Learning how to read and trade them adds a valuable weapon to your trading arsenal. Most technical analysis is based on Japanese candlestick charts, after all. In this post, we’ll go over everything you need to know to trade ladder top candle patterns.
To start, let’s define them.
What Is a Ladder Top Candlestick Pattern?
A ladder top is a bearish reversal formation. They occur during uptrends and consist of 1) three large-bodied candlesticks moving up, 2) a small-bodied candlestick moving up (or remaining neutral) that has a lower wick, and 3) a large-bodied candlestick moving down that is preceded by a gap down and closes below the lower wick of the fourth.
It is the bearish version of the ladder pattern, and therefore the opposite of the ladder bottom pattern. It is also similar to the bearish breakaway pattern.
Of course, no candlestick pattern guarantees a particular outcome. They are more like suggestions than promises.
So, what do ladder top patterns really tell you?
What Ladder Bottom Patterns Mean
Unlike some patterns, English speakers do not use the Japanese name for this one.
Instead, the term “ladder” probably comes from the way the pattern seems to step up leading into the final candle. As far as candlestick pattern names go, it is easy to remember and describes the pattern well. Plus, the “top” conveys that it gives a bearish reversal signal.
In trading terms:
- First Period – The price increases significantly, in line with the upward trend.
- Second Period – The price increases significantly, in line with the upward trend.
- Third Period – The price increases significantly, in line with the upward trend.
- Fourth Period – The price decreases for part of the period but eventually closes higher than it opened.
- Pre/Post-Market Trading – The price decreases below the open of the prior period.
- Fifth Period – The price decreases significantly and closes below the low of the prior period.
This threatens the ongoing uptrend and creates several decision zones that are likely to play a major role in determining trend direction. If buyers cannot push price back above the formation, it may lead to a bearish reversal and subsequent downtrend.
Figuratively, ladder tops indicate that price may want to climb back down the rungs.
How To Recognize Ladder Top Candlestick Patterns
Patterns are attractive partly because they stand out.
To the untrained eye, they may mean nothing. But to those with experience, they are something like a beacon. They draw your attention to a specific segment of price action, encouraging you to look more closely.
To gain this insight, all you need to do is learn the rules and practice finding them on the charts.
By definition, a ladder top pattern has several requirements.
- It must appear during a general uptrend.
- The first three candles must be bullish long-line candlesticks.
- The fourth candle must be a bullish short-line candlestick.
- The fourth candle must have a lower wick.
- The fifth candle must be a bearish long-line candlestick.
- The fifth candle must open with a gap down.
- The fifth candle must close below the lower wick of the fourth candle.
As you can see, each candle has its own unique ruleset.
However, some exceptions may be acceptable.
- The first three candles don’t all necessarily have to be long candles, as long as they represent a significant cumulative price increase.
- Each of the first four candles may open inside the preceding one, as long as each successive open and close is higher than the one before.
- The fourth candle doesn’t necessarily have to be a short candle, as long it isn’t a long candle and has the lower wick.
- The fifth candle doesn’t necessarily have to open below the body of the preceding one, as long as it is a long candle and closes below the wick of the fourth candle.
You may find better results by stretching some of these criteria (or even adding your own). For instance, your analysis may reveal that ladder patterns in which the fifth candle closes closer to the open of the first candle perform more reliably. Or, you may find something else entirely.
Technically, these variations may fall more accurately under other candlestick reversal patterns, like the bearish breakaway.
This is okay though, as implication supersedes classification. And similar patterns usually have similar implications (though not always).
Yet, that does not mean that these standards are wholly irrelevant. In fact, certain ones are definitely mandatory, such as the wick on the fourth candle or the direction of the candles in relation to trend. It just means that deeper examination may help you identify more and/or better trading opportunities.
Ultimately, how seriously you take each of these guidelines is up to you. Don’t forget that the purpose of analyzing candlestick patterns is to interpret underlying price action. Your pattern labeling skills are less important.
To this end, you need to understand where they fit.
Where Ladder Tops Fit in the Chart Narrative
The markets are often described as a battle between the bulls and the bears.
Ladder top patterns show that the bulls pressed their advantage on candles one through three, stalled out on candle four, then surrendered momentum to the bears completely by the end of candle five.
On the chart, it looks like the ascent upward may have come to an end
The first day played out like so many before it, with a powerful move upward. That was followed by two more days of the same. On the fourth day, the bears attempted to take control but were thwarted as price ultimately closed higher yet again. After regular trading hours, some of the bulls began to take profit in anticipation of another push from sellers. By the time trading opened on the fifth day, price had already fallen below the open of the previous day. From there, it continued to plummet, closing below the previous day’s low by the final bell.
The stage is now set for a fight over the levels highlighted by this price action. If sellers can defend these levels, the chance of a bearish reversal increases.
Please note: This is only an illustration. Ladder top patterns can reflect any number of real-world scenarios.
