Reversal candlestick patterns are an essential tool for technical analysts. Be it stock markets or any other financial markets. These patterns are used to identify potential price reversals and critical support and resistance levels. As a result, they provide traders with valuable insight into the market sentiment and can be used to make informed trading decisions.
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Types of Reversal Candlestick Patterns
Reversals Candlestick Patterns Can be classified into 2 types-
Bullish Reversal Candlestick Patterns:- Bullish Candlestick Patterns form at the end of a Downtrend and indicate that the price may move upwards.
Bearish Reversal Candlestick Pattern:- Bearish Reversal Candlestick patterns form at the top of an uptrend and indicate that the price may move downwards.
How to read a Candlestick
Each candlestick provides price data on a particular stock through 4 pieces of information.. the opening price, the closing price, the high price, and the low price. The Colour of the body tells an analyst whether the closing price is higher than the opening price or vice versa. A black or red candlestick means that the closing price of the asset was less than the opening price. Whereas a green candle denotes that the closing price of the asset is higher than the opening price.
The Bullish Engulfing Pattern
The Bullish Engulfing Pattern is a two-candle pattern used to identify potential bullish reversals. It consists of a large green candle followed by a smaller red candle. The green candle opens below the close of the last red candle and closes above its open. The larger green candle “engulfs”, the smaller red candle, indicating a potential reversal in the market trend.
How to Use the Bullish Engulfing Pattern
The Bullish Engulfing Pattern is used to confirm potential bullish reversals in the market. The pattern can be used as a signal to buy if there is confirmation from other technical indicators or tools. One way of confirming the Bullish move is to wait for the price to close above the Bullish Engulfing candle. The close above the Bullish engulfing candle can be a reliable Confirmation of reversal.
The Bearish Engulfing Pattern
The Bearish Engulfing Pattern is similar to the Bullish Engulfing Pattern, except that it consists of a large red candle followed by a smaller green candle. The red candle opens above the close of the last green candle and closes below its open. The larger red candle “engulfs”, the smaller green candle, indicating a potential reversal in the market trend.
How to Use the Bearish Engulfing Pattern
The Bearish Engulfing Pattern is used to confirm potential bearish reversals in the market. The pattern can be used as a signal to sell if there is confirmation from other technical indicators or tools. Traders should look for confirmation from other indicators, such as support and resistance levels, before taking a position.
The Morning Star Pattern
The Morning Star Pattern is a three-candle pattern used to identify potential bullish reversals. It consists of a red candle, a small Doji-like candle, and a large green candle. The first red candle signifies the ongoing selling pressure. The middle candle captures a moment of indecision in the market. At the same time, the 3rd candle indicates that the bulls might take charge and move the price up.
How to Use the Morning Star Pattern
The Morning Star Pattern is used to confirm potential bullish reversals in the market. The pattern can be used as a signal to buy as long as there is confirmation from other technical tools. Traders should look for confirmation from other indicators, such as the moving averages or support and resistance levels, before taking a position.
The Evening Star Pattern
The Evening Star Pattern is similar to the Morning Star Pattern, except that it consists of a big green candle, a small Doji-like candle, and a green candle. The first green candle signifies the current bullish pressure in the market, the Doji-like candle represents indecision, and the final green candle indicates that bears may take charge and move the price downwards.
How to Use the Evening Star Pattern
The Evening Star Pattern is used to confirm potential bearish reversals in the market. In addition, the pattern can be used as a signal to sell if there is confirmation from other technical indicators. Therefore, before taking a position, traders should look for confirmation from other indicators, such as the Fibonacci Retracement or support and resistance levels.
Hammer
The Hammer is a bullish reversal Candlestick pattern. It consists of a small body and A long lower wick. The Long lower wick signifies that the sellers are present in the market, and they tried to push the price further down But were unable to do so. Indicating that the bulls are stronger and may take the price further up.
How to use a Hammer Pattern
Hammer Pattern is used to take long positions. A trader should consider taking up a long position if they observe Hammer at an area of value such as a Support or demand zone. Also, traders should always wait for confirmation before taking up a position. One way to confirm a bullish reversal when trading with a hammer candle is to mark the high of the hammer candle. A close in the price above the high of Hammer can be considered a Confirmation. Traders can also use other technical indicators and tools to generate conformations
If you find learn candlestick patterns overwheming, or you get confused about candlestic patterns while watching the live market. Here is a Candlestick pattern cheatsheet that will help you get you candlestick patterns right.
