Reversal candlestick patterns are one of the most popular technical analysis tools in any trader’s repertoire. As one of the most commonly used technical trading signals in crypto and forex, candlestick patterns — first developed in Japan and therefore also referred to as Japanese candlestick patterns — represent market data in a graphical manner.
The practice of candlestick charting first emerged in Japan over 300 years ago, and was popularized in the latter half of the 20th century in the West by Steve Nison, the author of “Japanese Candlestick Charting Techniques.” Today, candlestick charting has largely replaced traditional bar charting and provides traders with a wide range of advantages.
Candlestick charting typically provides traders with a far greater degree of visual accuracy when compared to other charting methods — candlesticks are highly efficient in representing a specific time period and provide a more concise visual representation of the relationship between price changes in an asset.
Candles also make it easier for traders to observe the most obvious patterns and trends in a market over a specific time period. Other advantages of candlestick chart patterns include a large number of resources available to traders that use candlesticks — clearly defined and well-documented candlestick patterns can be used to identify a potential market reversal, for example.
Reversal candlestick patterns are a series of specific candlesticks, in a specific order. Traders that are able to spot reversal candlestick patterns can use the insight they deliver to make swift trading decisions and make informed predictions about market sentiment.
Bullish vs. Bearish Reversal Candles
Bullish and bearish reversal candles are some of the most important patterns to recognize when using reverse candlestick patterns. Market conditions that are changing from a downtrend to an uptrend are typically associated with bullish reversals, while market conditions that are changing from an uptrend to a downtrend are typically associated with bearish reversals.
There are a number of different factors that should be taken into account when identifying candlestick patterns. Different patterns have different arrangements and sequences — it’s important to pay careful attention to the length of the wick, or shadow of thea candle, as well as the size of the candle body itself.
One of the most important identifiers to look for when looking for reverse candle patterns is where the a pattern appears within a market trend. A potential upcoming rally wherein which market conditions are changing from resting to bullishupward, for example, may appear occur in a downtrend.
Alternatively, a reversal pattern revealed in an uptrend may indicate to traders that asset prices could correct significantly.
Different candlestick patterns have different characteristicsperformances, that are determined by the accuracy of the pattern and the likelihood that market conditions will develop resolve in the direction indicated by thea pattern.
Some reverse candlestick patterns are known to be far more reliable than others. Three relatively reliable bullish reverse candlestick patterns are the morning star, three white soldiers, and the morning doji star. Three black crows, identical three crows, and evening star are known to be reliable bearish reverse candlestick patterns.
Candlestick performance is commonly measured as a percentage, referencing the Encyclopedia of Candlesticks. Three black crows, for example, has a performance rate of 59.83 percent, while evening star has a performance rate of 55.85 percent. Performance is typically measured in bull and bear markets over one, three, five, and ten days after the end of the candle. a candle ends.
Top Bullish Reversal Candlesticks
Traders use bullish reversal candlestick patterns to identify and, ideally, correctly predict trends in markets that may indicate an upcoming downtrend reversal. Crypto traders that correctly identify a bullish reversal candlestick pattern may determine that a rally is about to begin.
Unlike traditional asset markets, digital asset market rallies can continue for an extended period of time. Identifying bullish reversal patterns can assist traders and potentially provide them with insight into market movements before they happen at a broader scale.
The dragonfly doji is identified by a long lower tail, also referred to as a tail, and has no body. Dragonfly doji candlestick patterns are relatively unique and typically occur when high, open, and close prices are equal, and are easily identified due to the dragonfly-like pattern it creates on a chart.
The dragonfly doji candlestick pattern is typically regarded as a bullish signal, suggesting that a the lower -trading market is in the middle of an immediate rebound, with closing prices identical to opening prices.
Three White Soldiers
Three white soldiers is a candlestick pattern that appears as three sequential candlesticks in a row with long bodies. Each candle in a three white soldiers candlestick pattern should open inside the body of the previousior candle, and close higher than the previous candle’s closuree.
The shadows, or wicks, of the candles in three white soldiers, should be relatively small when compared to the average wick size, implying a continuous rally across all three candles.
The morning star manifests on charts as a three-candle formation that begins with a large and bearish first candle. The morning star appears on the charts as a formation of three candles that starts with a big and bearish first candle. The middle candle in a three-candle morning star reverse candlestick pattern opens with a below, but will present as a rebound with a relatively small candle body. The last candlestick in this pattern should appear as a bullish, large-bodied candle that closes relatively high above the middle of the initial candle.
