Bearish High Wave Explained & Backtested (2024)

The bearish high wave is a single-bar Japanese candlestick pattern representing indecision. 

But what if I told you that you could surf this pattern profitably using history as your guide?

Would you be interested?

If so, keep reading to learn what a 21-year backtest tells us about the best bearish high-wave trading strategy.

What Are Bearish High Wave Candlestick Patterns?

The bearish high wave is a frequently occurring one-bar candlestick pattern that supposedly represents indecision. 

The pattern gets its name from appearing like a giant wave on a Japanese candlestick chart.

And while most candlestick traders think this pattern is a neutral pattern with little profit potential, history tells us otherwise.

But before we learn how to ride the wave to new portfolio profits, let’s know how to identify these bearish high wave patterns.

How to Identify the Bearish High Wave Candlestick Pattern

The following are the requirements for a valid bearish high wave:

• A small bearish body with long upper and lower shadows (at least 3x the body size)

The trend doesn’t matter. The bearish high wave pattern appeared on the AEHR test systems December 8th, 2021, daily chart.

We see a red candle with a small, almost doji-like, real body with shadows at least 3x longer than the body.

Now that we know how to discover this single candlestick on our charts, let’s learn the best bearish high wave trading strategy.

How to Trade the Bearish High Wave Candlestick Pattern

The bearish high wave candlestick pattern is traded optimally using a bullish mean reversion strategy in the crypto and stock markets and a bearish mean reversion in the forex markets, according to our 21-year backtest.

Since there isn’t a traditional way of trading this pattern, we’ll jump right to the optimal bearish high wave crypto and stock market trading strategies.

Bearish High Wave Bullish Mean Reversion Trade Setup

Identifying the bearish high wave is as easy as they come. We only need to place a single red bar whose real body is short with wicks at least 3x the size of the real body. We don’t need to worry about the trend.

We saw the bearish high wave pattern on the Berkshire Hathaway (BRK.B) daily chart on December 15th, 2020.

Data-driven stock and crypto traders go long at the candle’s low when prices cross below and back above the candle’s low, setting a stop loss of one ATR.

Let’s make this crystal clear. The low of the candle is $222.73. Prices cross below the low the next day and back above $338 the day after triggering an entry at the same price.

Traders using this data-driven strategy would likely have exited on December 28th with a handsome profit.

And while this is the best way to trade high wave candlesticks in the crypto and stock markets according to history, forex traders should do it differently.

Bearish High Wave Bearish Mean Reversion Trade Setup

With shadows larger than the bearish body, we see another bearish high wave.

An intelligent forex trader will enter short after the price moves above and below the candlestick’s high, setting a stop loss of one ATR.

Let’s unencrypt this pattern by using the Bitcoin example above.

The bearish high wave appears on the May 25th, 2021, Bitcoin chart. Price moves above the $40,000 pattern high and then comes back down through that high, triggering an entry the next day.

Forex traders using this high wave signal profited nicely from the price drop.

Speaking of trading profits, how have these bearish high wave trading strategies performed across the crypto, forex, and stock markets historically?

Does the Bearish High Wave Candlestick Pattern Work? (Backtest Results)

I backtested the bearish high wave candlestick patterns on the daily timeframe in the crypto, forex, and stock markets using the following rules:

• A close above the 50-day SMA constitutes an uptrend.
• I tested risk-reward ranges from 1 to 5. 
• The optimal risk-reward ratio is selected using profit per bar.
• Entry and exits are discussed in the how-to trade section above.
• Confirmation must occur within three days of the pattern signal.

Similar Candlestick Patterns

Multiple candles are confused with the bearish high wave.

Bullish High Wave vs. Bearish High Wave

The bullish high wave candlestick pattern is the opposite of its bearish brother. Neither requires a trend, and both require a small body with shadows at least 3x the body size.

The candle color is the only difference between the bullish and bearish high waves.

Both are considered indecision candlesticks, yet the backtests show that the high wave candle tells us volatility is likely incoming.

Bearish Spinning Top vs. Bearish High Wave

The bearish spinning top is a close cousin of the bearish high wave—both single candlestick patterns that don’t require a trend.

The bearish spinning top requires a real body near the middle of the daily range, whereas body location isn’t a requirement of the high wave. Additionally, high wave candlestick patterns require shadows at least three times the size of the body, and spinning tops should have wicks 2-3 times the real body size.

The Bottom Line

The bearish high wave is a one-bar pattern that most market participants believe represents indecision. According to our backtests, this candlestick likely represents future volatility.

According to history, the best trading strategy for the bearish high wave is to expect volatility and use a bullish mean reversion strategy in the crypto and stock markets and a bearish mean reversion strategy in the forex markets.

Looking to make a splash? I backtested every candlestick pattern to determine the best candlestick patterns for day trading.