In the short-term, it amounts to (long overdue) return fire.
The question for traders:
“Do the bears have enough firepower to make the trend change stick?”
To answer that question, you’ll need more than an understanding of Japanese candlesticks and candlestick patterns. You’ll want to evaluate both within the context of longer-term chart patterns as well as trend and price levels. You’ll also want to make use of your own chart markup and indicators.
Explore the history of your preferred asset(s) with respect to ladder candlestick patterns and apply your findings to your own trading style.
The more thorough your technical analysis, the more clear the story in the charts becomes.
How To Trade Ladder Top Candle Patterns
Bearish reversal patterns are great places to enter shorts or exit longs, especially when you see them coming.
As such, ladder top candle patterns serve as easy-to-spot signs of potential changes from bullish to bearish momentum. They may even lead to cycle-ending tops.
In most cases, you can assign greater weight to multi-stick patterns than single candles because they provide more information over a longer duration. However, you should wait for all candles to close before making any decisions. Otherwise, there is a good chance that you’ll get caught in a fake out.
Additionally, there are a few other things you should consider before trading candlestick patterns.
First and foremost, they are never a “sure thing.” Unfortunately, Bulkowski’s Encyclopedia of Candlestick Patterns does not include analysis of ladder tops—but ladder bottoms tested with a hit rate of 56%. As far as trading signals are concerned, this is little better than a coin flip.
What’s more, candlestick patterns do not have uniform price targets or measured moves like chart patterns do. That makes position management trickier.
Plus, failed reversal patterns often lead to continuation or consolidation. Thus, you’d be wise to seek additional confirmation factors to increase your odds of a successful trade.
Some of these include:
- Volume – Reversals are often accompanied by elevated trading volume. For ladder patterns, you want to see a spike on the fifth candle (or shortly thereafter).
- Price Formations – Bearish reversal patterns that form just below important resistance levels tend to be more reliable. They also reinforce the strength of these levels.
- Oscillator Shift – Oscillating indicators like the RSI or stochastics are commonly used to identify reversals by analyzing slope, percentile, and/or divergence.
The more corroborating elements are present, the more confident you can be about the strength of a bearish ladder reversal signal.
Even so, it would be difficult to form a successful trading strategy built around any single candlestick pattern. There simply isn’t enough there to develop a strong edge. It would still be suboptimal with an expert understanding of trading math, order execution, market psychology, risk management, options, and automation.
In essence, ladder patterns are more useful idea givers than trade makers.
Better yet, you’ll probably find more success building your strategy around other tools and using candlestick patterns as the final point of confirmation.
Other Candlestick Pattern Types
There are many bearish reversal candlestick patterns.
The ladder top is only one.
Likewise, there are many bullish reversal candlestick patterns. Not to mention, you have bearish continuation candlestick patterns and bullish continuation candlestick patterns.
For most traders though, tackling all candlestick patterns at once may be the best learning path.
- Abandoned Baby – Bearish | Bullish
- Breakaway – Bearish | Bullish
- Counterattack Line – Bearish | Bullish
- Doji Star – Evening | Morning
- Engulfing – Bearish | Bullish
- Harami – Bearish | Bullish
- Harami Cross – Bearish | Bullish
- Hikkake – Bearish | Bullish
- In Neck – Bearish | Bullish
- Kicking – Down | Up
- Ladder – Top | Bottom
- Last Engulfing – Top | Bottom
- Long Day – Black | White
- Mat Hold – Bearish | Bullish
- Matching – High | Low
- Meeting Lines – Bearish | Bullish
- On Neck – Bearish | Bullish
- Separating Lines – Bearish | Bullish
- Star – Evening | Morning
- Stomach – Below | Above
- Tasuki Gap – Downside | Upside
- Three Inside – Down | Up
- Three Line Strike – Bearish | Bullish
- Three Methods – Falling | Rising
- Three Outside – Down | Up
- Tri-Star – Bearish | Bullish
- Tweezer – Top | Bottom
- Window – Falling | Rising
Sure, it is quite a long list.
Luckily for us all, you don’t need to memorize every pattern and its criteria. Instead, focus on price action and technical analysis principles. The goal is to be able to look at any group of candlesticks and understand what they mean.
The more candlestick patterns you study, the easier this will become.
Takeaways
To review:
Ladder tops are a type of candlestick pattern that signal a potential bearish reversal. While not a guarantee, their appearance may indicate that market conditions are shifting in favor of sellers. When used properly, this can help you find winning trades.
Of course, there are other candlestick patterns that you should learn about. Still, the ability to recognize patterns is not enough to trade successfully on its own.
Nonetheless, you’ve now added one more weapon to your trading arsenal.
Have questions or more information to add? Contribute to the conversation in the comments below! Or, if you know someone who could benefit from this post, share it with them. You can also check out our Candlestick Patterns Guide to improve your candlestick analysis skills.