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Forex candle reverse pattersnBest 5 Forex Candlestick Patterns for Day Trading. Forex candlestick patterns are crucial for the success of your price action technical analysis. Along with chart patterns, traders constantly use candlestick patterns for day trading to open and close different trades. This is so because every Forex candle pattern contains a tradable potential. For this reason, I will dedicate the following material to the best 5 candle patterns Forex indicators and the way they should be traded when spotted on the chart. What are the Forex Candlestick Patterns? Forex candlestick patterns are special on-chart formations created by one or few Japanese candlesticks. There are many different candlestick pattern indicators known in Forex, and each of them has specific meaning and tradable potential. Forex traders constantly use candlestick chart patterns for day trading to foretell potential price moves on the chart. Forex candlesticks help them guess where the price will go and they buy or sell currency pairs based on what the pattern is telling them. Therefore, you should also spare time to examine the best candlestick patterns for intraday trading if you want to be a successful Forex trader. Type of Candlestick Patterns for Day Trading. There are two types of Forex candlestick patterns for day trading – continuation and reversal candle patterns. Let’s now briefly go through each of these two kinds. Continuation Forex Candle Patterns. Continuation Forex candle patterns are the ones that come after a price move and have the potential to continue the price action in the same direction.

The truth is that continuation candle patterns are not very popular in Forex trading. The reason for this is that they are not that many. In comparison to that, reversal candlestick patterns are dominating the Forex charts. Reversal Forex Candle Patterns. The reversal Forex candle patterns are the ones that come after a price move and have the potential to reverse the price action. Compared to continuation candle patterns, the reversal candle pattern indicators are the majority of the candle patterns you will meet on the Japanese candlestick charts. Best 5 Candlestick Patterns Explained with Examples. In this relation, you should not be surprised that the best 5 candlestick patterns for day trading are reversal patterns. 5 of the most profitable Forex candlestick indicators are: The Doji Family Tweezer Tops Tweezer Bottoms The Hammer Family Three Inside Ups Three Inside Downs Evening Star Morning Star. Notice that I have separated these into “families” or in their bullish and bearish versions since they refer to the same thing but upside down. Let’s now explain each of these with examples. Doji Candle Patterns.

The Doji candle family consists of single candle formations where the price action opens and closes at the same price. Every Doji candlestick symbolizes the equalization of the bearish and the bullish forces. This means that the current price trend is getting exhausted and it is likely to be reversed. The Doji Forex pattern could appear after bullish moves as well as after bearish moves. Despite that, the function of the pattern stays the same – to reverse the price action. Since the Doji candle closes at the same level where it opened, the candle looks like a dash. Yes, but this is not the only Doji candle pattern known in Forex trading. There are other Doji candlesticks too. Below you will find the most popular Doji candlestick pattern types. The confirmation of all of the Doji patterns comes when with the finish of a candle that closes in the direction that is opposite to the trend. This candle is the first indication that the reversal is beginning.

Tweezer Tops and Tweezer Bottoms. The Tweezer Tops is a double candlestick pattern Forex indicator with reversal functions. The pattern comes at the end of bullish trends and signalizes about the beginning of a fresh bearish move. The first candle of the Tweezer Top candlestick formation is usually the last of the previous bullish trend. The second candle of the Tweezer Top pattern should have an upper shadow that starts from the top of the previous shadow. At the same time, the upper shadows of the two candles should be approximately the same size. The Tweezer Tops has its opposite equivalent that is called Tweezer Bottoms. The Tweezer Bottoms Forex pattern has absolutely opposite structure. The pattern comes after price drops and signalizes upcoming bullish moves.