The morning star candlestick pattern is named as such due to the way in which it resembles the rising sun.
Morning Doji Star
Morning doji star candlestick patterns consist of three candles in a row — in this way, a morning doji star is similar to the normal morning star. Unlike the morning star, however, the second candle of a morning doji star forms a doji instead of a full candle.
Three -Line Strike
A three -line strike candlestick pattern consists of four candlesticks. The first three candlesticks of a three-line strike should be bullish, while the last candle is bearish. The first three three-line strike candlesticks close progressively higher, while the final candlestick denotes a significant strike down.
The three -line strike is generally regarded as a bearish candle but can represent an opportunity for traders to take advantage of a dip in advance of a reversal.
The bullish engulfing pattern is a straightforward candlestick pattern in which two candles may indicate a market falling to a new low for a short period of time then rallying above the beginning of the pattern.
The bullish engulfing pattern occurs when a bearish initial candle is followed by a second candle that opens lower than the first, then closes higher. The second candle of the bullish engulf pattern should engulf the first candle, hence the name of this pattern.
Bullish Abandoned Baby
A bullish abandoned baby pattern is a three -candle pattern that should, inversely to a morning star pattern, begin with a large bearish candle rather than a large bullish candle. The next candle in the sequence will have a small body, while the final candle in this pattern should be large and bullish.
The bullish abandoned baby pattern is similar to the morning star pattern in that the second candle is significantly smaller than the first and third candles, but is unique due to the fact that the second candle will gap below the lower wick of the initial candle, with the third candle gapping above the second.
The piercing line candlestick pattern involves two candles and occurs when an initial bearish candle with an average or large body is followed by a second bullish candle. This pattern is recognized by the second candle pushing to a new low, then closing in the upper half of the first candle’s body. In many cases, this pattern may suggest that the market has traded to a low but will potentially rally.
A hammer candlestick pattern is one of the easiest candlestick patterns to recognize identify and is easily identified as a single candle with an extremely long tail, or wick, at the bottom with a small body. Hammer candlestick patterns are a type of pin bar candle and can be either red or green, but the long wick suggests a potential upcoming rally in both cases.
Hammer candlestick patterns occur in markets that have traded significantly lower for a short period of time and are commonly followed by a rally.
Bullish harami candlestick patterns occur across two candles. The initial candle of a bullish harami is bearish and larger-sized, while the second candle in the pattern is a smaller green candle. The bullish harami candlestick pattern is unique in that the second candle gaps higher than the first with a significantly smaller body.
While the bullish harami pattern may, at first glance, appear to indicate a market consolidation, it often occurs when trend sentiments are shifting from low to high.
Inverse Head and Shoulders
The inverse head and shoulders pattern is a relatively complex pattern that forms across multiple candles, and is visible on a chart as a multiple candle bottoming pattern. The initial section of an inverse head and shoulders pattern forms the left shoulder with prices falling to a new low.
The second portion of an inverse head and shoulders pattern occurs during a brief rally that retraces a segment of the downtrend, followed by a trend change in which the left shoulder is pushed lower to form the head. Another rally forms that stalls at or near the price point of the initial rally, forming a neckline.
The final portion of an inverse head and shoulders pattern occurs when the market corrects again, establishing the right shoulder of the pattern. While the inverse head and shoulders pattern can be hard to identify, it can indicate potentially powerful rallies.
Top Bearish Reversal Candles
Inversely to bullish reversal candlestick patterns, bearish reversal candles are used by traders to identify market conditions that may indicate that an uptrend is currently or will soon change to a downtrend. Bearish reversal candles occur when a market is about to correct, providing traders with the opportunity to take action.
A trader that identifies an impending bearish reversal using bearish reversal candles may consider closing long positions, adjusting stop loss values, adjusting take-profit, or potentially opening short positions.
Three Black Crows
Three black crows is an easy-to-identify candlestick pattern that consists of three consecutive downward candlesticks. The bearish candles that make up the three black crows pattern are typically either black or red, hence the name of this pattern.
Each of the candles that comprise the three black crows pattern should have a small tail or wick, which typically suggests that a market is closing near the now after opening near the high. The three black crows pattern is commonly indicative of an impending significant correction.
