Introduction
The Homing Pigeon is an intermediate pattern that often tricks novice traders. It looks like the market is dropping, as both candles are red. However, savvy traders know that this specific formation actually signals that the support is holding.
It is essentially a “Bullish Harami” where the baby candle is also red.
How to Identify It
- Candle 1: A large Red candle.
- Candle 2: A smaller Red candle.
- The Rule: The body of the second Red candle must be completely inside the body of the first candle.
The Psychology
Why is a red candle bullish?
- The market gapped up at the open of the second day.
- Sellers tried to push it down but couldn’t even reach the previous day’s low.
- The fact that the price stayed “inside” the previous day’s range shows that selling momentum is drying up, even though the close was red.
How to Trade It
- Context: This pattern is only useful at major support levels. In the middle of a range, ignore it.
- Confirmation: You must wait for a green candle on the 3rd day to confirm the reversal.
- Stop Loss: Below the lowest low of the two candles.