The first candle of the Tweezer Bottom is usually the last candle of the previous bullish trend. The second candle of the Tweezer Bottom pattern should have a lower shadow that starts from the bottom of the previous shadow. At the same time, the lower shadows of the two candles should be approximately the same size. The confirmation of the Tweezer Candlesticks comes with the candle that manages to close beyond the opposite side of the pattern. This candle is a strong indication that the trend is reversing. The Hammer candlestick pattern is a single candle pattern that has three variations depending on the trend they take part in. Every Forex candlestick that belongs to the Hammer family has a small body and a big upper or smaller shadow. At the same time, the other shadow is either missing or very small. You will guess right if you are wondering if the name of the Hammer candle family comes from the structure of the candles. The candles in the Hammer family are four, and they all have reversal character. Let me meet you with these candles now: I have shown the bullish and the bearish version of each candle. Notice that it doesn’t matter which of the two candles you will receive. The meaning is the same. Hammer Candlestick Chart Pattern.

The first candle on the sketch is the Hammer candlestick chart pattern. The candle emerges during bearish trends and signalizes that a bullish move is probably on its way. The Hammer candle has a small body, a long lower shadow and a very small or no upper shadow. Traders use the Hammer candlestick to open long trades. Inverted Hammer Candlestick Pattern. The Inverted Hammer candle has absolutely the same functions as the Hammer candle, but it is upside down. The Inverted Hammer has a small body, a big upper shadow, and a small or no lower shadow. Same as the Hammer candle, the Inverted Hammer candlestick comes after bearish moves and signalizes that a fresh bullish move might be emerging. Traders use the Inverted Hammer pattern to open long trades. Hanging Man Candle Pattern. The Hanging Man candlestick is absolutely the same as the Hammer candlestick pattern. It has a small body, a long lower shadow and a very small or no upper shadow. However, the Hanging Man Forex pattern occurs after bullish trends and signalizes that the trend is reversing. In this relation, the Hanging Man candle pattern is used by traders to open short trades.

Shooting Star Candlestick Pattern. The Shooting Star candle pattern has the same structure as the Inverted Hammer candle. It has a small body, a long upper shadow and a tiny or no lower shadow. However, the Shooting Star Forex candle comes after bullish trends and signalizes that the bulls are exhausted. As a result, a reversal and a fresh price decrease usually appear afterward. In this relation, Shooting Star candlestick chart pattern acts as a signal to short Forex pairs. The confirmation of the Hammer, Inverted Hammer, the Shooting Star and the Hanging Man comes with the candle which closes in the direction opposite to the trend. This candle is likely to be the first of an eventual emerging trend. Three Inside Up and Three Inside Down Candlestick Patterns. The Three Inside Up is another reversal candle pattern indicator that comes after bearish trends and foretells fresh bullish moves.

It is a triple Forex candlestick pattern that starts with a bearish candle. The pattern continues with a bullish candle, which is fully engulfed by the fist candle, and which closes somewhere in the middle of the first candle. The pattern ends with a third candle, which is bullish and breaks the top of the first candle. The first candle of the Three Inside Up candle pattern is usually the last candle of the previous bearish trend. The Three Inside Up has its opposite equivalent – the Three Inside Down candlestick pattern. The Three Inside Down is a mirror image of the of the Three Inside Up. It comes after bullish trends and usually begins fresh bearish moves. The Three Inside Down candlestick pattern starts with a bullish candle, which is usually the last of the previous bullish trend. The pattern continues with a second candle – a bearish one that is fully engulfed by the first candle and closes somewhere in the middle of the first candle. The pattern then continues with a third candle, which is bearish and goes below the beginning of the first candle. The confirmation of the Three Inside Up and the Three Inside Down candlestick patterns comes with the third candle that closes beyond the beginning of the first candle of the pattern. Morning Star Candle and Evening Star Candle Pattern. The Morning Star candle pattern is another three bar formation that has reversal functions. The Morning Star candlestick chart pattern comes after bullish trends and signalizes eventual price reversal.

