Top 6 best candlestick reversal patterns
Eastern wisdom gained iconic status in Western countries. Some people addressed to Eastern thinkers in order to purge themselves from sins and deepen their spirituality, while others learnt how to make money. That’s the case of Japanese candle chart analysis now used internationally by traders. One of the main advantages of using candle charts is that they provide you with early indications of market reversals. To be able to recognize these trading signals, you should memorize the main candlestick patterns.
Harami and Engulfing candlestick
Let’s refer to my favorite reversal pattern – Harami. From old Japanese “harami” means pregnant. The bigger candlestick is the mother, and the smaller one is the baby. The body of the baby must lie within the body of its mother.
Their position tells us that the market has come to a muted reversal. You may ask: “Ok, and how do we trade it?” In a bull trend, we should use the bullish Harami to define the end of the ascending trend. In a bear trend, you have to use the bearish Harami to designate the end of the bullish retracement.
The next popular trend is called engulfing candlestick. It is the opposite of Harami pattern flipped horizontally. The body of the second candle entirely engulfs the body of the first. The engulfing candlestick is a reversal of a downward trend; it demonstrates how the sellers were overpowered by the buyers.
Trading signals. In case of a bull trend, you should buy above the bullish engulfing pattern for bullish continuation. If there is bear trend, sell below the bearish engulfing pattern for bearish continuation.
Hammer and Hanging Man candlesticks
Well, let me put it bluntly, these two patterns look exactly the same. Their body is located near the top of the candlestick, and their shadow is much longer than their body. The difference between the hammer and the hanging man is following: the hammer pattern can be identified at the very end of the downward trend line (it is a strong bullish signal), while the hanging man appears at the end of a bull run (roughly speaking, the suffocation of the hanging man signifies the beginning of the bearish trend).
Trading signals. If there is a downward trend, we should buy above the hammer pattern for a reversal play. In case of a bullish trend, we should sell below the Hanging Man pattern for a reversal play as soon as the bears consolidate their positions.
Piercing Line and Dark Cloud Cover
The first candle of the Piercing line pattern is bearish, while the second one is bullish. It opens below the wick of the first candlestick and closes above the 50% of the first candle’s body. Both bodies are long enough.
The Dark cloud cover is a bearish version of the Piercing line. The first candlestick is bullish. The second one opens above the higher ending of the wick of the first candlestick and closes below the mid-point of the first candlestick.
2. Inverted Hammer and Shooting star.
The Inverted hammer has the same shape as the Shooting star. But they designate the beginning of two different trends. When an Inverted Hammer is found at the end of a downtrend, a Shooting star is placed at the end of the uptrend.
Trading signals. In a downtrend, you should buy above the Inverted Hammer pattern for a reversal play once “bullies” win back their lost position and consolidate them. And in a bull trend, it’s better to sell below the Shooting star pattern for a reversal play.
- Morning and Evening Stars
These ones have three bars. A Morning star consists of a long bearish candlestick, a candle below it (no matter which one, it could bearish or bullish one) and a bullish candlestick that closes within the body of the first candlestick of the same pattern.
An evening star consists of a long bullish candlestick, a star above it (either bullish or bearish) and a bearish candlestick closing within the body of the first candlestick.
Trading signals are following: buy above the last candlestick of Morning star three-bar pattern and sell below the las bar of the Evening start formation.
- Three White Soldiers and Three Black Crowns
It’s a sort of an ascending ladder, each candlestick embodies a staircase. All three part of this pattern have almost the same size with a little deviation. After we pass three staircases, we may be sure that the bullish trend is growing in strength.
The Three Black Crows pattern reminds a descending ladder. Each of the three candlesticks in this pattern should open within the previous candle body and close near its ending. If three crows flew in the “window” (appear on the graph), the bearish trend is on the lookout.
Trading signals: you should buy above the Three White Soldiers pattern and sell below the Three Black Crowns.