Dark Cloud Cover
The dark cloud cover pattern consists of two candles. The first candle in the pattern should be bullish, while the second should be strongly bearish. The key to identifying this pattern is identifying a second candle that pushes to a new high and then reverses lower than the initial candle. The second candle should finish within the body of the first candle.
The dark cloud cover candle pattern is the opposite of the piercing line pattern outlined above.
Shooting Star Candlestick
The shooting car candlestick pattern is another single -candle pattern that typically occurs at the end of an uptrend. A shooting star candlestick should have a long upside wick, with a small body.
The shooting star pattern occurs when prices rally to a new high upon opening and then immediately revertse back to the opening price. The large topside and small downside wick of the shooting star candlestick is caused by significant short-term seller action in a market.
The evening star is the bearish version of the bullish morning star candlestick pattern and consists of a three-candlestick formation that indicates a significant correction. The initial candle of an evening star pattern is bullish, followed by a second candle that results in the continuation of the rally until stalling with a relatively small body. The third candle in the sequence falls back to the opening price of the initial candle.
The evening star pattern is generally considered a conservative pattern, as it requires more complex data to identify.
Evening Doji Star
The evening doji star is a complex version of the evening star pattern. While the evening doji star is similar to the evening star pattern, the second candle in the sequence is a doji, rather than a small candle. This represents indecision within the market, indicating that the market may be losing momentum.
The second doji candle in an evening doji star is followed by a final bearish candle with prices falling back to the opening price in the same manner as the standard evening star, potentially indicating an upcoming deeper correction.
Hanging Man Candlestick
The hanging man candlestick is a single candle pattern that, at a glance, is visually similar to the hammer pattern outlined above. A hangding man candlestick can be either red or green, with a small body and a long lower wick at the bottom.
The difference between a hammer pattern and a hanging man pattern is the location of the candlestick — if this pattern appears atnd the end conclusion of an uptrend, it’s generally considered a bearish pattern that indicates a potential correction.
Bearish Abandoned Baby
The bearish abandoned baby is similar to the evening star, and consists of three candles. Unlike the evening star pattern, however, in the bearish abandoned baby pattern there is no overlap between the middle candle’s new high and the initial or final candle.s in a bearish abandoned baby pattern.
The bearish abandoned baby pattern indicates the presence of a strong rally that fails to carry higherthrough to upside, and ends with a third bearish candle that retraces price action to the opening of the initial candle.
The bearish engulfing pattern is the opposite of a bullish engulfing candlestick pattern and consists of two candles. An initial bullish candle, representing an existing rally, will be followed by a second bearish candle that begins with a small rally that pushes to a new high before immediately falling and closing below the initial candle.
The bullish engulfing pattern engulfs the initial candle with a bullish candle while the bearish engulfing pattern, conversely, engulfs the first candle with a bearish candle.
The second candle of a bearish engulfing pattern should fully enclose the initial candle. This pattern is commonly viewed as a strong signal of a potential bearish reversal.
What time frame is best for day trading?
As a general rule, many crypto traders use a 1:4 or 1:6 ratio when identifying candlestick patterns in day trading strategy — a 1:4 ratio, for example, represents a one-hour chart for entries and a four-hour chart for trend identification.
What is the best indicator for trend reversal?
Technical indicators such as relative strength index (RSI), Fibonacci retracement levels, or the stochastic oscillator indicators are popular indicators that can be used alongside significant candlestick patterns that indicate a reversal, such as three -line patterns.
What's bullish reversal strength?
Bullish reversal strength refers to the likelihood that a reversal indicated by a candlestick pattern will occur.
What is a reversal candlestick pattern?
A reverse candlestick pattern is a unique and often-repeated series of candlesticks or individual candles that are recognized as indicators of a potential reversal. There are both bullish and bearish reversal candlestick patterns.
How do you spot a reverse candle?
In order to identify reverse candlestick patterns, it’s best to become familiar with the most common bullish and bearish patterns and frequently practice spotting these patterns on charts.
What is the most powerful candlestick pattern?
Some of the strongest reverse candlestick patterns include the morning star pattern, the evening star pattern, and the bullish or bearish engulfing patterns.
What are bullish reversal candlestick patterns?
Bullish reversal candlestick patterns occur when a market may be about to make a change from a bearish to bullish trend and can indicate a change in market price direction.