The pattern starts with a bullish candle that is long, and it is usually the last candle of the previous bullish trend. Then it continues with a very small candle that could sometimes even be a Doji star, and it is possible that this candle sometimes gaps up. The third candle of the pattern is bearish and goes below the middle point of the first candle, and it could also gap down from the second candle. The opposite equivalent to the Morning Star Forex figure is called Evening Star candlestick pattern. The Evening Star Forex figure is a mirror version of the Morning Star that comes after bearish trends and signalizes their reversal. The Evening Star candle pattern starts with a bearish candle that is long, and it is usually the last candle of the previous bearish trend. Then it continues with a very small candle that could sometimes even be a Doji star, and it is possible that this candle sometimes gaps down. The third candle of the pattern is bullish and goes above the middle point of the first candle of the pattern. It could also gap up from the second candle. The confirmation of the Morning Star and the Evening Star candlestick reversal patterns comes with the end of the third candle. If the pattern emerges meeting the requirements of the three candles then you can trade in the respective direction. Best Forex Candlestick Patterns Cheat Sheet. I have created a simple candlestick pattern cheat sheet for your convenience. It contains all the sketches shown above. You can use these Forex candlestick patterns for day trading by simply peeking at the cheat sheet to confirm the patterns. Save the image on your PC, or simply print it for your convenience.

Real Examples of Candle Pattern Indicators. Now that you are familiar with the structure of the best candlestick patterns for intraday trading, I suggest that we go through coupe chart examples of how these work in trading. The first example on the chart shows the Three Inside Up and the Three Inside Down chart pattern indicators in action. See that after each of these two patterns the price action creates a turning point and the price reverses the previous trend. You should open a short trade at the Three Inside Down pattern and a long trade at the Three Inside Up Pattern. You should place your Stop Loss orders at the opposite side of the patterns as shown in the image. This is a Tweezer Bottoms Forex candle pattern. See that the lower shadows of the two candles start and end approximately at the same level, which confirms the validity of the pattern. As a result, the price action reverses, which triggers a long trade. At the same time, you should put a stop loss order below the lowest point of the pattern. Now let’s go through the Morning Star candle pattern and the Hanging Man candlestick. Both patterns have the ability to end a bullish trend and to start a fresh bearish move. You should approach both patterns with a short trade, and you should sell upon their confirmation placing Stop Loss orders above their high. As you see, in both cases the price decreases after the confirmation of the pattern.

Lastly, we will discuss a Doji candlestick pattern that comes after a bearish trend. Our Doji candlestick analysis shows that the price ends the bearish move and starts a fresh bullish move. You should trade in bullish direction here placing a Stop Loss order below the lowest point of the Doji star candle. Stop Loss Orders on Forex Candle Patterns. You should always use a Stop Loss order when trading Forex candle patterns. As you have probably seen on the trading images above, the best place for your stops on candle trades is at the opposite side of the patterns. If you are trading a bullish candlestick pattern, place your Stop Loss order below the formation. If you are trading a bearish candlestick pattern, then you should place your Stop Loss order above the candle figure on the chart. Take Profit Orders and Targets on Forex Candlesticks. The rule of thumb says that you should trade every candle pattern for a minimum price move equal to the size of the pattern measured from the tip of the upper shadow to the tip of the lower shadow.

In some cases, the price action will continue further than that. Therefore, use the basic price action rules to determine further exit points on the chart. If you spot another candle pattern during you trade that suggests the end of the trend, you should simply exit your trade and collect your profit. Forex candlestick patterns are crucial for the price action technical analysis of currency pairs. The candlestick pattern indicators form on the Japanese candlestick charts that visualize the price action of Forex pairs. There are two main types of candle patterns Forex indicators: Continuation candle patterns – not very popular in Forex trading Reversal candle patterns – widely used to profit on the Forex market The best Forex candlestick patterns for day trading have reversal character. These are: The Doji Candlestick Patterns – Doji, Long Legged Doji, Dragonfly Doji, Gravestone Doji, and Four Price Doji Tweezer Tops and Tweezer Bottoms The Hammer Candle Pattern Family: Hammer, Inverted Hammer, Shooting Star, and Hanging Man Three Inside Up and Three Inside Down Evening Star and Morning Star Candle Patterns You should place your Stop Loss orders at the opposite side of the candle pattern you are trading. Stay in each candle trade for a minimum price move equal to the size of the pattern. Extend your targets by applying price action rules. GET STARTED WITH THE FOREX TRADING ACADEMY. Damyan is a fresh MSc International Management from the International University of Monaco. During his bachelor and master programs, Damyan has been working in the area of financial markets as a Market Analyst and Forex Writer. He is the author of thousands of educational and analytical articles for traders.

