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In the Internet age, financial markets have become more accessible to the common folk, and hence, we see more people wanting to trade and invest in assets like stocks. Many approaches exist to trade in the stock market. Investors and traders may refer to company financials, research reports, stock charts and a manifold of analytical tools and indicators to help strategise their trades. In this article, let’s understand a popular technical pattern called the sushi roll reversal pattern.
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Defining Sushi Roll Reversal Candlestick Pattern
The term ‘sushi roll’, coined by British writer and trader Mark Fischer in his book, The Logical Trader, may initially seem unrelated to stock trading. However, the pattern is named for its resemblance to an actual sushi roll. Looking beyond the name, let’s examine the pattern’s structure and significance.
The sushi roll reversal pattern is a candlestick pattern that consists of ten bars—or ten candlesticks—wherein each bar represents a well-defined period. So, on a chart using daily candles, each candle represents one trading day. The first five bars are confined within a narrow range of highs and lows, and the remaining five bars surround the first five with both lower lows and higher highs. Hence, this creates a pattern that resembles a sushi roll.
The significance of this pattern is that when this pattern appears during a prevailing trend, it’s a sign that a trend reversal is likely to occur. For those with some familiarity with technical analysis and chart patterns, the sushi roll pattern operates akin to bullish and bearish engulfing patterns. The distinction lies in the fact that, instead of involving two bars or candlesticks, the sushi roll reversal pattern incorporates multiple bars.
Implication of Sushi Roll Reversal
To understand the significance of the pattern in depth, let’s first break down what we mean by a trend reversal. When a trend reverses, it means that the direction in which the stock price exhibited movement over a time period is changing.
- An uptrend is when the price of the stock moves up over a specific timeframe
- A downtrend is when the price declines over a time period
Assuming a long position was taken with the expectation of the stock price rising, the emergence of a trend reversal pattern signals the potential conclusion of the upward trend and the initiation of a downtrend. Similarly, when a reversal pattern appears in a downtrend, it suggests a potential end to the downtrend and the start of an uptrend. Therefore, upon identifying a reversal pattern on the price charts, it serves as a signal to contemplate exiting the trade or initiating a new trade in the opposite direction.
In the context of the sushi roll pattern, if it manifests during a downtrend, it warns of a likely trend reversal, prompting consideration of long positions and exit from short positions. Conversely, if it occurs in an uptrend, it indicates a potential time to sell long positions, secure profits, or enter a short position. Notably, these patterns hold significance when appearing at the peak of an uptrend or the trough of a downtrend.
Identifying the Pattern
As said above, this 10-bar pattern appears at the bottom of a downtrend or the peak of an uptrend. But here’s the thing: the number of bars in the sushi roll pattern doesn’t have to be exactly ten—ten bars cumulatively or a set of five inside bars and five outside bars. There is no such hard and fast rule engraved in stone to define the sushi reversal role pattern.
In addition to this, the bottom and peak of a trend can only be determined in hindsight. In other words, one can only confirm the bottom or peak was made once the trend reversal is complete. So, the emergence of the sushi roll pattern on the price chart does not indicate a trend reversal but a potential trend reversal. So, avoid making hasty trading decisions; keep in mind that a sushi roll reversal pattern could follow up with a false reversal, which will lead to the continuation of the existing trend. This means the emergence of a sushi roll reversal in a downtrend could simply result in a trend reversal failure, which leads to the continuation of the downtrend.
Conclusion
Should one refer to the pattern to analyse the stock price and make a trade? Yes, spotting this pattern and taking a trend based on its formation is a sensible move, provided one understands the risks involved and has measures in hand to counter the risk. The risks are an unsuccessful trend reversal or the continuation of the prevailing trend. It would also be a wise move to refer to other technical indicators and patterns—including other reversal indicators—and not rely on one technical indicator or pattern alone.