Last Updated on 21 September, 2020 by Samuelsson

Candlestick patterns are some of the most popular ways to analyze price action, and are relied upon by many traders. One such candlestick pattern, is matching highs.

Matching high is a bearish two candle reversal pattern that forms in an uptrend, and signals that the current uptrend may have come to an end. As to its appearance, a matching high consists of two candlesticks that are positive but close at the same price.

In this guide to the matching high, we will cover how to identify the pattern, its meaning and show you some ways that you can improve the profitability of a signal. In addition to this, we’ll also cover a couple of trading strategies that make use of the pattern!

Let’s begin!

How to Identify the Matching High Candlestick Pattern

Matching High

Matching High

For a matching high to be formed, the following conditions must be met.

  1. The market is in a positive uptrend.
  2. The first candle is bullish.
  3. The second candle gaps down, but still manages to close at or very close to the close of the previous candle.

Once a matching high has been formed, the general belief is that the market will revert from a positive trend to a negative one.

What Does a Matching High Mean?

All candlesticks are representations of market data, and market data is the result of the aggregate psychology of all market participants. As such, candlestick patterns like the matching high could help us tremendously with understanding what the market has done, and where it’s headed.

Of course, knowing exactly what has happened is close to impossible, but still, we might be able to discern the bigger picture and gain some clues!

Here is what might have happened in the market once a matching high appears!

As the market comes from a bullish trend, market sentiment is mostly positive, and market participants expect prices to continue up. As a result of the positive sentiment, buying pressure prevails and manages to push the market up for another day. The first candle of the matching high has now been formed.

However, having been in an uptrend for quite some time, market sentiment starts to turn more bearish, since more market participants fear that the market has turned overbought. As such, some decide to close their positions to lock in profits, which sends a major wave of selling pressure the market’s way, causing it to gap down.

Still being fairly bullish, the market manages to recover from the drop, but doesn’t manage to get past the close of the previous bar.

Upon spotting that the market performed a negative gap and couldn’t surpass the previous close, more people decide to get out of the market. Selling pressure increases, and soon, the market has turned around into a full-fledged bearish trend.

Matching High Examples

Here are two examples of the matching high candlestick pattern.

Matching High Example

Matching High Example

Matching High Example

Matching High Example

How to Trade the Matching High: How to Improve the Pattern for Live Trading

Even if the matching high pattern traditionally is believed to signal a bearish trend reversal, the pattern itself isn’t enough for us to take a trade. We will need additional confirmation, or add filters and conditions which ensure that the odds are in our favor once we enter a trade.

When it comes to filters and conditions, the only limiting factor is your own creativity. However, in this section of the article, we wanted to show you some of the filters and conditions that we’ve had a lot of success with over the years!

Let’s start!

Volume Conditions

Volume is a great way to filter out bad trades, and improve a pattern like the matching high. While the price chart shows us how a market has moved, volume tells us (to some extent) how many market participants that took part in forming the market move. This could be of great help when it comes to gauging the conviction behind a market move.

When we use volume, there are some conditions that we come back to regularly, and that have worked well in many of our trading strategies. Depending on the market and timeframe you’re working with, what works best will vary a lot, and as such, you definitely have a look at all of the conditions below!

Here are our favorite volume conditions:

  1. Volume is greater than the moving average of volume
  2. The volume of this bar is greater or lower than the volume of the last bar. You may use a multiplier to demand a greater difference.
  3. The volume of this bar is the greatest or lowest volume x-bars back.

Overbought and Oversold Readings

One very powerful concept in equities like stocks, is to look at oversold and overbought levels. This is because equities are mean-reverting by their nature, meaning that they perform exaggerated moves in either direction that tend to get corrected. When the market has moved too much to the upside we say that it’s overbought, and when it has moved too much to the downside, it’s oversold.

Now, we like to trade the matching high pattern only when the market is overbought.  Here are our favorite ways to define this:

  1. The RSI indicator shows readings above 70. While the RSI traditionally is used with a 14-period length, we’ve not had so great experiences with this. In our experience, RSI works much better with settings between 2-10. You can read more about the RSI and our preferred settings in our guide to the RSI Indicator.
  2. You may require that the high of the matching high is the highest close x-bars back.
  3. Or you may decide to only take trades that occur when the market is above its moving average.

As you see, there are numerous ways to define an overbought market. Be sure to test different alternatives, since results could vary quite a lot!

Seasonality

One of the perhaps most overlooked ways to improve your results, is by looking at the seasonal and time-based tendencies of a market.

The thing is that a market isn’t equally bullish or bearish all the time. You may find that there exist repeated patterns where the market time after time is more bearish at certain times.

For example, the market might be more prone to going up on Tuesdays, than on Wednesdays. And if you now these tendencies, you could use them to your advantage, in your trading.

For instance, assume that you spot a matching high on a Tuesday, and you know that the market you’re working with is prone to be bearish from Wednesdays and onwards. Then you could be a little more certain that the trade is worth taking, since the seasonality is right.

When we use seasonality, these are the most common filters we emply:

  1. Day of  the Week- Often some days of the week are more bullish or bearish than others
  2. Part of the Month- You may divide the month into two or three halves, to see if there is any significant difference between the two.
  3. Time of the Day- For intraday systems, the time of the day sometimes has a great impact on the performance of patterns like matching high. Try and divide the session into two or three halves, and see where the pattern works best!

Matching High Trading Strategies

Now that we have covered some ways you can improve patterns like the matching high, we wanted to share a couple of trading strategies with you!

These are not meant for live trading, but to show you how we would go about to create a trading strategy using the matching high pattern. Depending on the market and timeframe, the results will vary greatly. However, the filters and conditions used are some that we utilize in our own trading strategies, which is why we believe that the coming examples will come very handy.

Strategy 1: Matching High With Confirmation

Even if the matching high is a reversal pattern, the market will continue to trend upwards in many cases. And in order to reduce the number of false signals, we might try and add some sort of confirmation.

In this strategy, we’re attempting to limit the number of false signals by requiring a breakdown below the low of the matching high pattern, before we take a trade. So, in other words, our conditions become that we go short if.

  1. We have a matching high candlestick pattern
  2. The market closes below the low of the pattern, which acts as our confirmation.

Then we exit the trade after 5 bars.

Matching High Strategy

Matching High Strategy

 

 

 

 

 

 

 

 

 

Strategy 2: Matching High With Gap Requirement

As you might remember, one of the integral parts of the matching high pattern, is the negative gap between the first and second candles. As such, the size of the gap could have a significant impact on its performance.

In this strategy, we’re taking advantage of this by only taking a trade if the second candle gaps below the midpoint of the first candle. In traditional technical analysis, the middle point of a candle is considered a support or resistance level. As such, if the market gaps down below it, it would strengthen our negative view on the market.

So, to enter a trade, we require that:

  1. There is a matching high
  2. The second candle gaps below the middle point of the first candle.

And to exit the trade, we once again use a simple time exit!

Matching High Trading Strategy

Matching High Trading Strategy

Ending Words

In this guide to the matching high pattern, we’ve covered the definition and meaning of the pattern. In addition to that, we’ve shared som powerful techniques that can be used to reduce the chances of taking false signals.

Before we end, we just wanted to share an important piece of advice with you! NEVER TRADE PATTERNS THAT YOU HAVEN’T TESTED PROPERLY! Most public concepts in technical analysis don’t work, and you will have to come with your own strategies and patterns to have a chance of surviving the game.

If you want to learn more about how to build your own profitable trading strategies, we recommend that you read any of our following guides!

Complete guide to algorithmic trading

How to build a trading strategy

Complete guide to Swing Trading

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