When being in bachelor school, he represented his university in the National Forex Trading Competition for students in Bulgaria and got the first place among 500 other traders. He was awarded a cup and a certificate at an official ceremony in his university. Basic Japanese Candlestick Patterns. Japanese candlesticks with a long upper shadow, long lower shadow and small real bodies are called spinning tops . The color of the real body is not very important. The pattern indicates the indecision between the buyers and sellers. The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both buyers and sellers were fighting but nobody could gain the upper hand. Neither buyers nor sellers could gain the upper hand, and the result was a standoff. If a spinning top forms during an uptrend, this usually means there aren’t many buyers left and a possible reversal in direction could occur. If a spinning top forms during a downtrend, this usually means there aren’t many sellers left and a possible reversal in direction could occur.

Sounds like some kind of voodoo magic, huh? “I will cast the evil spell of the Marubozu on you!” Fortunately, that’s not what it means. Marubozu means there are no shadows from the bodies. Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as its open or close. Check out the two types of Marubozus in the picture below. A White Marubozu contains a long white body with no shadows. The open price equals the low price and the close price equals the high price . A Black Marubozu contains a long black body with no shadows. The open equals the high and the close equals the low . This is a very bearish candle as it shows that sellers controlled the price action the entire session. It usually implies bearish continuation or bearish reversal. Doji candlesticks have the same open and close price or at least their bodies are extremely short. A doji should have a very small body that appears as a thin line. Prices move above and below the open price during the session, but close at or very near the open price. Neither buyers nor sellers were able to gain control and the result was essentially a draw. There are FOUR special types of Doji candlesticks.

The length of the upper and lower shadows can vary and the resulting forex candlestick looks like a cross, inverted cross or plus sign. The word “Doji” refers to both the singular and plural form. When a Doji forms on your chart, pay special attention to the preceding candlesticks. If a Doji forms after a series of candlesticks with long hollow bodies (like White Marubozus), the Doji signals that the buyers are becoming exhausted and weakening. In order for price to continue rising, more buyers are needed but there aren’t anymore! Sellers are licking their chops and are looking to come in and drive the price back down. If a Doji forms after a series of candlesticks with long filled bodies (like Black Marubozus), the Doji signals that sellers are becoming exhausted and weak. In order for price to continue falling, more sellers are needed but sellers are all tapped out! Buyers are foaming in the mouth for a chance to get in cheap. While the decline is sputtering due to lack of new sellers, further buying strength is required to confirm any reversal. In the next following sections, we will take a look at specific Japanese candlestick pattern and what they are telling us. Hopefully, by the end of this lesson on candlesticks, you will know how to recognize different types of forex candlestick patterns and make sound trading decisions based on them. The 5 Most Powerful Candlestick Patterns. Candlestick charts are a technical tool that pack data for multiple time frames into single price bars. This makes them more useful than traditional open-high, low-close bars (OHLC)? or simple lines that connect the dots of closing prices. Candlesticks build patterns that predict price direction once completed. Proper color coding adds depth to this colorful technical tool, which dates back to 18th century Japanese rice traders.

