What Is the Ladder Bottom/Top Candlestick Pattern?
The ladder top is a five candle reversal pattern, pointing to a fall in price following a rise. The pattern is composed of a series of higher closes, followed by a sharp price drop.
- In theory, the ladder bottom indicates a price reversal to the upside following a downtrend.
- In theory, the ladder top indicates a price reversal to the downside following an uptrend.
- In reality, the pattern acts as a reversal pattern a little more than 50% of the time.
- The pattern is quite rare, so opportunities for trading the pattern are limited.
Understanding the Ladder Bottom/Top Pattern
The ladder bottom and top are theoretically reversal patterns, although they don't always act like that. According to the Encyclopedia of Candlestick Charts, by Thomas Bulkowski, the pattern only acts as a reversal pattern about 56% of the time. Therefore, traders may wish to trade breakouts from the pattern—price moves above or below the pattern high or low, respectively—in either direction.
The bottoming pattern tended to show the best performance when the price was in an overall donwtrend, and breakouts higher or lower tended to work out about equally.
The ladder bottom is a bullish reversal pattern with the following characteristics:
- The market is in a downtrend.
- The first, second, and third candles have long black (down) real bodies with each open and close below the open and close of the previous candle.
- The fourth candle is black with a short real body and long upper shadow.
- The fifth candle is white (up) with an open above the real body of the prior candle.
The theory behind the pattern is that a downtrend loses momentum with an inverted hammer candle that creates an opening for bulls to take over and reverse the trend. In addition to not being common, the ladder bottom tends to be mediocre at predicting a reversal. However, the pattern does tend to produce price moves of 6% or more in the breakout direction within the 10 days following the pattern (for stocks).
Traders should use the ladder bottom in conjunction with other technical indicators to predict bullish reversals. If the pattern does occur, traders may want to exit any short positions or adjust their stop-loss levels, but betting on a long position may require additional confirmation through other chart patterns or technical indicators.
The ladder top is a bearish reversal pattern with the following characteristics:
- The market is in an uptrend.
- The first, second, and third candles have long white (up) real bodies with each open and close above the open and close of the previous candle.
- The fourth candle is white with a short real body and long lower shadow.
- The fifth candle is black (down) with an open below the real body of the prior candle.
The theory behind the pattern is that an uptrend loses momentum with a hammer or harami candle that creates an opening for bears to take over and reverse the trend. As with the bottoming pattern, a breakout from the ladder top pattern tends to produce a decent-sized move in the days following pattern, but the breakout could occur in either direction. It won't always be a reversal pattern.
Example of How to Use the Ladder Bottom/Top Candlestick Pattern
The Apple Inc. (AAPL) daily chart shows a large ladder bottom pattern. There are three long red (down) candles, followed by an inverted hammer and a large green (up) candle. From high to low this particular pattern covered more than a 12% price area.
Following the firth (green) candle, the price moved up initially but didn't move above the high of the pattern (candle one). It then briefly moved below the low of the pattern. This indicates a further slide. The price quickly recovered though and moved above the high of the pattern, continuing to the upside.
If taking trades based on the pattern, entry points and stop losses could be placed at various locations within the pattern. A long could be taken following the green candle in a bottoming pattern, with a stop loss below the pattern low or below the green candle, for example.
The Difference Between the Ladder Bottom/Top and Three White Soldiers
The three white soldiers pattern is created by three large white (up) candles in a row, where each opens within the real body of the last candle, but then closes higher. It shows strong bullish sentiment and traders typically look for it following a decline. It is possible that a ladder bottom could transition into a three white soldiers if two more long up candles follow the white candle (fifth candle) in the ladder bottom.
Limitations of the Ladder Bottom/Top Candlestick Pattern
The pattern is quite rare, which means the opportunities to use the pattern for trading or analytical purposes will be limited.
The pattern is a poor predictor of price direction. The price could break higher or lower following the pattern, with a breakout being a price move above the high or low price of the pattern. While called a reversal pattern, it is about 50/50 as to whether the pattern will reverse or continue the prevailing trend.
The pattern can be quite large and cover a lot of price area. By the time the price moves outside the range of the pattern, a significant portion of the ensuing price move may have already occurred.
The candlestick pattern is typically best used in conjunction with other forms of technical analysis, such as price action, larger chart patterns, or technical indicators.