Bullish Counterattack Explained & Backtested (2024)

The bullish counterattack, also known as the bullish counterattack lines, is a two-bar bearish reversal Japanese candlestick pattern that suggests bearish action is ahead according to historical backtests.

This pattern loses in a big way when traded traditionally.

But what if I said you could make this candle pattern much more profitable by listening to the data?

Would you be interested?

If so, keep reading to learn how to trade the bullish counterattack lines pattern in a profitable, data-driven way.

What Is a Bullish Counterattack Candlestick Pattern

Bullish Counterattack Candlestick Pattern Illustration © Analyzing Alpha
Bullish Counterattack Candlestick Pattern Illustration

Bullish counterattack lines patterns supposedly signal a trend reversal. But history tells us that the traditional trading lore is incorrect and that this pattern is a bearish continuation.

The pattern’s name derives from how the candles move in opposite directions, with a horizontal line between their closes – a counterattack.

But before we learn the details of this counterattack, we must learn how to identify this supposed bullish reversal pattern.

How to Identify the Bullish Counterattack Candlestick Pattern

Bullish Counterattack Candlestick Pattern Identification on the Apple (AAPL) February 28th, 2020 daily chart
Bullish Counterattack Candlestick Pattern Identification on the Apple (AAPL) February 28th, 2020 daily chart

The following are the requirements for a valid bullish counterattack pattern:

  • The first candle must be bearish with a long real body.
  • The second candle must be bullish, closing equal to the previous close.
  • The bullish counterattack must occur during a downtrend.

We see the bullish counterattack pattern on the Apple (AAPL) daily chart emerging on February 28th, 2020.

Price is in a downtrend as it’s below the fifty-day moving average. We then see the first candle is a long-bodied red candle. We see the second candle gap down, with a closing price similar to the previous candle’s close, giving us the bullish counterattack pattern.

Now that we can identify this bullish counterattack line pattern, let’s learn how to trade it on our candlestick charts.

How to Trade the Bullish Counterattack Candlestick Pattern

The bullish counterattack lines pattern should be traded as a bearish continuation in the stock market and as a bearish mean reversion in the forex market. Crypto traders won’t want to trade this pattern due to a lack of data.

Before we dig into how to make money using the pattern’s past performance as our teacher, let’s learn how most traders trade this candlestick pattern.

Bullish Counterattack Bullish Reversal Trade Setup

Bullish Counterattack Bullish Reversal Trade Setup on the Goldman Sachs (GS) April 15th, 2020 daily chart
Bullish Counterattack Bullish Reversal Trade Setup on the Goldman Sachs (GS) April 15th, 2020 daily chart

The bullish counterattack line appears on Goldman Sach’s (GS) daily candlestick charts on April 15th, 2020.

The price is in a downtrend. The first candle is bearish. The second candle gaps down, and buying pressure moves the price upward in the opposite direction, closing near the previous day’s close.

With the pattern signaled, most traders trade these patterns as trend reversals, going long at a break of the first bar’s high and placing their stop loss at the second bar’s low.

In this example, there was a lot of sideways action, and the trader didn’t take a loss as the price never went below the first day’s low.

Now that we know how most traders burn cash on this candlestick pattern, let’s learn how to profit.

Bullish Counterattack Bearish Continuation Trade Setup

Bullish Counterattack Bearish Continuation Trade Setup on the DISH Network Corporation (DISH) February 28th, 2020 daily chart
Bullish Counterattack Bearish Continuation Trade Setup on the DISH Network Corporation (DISH) February 28th, 2020 daily chart

The bullish counterattack pattern appeared on the Dish Network Corporation (DISH) daily chart on February 28th, 2020.

We see bearish price action below the fifty-day moving average (barely), a continuation bear candle with a larger real body, and then another significant bullish candle closing near yesterday’s candle’s close. With the signal set, how do we profit from this pattern?

Easy.

Professional traders in the stock market go short when the price breaks below the close of the trigger bar with a stop loss above the second day’s high, anticipating the bearish trend to continue.

And they say past performance isn’t indicative of future results; I would rather have a valid backtest on my side.

This pattern doesn’t work in all markets, but it does pretty well as a continuation in the stock market, which is significant as the stock market is usually biased upwards.

But what about the forex markets? We’ll skip the crypto market due to insignificant data.

Bullish Counterattack Bearish Mean Reversion Trade Setup

Bullish Counterattack Bearish Mean Reversion Trade Setup on the ENGlobal Corporation (ENG) July 8th, 2021 daily chart
Bullish Counterattack Bearish Mean Reversion Trade Setup on the ENGlobal Corporation (ENG) July 8th, 2021 daily chart

Bearish mean reversion traders wait for the pattern to go above the pattern’s high and then go short when the price crosses below that same high, setting a stop loss of one ATR.

Let’s clarify this using the ENGlobal candlestick chart above.

The price moves above the pattern high of $2.94 on the first day after the two candle reversal pattern forms. The next day’s price opens lower, causing an immediate entry at the open at $2.90. The price then continues lower, providing profits for this data-driven trader.

Speaking of profits, what can history tell us about these trading strategies?

Does the Bullish Counterattack Pattern Work? (Backtest Results)

Using the following rules, I backtested the bullish counterattack lines candlestick pattern on the daily timeframe in the crypto, forex, and stock markets.

  • 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 Japanese candlestick patterns are often confused with the bullish counterattack. It’s critical to understand the differences when using candlestick pattern technical analysis.

Bearish Counterattack vs. Bullish Counterattack

Bearish Counterattack Candlestick Pattern Illustration © Analyzing Alpha
Bearish Counterattack Candlestick Pattern Illustration

The bearish counterattack candlestick pattern, also known as the bearish counterattack lines, is almost identical to the bullish counterattack, except that you need to reverse the rules.

The bearish counterattack pattern occurs in a bearish trend, while the bearish pattern occurs in a bullish trend.

The first bar of the bullish counterattack is a black bearish candle with a long real body, while the bullish counterattack has a more prominent white candle.

The second bar in both candle patterns moves opposite the first, with similar closing prices.

Bullish Kicking vs. Bullish Counterattack

Bullish Kicking Candlestick Pattern © Analyzing Alpha
Bullish Kicking Candlestick Pattern

The bullish kicking candlestick pattern is similar to the bullish counterattack. They are both two candle reversal patterns that expect a bullish candlestick continuation. I say a bullish candlestick continuation since the bullish kicking doesn’t require a trend.

They are also similar in appearance, with a few minor differences. The bullish kicking requires one bearish marubozu followed by one bullish marubozu with an upside gap. In contrast, the bullish counterattack requires a long-boded bullish followed by a long-bodied bearish, with both candles having similar closes.

On Neck vs. Bullish Counterattack

On Neck Candlestick Pattern Illustration © Analyzing Alpha
On Neck Candlestick Pattern Illustration

The on neck candlestick pattern and the bullish counterattack get confused often. Both candlestick patterns occur in a downtrend, but the on neck is a continuation pattern, whereas the bullish counterattack is a reversal. 

The critical difference between the on neck and the bullish counterattack is that the on neck closes near the prior candle’s low, and the bullish counterattack closes near the last candle’s close.

Theoretically, two candles could be both patterns if the first bearish candle closed at the low.

The Bottom Line

The bullish counterattack is considered a potential reversal trade, but as we often see, most trading wisdom is wrong. Like the bullish counterattack, the bearish counterattack tends to be a short-term bump in a longer-term trend.

It’s important to understand the different types of candlestick patterns and their meaning.

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