Steve Nison brought candlestick patterns to the Western world in his popular 1991 book, "Japanese Candlestick Charting Techniques." Many traders can now identify dozens of these formations, which have colorful names like bearish dark cloud cover, evening star and three black crows. In addition, single bar patterns including the doji and hammer have been incorporated into dozens of long - and short-side trading strategies. (For related reading, see: Candlestick Charting: What Is It? ) Candlestick Pattern Reliability. Not all candlestick patterns work equally well. Their huge popularity has lowered reliability because they've been deconstructed by hedge funds and their algorithms. These well-funded players rely on lightning-speed execution to trade against retail investors and traditional fund managers who execute technical analysis strategies found in popular texts. In other words, hedge fund managers use software to trap participants looking for high-odds bullish or bearish outcomes. However, reliable patterns continue to appear, allowing for short - and long-term profit opportunities. (See also: The Multiple Strategies of Hedge Funds .) Here are five candlestick patterns that perform exceptionally well as precursors of price direction and momentum. Each works within the context of surrounding price bars in predicting higher or lower prices. They are also time sensitive in two ways. First, they only work within the limitations of the chart being reviewed, whether intraday, daily, weekly or monthly.

Second, their potency decreases rapidly three to five bars after the pattern has completed. Top 5 Candlestick Patterns. This analysis relies on the work of Thomas Bulkowski, who built performance rankings for candlestick patterns in his 2008 book, "Encyclopedia of Candlestick Charts." He offers statistics for two kinds of expected pattern outcomes: reversal and continuation. Candlestick reversal patterns predict a change in price direction, while continuation patterns predict an extension in the current price direction. In the following examples, the hollow white candlestick denotes a closing print higher than the opening print, while the black candlestick denotes a closing print lower than the opening print. (See The Basic Language of Candlestick Charting for more information.) The bullish three line strike reversal pattern carves out three black candles within a downtrend. Each bar posts a lower low and closes near the intrabar low. The fourth bar opens even lower but reverses in a wide-range outside bar that closes above the high of the first candle in the series. The opening print also marks the low of the fourth bar. According to Bulkowski, this reversal predicts higher prices with an 84% accuracy rate. The bearish two black gapping continuation pattern appears after a notable top in an uptrend, with a gap down that yields two black bars posting lower lows.

This pattern predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. According to Bulkowski, this pattern predicts lower prices with a 68% accuracy rate. The bearish three black crows reversal pattern starts at or near the high of an uptrend, with three black bars posting lower lows that close near intrabar lows. This pattern predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. The most bearish version starts at a new high (point A on the chart) because it traps buyers entering momentum plays. According to Bulkowski, this pattern predicts lower prices with a 78% accuracy rate. (For related reading, see How Do I Build a Profitable Trading Strategy When Spotting a Three Black Crows Pattern? ) The bearish evening star reversal pattern starts with a tall white bar that carries an uptrend to a new high. The market gaps higher on the next bar, but fresh buyers fail to appear, yielding a narrow range candlestick. A gap down on the third bar completes the pattern, which predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. According to Bulkowski, this pattern predicts lower prices with a 72% accuracy rate. (See also: How Is an Evening Star Pattern Interpreted by Analysts and Traders? ) The bullish abandoned baby reversal pattern appears at the low of a downtrend, after a series of black candles print lower lows. The market gaps lower on the next bar, but fresh sellers fail to appear, yielding a narrow range doji candlestick with opening and closing prints at the same price.

A bullish gap on the third bar completes the pattern, which predicts that the recovery will continue to even higher highs, perhaps triggering a broader-scale uptrend. According to Bulkowski, this pattern predicts higher prices with a 70% accuracy rate. (For more, see Using Bullish Candlestick Patterns to Buy Stocks .) Candlestick patterns capture the attention of market players, but many reversal and continuation signals emitted by these patterns don't work reliably in the modern electronic environment. Fortunately, statistics by Thomas Bulkowski show unusual accuracy for a narrow selection of these patterns, offering traders actionable buy and sell signals. (To learn more, take a look at Advanced Candlestick Patterns .) Using Bullish Candlestick Patterns To Buy Stocks. Candlestick charts are a type of financial chart for tracking the movement of securities. They have their origins in the centuries-old Japanese rice trade and have made their way into modern day price charting. Some investors find them more visually appealing than the standard bar charts and the price actions easier to interpret. Candlesticks are so named because the rectangular shape and lines on either end resemble a candle with wicks. Each candlestick usually represents one day’s worth of price data about a stock. Over time, the candlesticks group into recognizable patterns that investors can use to make buying and selling decisions.

