Top Candlestick Reversal Patterns Every Trader Must Know

For over 100 years, traders have used candlestick charts to visualise price movements and make trading decisions. Unlike regular line charts, candlesticks provide a more detailed and vivid view of the buying and selling activity of a particular security over a period of time.

One key advantage of candlestick charts is that you can easily track emerging patterns, especially reversal ones. Candlestick Reversal Patterns trends indicate that a particular market trend will likely change directions soon.

Recognising these reversal patterns early can help you take advantage of stock market turning points. This article will help you explore the most critical trend reversal candlestick patterns in detail.

What are Trend Reversal Candlestick Patterns?

A trend reversal candlestick patterns indicates that the direction of a particular market trend concerning distinct marketable security is about to change. It signals to traders that one specific uptrend may reverse into a downtrend or vice versa. The psychology behind reversals is that when there is a significant shift in market sentiment from bullish to bearish or bearish to bullish, it usually leads to a change in trend direction.

Trend reversal candlestick patterns are important because they can help traders spot trend changes in the early stages. This allows them to adjust their trading strategies quickly to capitalise on the new emerging trend, either by exiting trades or entering counter-trend trades. Identifying reversals is a valuable skill you should possess as a trader.

Here are some essential factors you should keep in mind about candlestick reversals:

• They indicate a high probability of a trend change but can still fail.
• The most reliable reversal patterns often occur after extended highs and lows.
• An increase in trading volume is a reliable indicator of a valid reversal.
• You can use technical analysis indicators to confirm the strength of the reversal.

Top Candlestick Reversal Patterns

Let us take a detailed look at some of the most common candlestick trend reversal patterns.

Bullish Reversal Patterns

Bearish reversal candlestick patterns indicate that buyers of marketable security have started to outnumber the sellers, pointing to a potential change to an upward trend. Here are some of the significant candlestick bullish reversal patterns:

1. Hammer / Inverted Hammer

• Appearance: The candle has a lower long wick candle reversal and a small natural body at the top of the candle range. It resembles a hammer shape.
• Explanation: The long lower wick candle reversal indicates that sellers have pushed the prices to their lows during the period, but buyers were able to force prices back up to close near the opening level. This shows that the buying pressure outweighs the selling pressure by the end of the period.
• Reliability: This reversal pattern is highly reliable when it occurs after a downtrend. It is exceptionally reliable if the hammer has a higher opening and closing and a long lower wick.

2. Bullish Engulfing Pattern

• Appearance: A large green (or white) real body candle engulfs the previous red (or black) real body candle.
• Explanation: The bullish engulfing pattern shows buyers considerably overtaking sellers. The size of the green natural body versus the previous red body explains the intensity of buying forces.
• Reliability: It is quite reliable after a confirmed downtrend, especially with an increase in volume on the bullish engulfing candle.

3. Morning Star

• Appearance: This reversal pattern consists of three candles – a long red candle, followed by a small real-body doji candle, and then a long green candle.
• Explanation: The morning star indicates a transition of power from the sellers to the buyers after the concerned marketable security has gone through a downward trend. The doji shows a period of indecision before a large green candle confirms the strength of the buyers.
• Reliability: Stock market analysts highlight that the Morning Star reversal pattern is most reliable when it comes after a clear downward trend. The high volume on the third bullish candle adds more confirmation.

Bearish Reversal Patterns

Bearish reversal candlestick patterns signal that there is growing momentum for sellers after an established upward trend, which could lead to a downward trend reversal patterns. Here are some significant types of bearish reversal candlestick patterns:

1. Shooting Star / Inverted Hammer

• Appearance: The shooting star or inverted hammer has the same shape as the inverted hammer, except it occurs after an upward trend. A small upper natural body, little or no lower wick, and a long upper wick indicate the existence of this reversal pattern.
• Explanation: The shooting star shows buyers tried to push the prices higher, but sellers forcefully drove the prices back down near the opening level by the candle’s end. It Indicates a transition of power from the buyers to the sellers.
• Reliability: Candlestick experts suggest that a shooting star or inverted hammer reversal pattern is a very reliable signal when it appears after an upward trend or a long green candle. It shows that selling momentum is outweighing the buying pressure.

2. Bearish Engulfing Pattern

• Appearance: The bearish reversal candlestick patterns is indicated by a large red real-body candle fully engulfing the previous smaller green real-body candle.
• Explanation: The bearish engulfing trend reversal patterns demonstrate a strong selling momentum. It indicates that sellers overpower the buying pressure after the previous green candle. This reversal pattern suggests that the sellers have forcefully assumed market control.
• Reliability: The bearish engulfing pattern is a reliable reversal pattern, especially after a heavy volume upward trend. It warns of a potential change to a downward trend.

3. Evening Star

• Appearance: A long green body candle is followed by a small real-body doji candle and a long red body candle.
• Explanation: This pattern indicates the buyers’ feeling of exhaustion after an upward trend. The doji shows a balance between buyers and sellers before the large red candle confirms that the sellers have assumed control from the buyers.
• Reliability: Candle stick experts suggest this reversal trend is most reliable after a confirmed upward trend. Notably, it warns of a potential trend reversal patterns as the sellers begin to dominate.

Conclusion

Candlestick reversal patterns capture unique visual price movements that can help traders identify potential market turning points. Mastering the art of analysing candlestick reversal patterns can significantly improve your market timing.

It is, however, essential to remember that no single signal can be perfect. Consider combining the candlestick reversal patterns with other techniques like fundamental candlestick chart analysis. Such an approach can help you develop reliable strategies for identifying and capitalising on reversal trends.

Frequently Asked Questions – FAQs

1. What are candlestick reversal patterns?

Candlestick reversal patterns are visual price patterns on a candlestick chart that signal a potential change in the direction of a market trend.

2. Why are reversal patterns important for traders?

Identifying reversal patterns early allows traders to adjust their strategies to take advantage of emerging new trends.

3. What is a hammer candlestick pattern?

A hammer pattern has a long lower wick and a small body at the top, indicating buyers overtaking sellers by the end of the period.

4. When is a shooting star reversal pattern reliable?

The shooting star reversal is most reliable after an upward price trend or long green candle when it signals selling momentum outweighs buying.

5. What does a bullish engulfing pattern indicate?

A bullish engulfing pattern shows strong buyer momentum fully engulfing the previous red candle’s range.

Author: All Content is verified by SMC Global Securities.