to only enter a trade once the pattern is confirmed, using additional technical tools such as indicators, chart patterns, and candlestick patterns.

To ensure profitable trades in the long term, it’s important to apply the knowledge gained while also managing the risk of positions effectively.

Written by Deepak

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