In this article we will focus on identifying bullish candlestick patterns that signal a buying opportunity. ( Read more in Candlestick Charting: What Is It?) How to Read a Single Candlestick. Each candlestick represents one day’s worth of price data about a stock through four pieces of information: the opening price, the closing price, the high price, and the low price. The color of the central rectangle (called the real body) tells investors whether the opening price or the closing price was higher. A black or filled candlestick means the closing price for the period was less than the opening price; hence, it is bearish and indicates selling pressure. Meanwhile, a white or hollow candlestick means that the closing price was greater than the opening price. This is bullish and shows buying pressure. The lines at both ends of a candlestick are called shadows, and they show the entire range of price action for the day, from low to high. The upper shadow shows the stock’s highest price for the day and the lower shadow shows the lowest price for the day. Bullish Candlestick Patterns. Over time, groups of daily candlesticks fall into recognizable patterns with descriptive names like three white soldiers, dark cloud cover, hammer, morning star, and abandoned baby, to name just a few. Patterns form over a period of one to four weeks and are a source of valuable insight into a stock’s future price action. Before we delve into individual bullish candlestick patterns, note the following two principles: Bullish reversal patterns should form within a downtrend . Otherwise, it’s not a bullish pattern, but a continuation pattern. Most bullish reversal patterns require bullish confirmation. In other words, they must be followed by an upside price move which can come as a long hollow candlestick or a gap up, and be accompanied by high trading volume. This confirmation should be observed within three days of the pattern.

The bullish reversal patterns can further be confirmed through other means of traditional technical analysis—like trend lines, momentum oscillators, or volume indicators—to reaffirm buying pressure. ( For insight into ancillary technical indicators see Basics of Technical Analysis) There are great many candlestick patterns that indicate an opportunity to buy. We will focus on five bullish candlestick patterns that give the strongest reversal signal. 1. The Hammer or The Inverted Hammer. The Hammer is a bullish reversal pattern, which signals that a stock is nearing bottom in a downtrend. The body of the candle is short with a longer lower shadow which is a sign of sellers driving prices lower during the trading session, only to be followed by strong buying pressure to end the session on a higher close. Before we jump in on the bullish reversal action, however, we must confirm the upward trend by watching it closely for the next few days. The reversal must also be validated through the rise in the trading volume. The Inverted Hammer also forms in a downtrend and represents a likely trend reversal or support. It’s identical to the Hammer except for the longer upper shadow, which indicates buying pressure after the opening price, followed by considerable selling pressure, which however wasn’t enough to bring the price down below its opening value. Again, bullish confirmation is required and it can come in the form of a long hollow candlestick or a gap up, accompanied by a heavy trading volume. 2. The Bullish Engulfing. The Bullish Engulfing pattern is a two-candle reversal pattern. The second candle completely ‘engulfs’ the real body of the first one, without regard to the length of the tail shadows.

The Bullish Engulfing pattern appears in a downtrend and is a combination of one dark candle followed by a larger hollow candle. On the second day of the pattern, price opens lower than the previous low, yet buying pressure pushes the price up to a higher level than the previous high, culminating in an obvious win for the buyers. It is advisable to enter a long position when the price moves higher than the high of the second engulfing candle—in other words when the downtrend reversal is confirmed. 3. The Piercing Line. Similar to the engulfing pattern, the Piercing Line is a two-candle bullish reversal pattern, also occurring in downtrends. The first long black candle is followed by a white candle that opens lower than the previous close. Soon thereafter, the buying pressure pushes the price up halfway or more (preferably two-thirds of the way) into the real body of the black candle. 4. The Morning Star. As the name indicates, the Morning Star is a sign of hope and a new beginning in a gloomy downtrend. The pattern consists of three candles: one short-bodied candle (called a doji or a spinning top) between a preceding long black candle and a succeeding long white one. The color of the real body of the short candle can be either white or black, and there is no overlap between its body and that of the black candle before. It shows that the selling pressure that was there the day before is now subsiding. The third white candle overlaps with the body of the black candle and shows a renewed buyer pressure and a start of a bullish reversal, especially if confirmed by the higher volume. 5. The Three White Soldiers.

This pattern is usually observed after a period of downtrend or in price consolidation. It consists of three long white candles that close progressively higher on each subsequent trading day. Each candle opens higher than then previous open and closes near the high of the day, showing a steady advance of buying pressure. Investors should exercise caution when white candles appear to be too long as that may attract short sellers and push the price of the stock further down. ( See more in How do I build a profitable strategy when spotting a Three White Soldiers Pattern?) The chart below for Enbridge, Inc. (ENB) shows three of the bullish reversal patterns discussed above: the Inverted Hammer, the Piercing Line, and the Hammer. The chart for Pacific DataVision, Inc. (PDVW) shows the Three White Soldiers pattern. Note how the reversal in downtrend is confirmed by the sharp increase in the trading volume. Candlestick Bullish Reversal Patterns. Candlestick Bullish Reversal Patterns.

There are dozens of bullish reversal candlestick patterns. We have elected to narrow the field by selecting the most popular for detailed explanations. Below are some of the key bullish reversal patterns with the number of candlesticks required in parentheses. The hammer and inverted hammer were covered in the article Introduction to Candlesticks . This article will focus on the other six patterns. For a complete list of bullish (and bearish) reversal patterns, see Greg Morris' book, Candlestick Charting Explained . Before moving on to individual patterns, certain guidelines should be established: Bullish Confirmation. Patterns can form with one or more candlesticks; most require bullish confirmation. The actual reversal indicates that buyers overcame prior selling pressure, but it remains unclear whether new buyers will bid prices higher. Without confirmation, these patterns would be considered neutral and merely indicate a potential support level at best. Bullish confirmation means further upside follow through and can come as a gap up, long white candlestick or high volume advance. Because candlestick patterns are short-term and usually effective for only 1 or 2 weeks, bullish confirmation should come within 1 to 3 days after the pattern. To be considered a bullish reversal, there should be an existing downtrend to reverse.

A bullish engulfing at new highs can hardly be considered a bullish reversal pattern. Such formations would indicate continued buying pressure and could be considered a continuation pattern. In the Ciena example below, the pattern in the red oval looks like a bullish engulfing, but formed near resistance after about a 30 point advance. The pattern does show strength, but is more likely a continuation at this point than a reversal pattern. The existence of a downtrend can be determined by using moving averages, peaktrough analysis or trend lines. A security could be deemed in a downtrend based on one of the following: These are just examples of possible guidelines to determine a downtrend. Some traders may prefer shorter downtrends and consider securities below the 10-day EMA. Defining criteria will depend on your trading style and personal preferences. Other Technical Analysis. Candlesticks provide an excellent means to identify short-term reversals, but should not be used alone. Other aspects of technical analysis can and should be incorporated to increase reversal robustness. Below are three ideas on how traditional technical analysis might be combined with candlestick analysis. Look for bullish reversals at support levels to increase robustness. Support levels can be identified with moving averages, previous reaction lows, trend lines or Fibonacci retracements. Use oscillators to confirm improving momentum with bullish reversals.

Positive divergences in MACD, PPO, Stochastics, RSI, StochRSI or Williams %R would indicate improving momentum and increase the robustness behind a bullish reversal pattern. Money Flows use volume-based indicators to access buying and selling pressure. On Balance Volume (OBV), Chaikin Money Flow (CMF) and the AccumulationDistribution Line can be used in conjunction with candlesticks. Strength in any of these would increase the robustness of a reversal. For those that want to take it one step further, all three aspects could be combined for the ultimate signal. Look for bullish candlestick reversal in securities trading near support with positive divergences and signs of buying pressure. A number of signals came together for IBM in early October. After a steep decline since August, the stock formed a bullish engulfing pattern (red oval), which was confirmed three days later with a strong advance. The 10-day Slow Stochastic Oscillator formed a positive divergence and moved above its trigger line just before the stock advanced. Although not in the green yet, CMF showed constant improvement and moved into positive territory a week later. The bullish engulfing pattern consists of two candlesticks, the first black and the second white.

The size of the black candlestick is not that important, but it should not be a doji which would be relatively easy to engulf. The second should be a long white candlestick – the bigger it is, the more bullish. The white body must totally engulf the body of the first black candlestick. Ideally, though not necessarily, the white body would engulf the shadows as well. Although shadows are permitted, they are usually small or nonexistent on both candlesticks. After a decline, the second white candlestick begins to form when selling pressure causes the security to open below the previous close. Buyers step in after the open and push prices above the previous open for a strong finish and potential short-term reversal. Generally, the larger the white candlestick and the greater the engulfing, the more bullish the reversal. Further strength is required to provide bullish confirmation of this reversal pattern. In Jan-00, Sun Microsystems (SUNW) formed a pair of bullish engulfing patterns that foreshadowed two significant advances. The first formed in early January after a sharp decline that took the stock well below its 20-day exponential moving average (EMA). An immediate gap up confirmed the pattern as bullish and the stock raced ahead to the mid-forties. After correcting to support, the second bullish engulfing pattern formed in late January. The stock declined below its 20-day EMA and found support from its earlier gap up. This also marked a 23 correction of the prior advance. A bullish engulfing pattern formed and was confirmed the next day with a strong follow-up advance.

Note: The Bullish Engulfing candlestick pattern is similar to the outside reversal chart pattern, but does not require the entire range (high and low) to be engulfed, just the open and close. The piercing pattern is made up of two candlesticks, the first black and the second white. Both candlesticks should have fairly large bodies and the shadows are usually, but not necessarily, small or nonexistent. The white candlestick must open below the previous close and close above the midpoint of the black candlestick's body. A close below the midpoint might qualify as a reversal, but would not be considered as bullish. Just as with the bullish engulfing pattern, selling pressure forces the security to open below the previous close, indicating that sellers still have the upper hand on the open. However, buyers step in after the open to push the security higher and it closes above the midpoint of the previous black candlestick's body. Further strength is required to provide bullish confirmation of this reversal pattern. In late March and early April 2000, Ciena (CIEN) declined from above 80 to around 40. The stock first touched 40 in early April with a long lower shadow. After a bounce, the stock tested support around 40 again in mid-April and formed a piercing pattern. The piercing pattern was confirmed the very next day with a strong advance above 50. Even though there was a setback after confirmation, the stock remained above support and advanced above 70. Also notice the morning doji star in late May. The bullish harami is made up of two candlesticks. The first has a large body and the second a small body that is totally encompassed by the first. There are four possible combinations: whitewhite, whiteblack, blackwhite and blackblack . Whether they are bullish reversal or bearish reversal patterns, all harami look the same. Their bullish or bearish nature depends on the preceding trend.

Harami are considered potential bullish reversals after a decline and potential bearish reversals after an advance. No matter what the color of the first candlestick, the smaller the body of the second candlestick is, the more likely the reversal. If the small candlestick is a doji, the chances of a reversal increase. In his book Beyond Candlesticks , Steve Nison asserts that any combination of colors can form a harami, but that the most bullish are those that form with a whiteblack or whitewhite combination. Because the first candlestick has a large body, it implies that the bullish reversal pattern would be stronger if this body were white. The long white candlestick shows a sudden and sustained resurgence of buying pressure. The small candlestick afterwards indicates consolidation. Whitewhite and whiteblack bullish harami are likely to occur less often than blackblack or blackwhite. After a decline, a blackblack or blackwhite combination can still be regarded as a bullish harami. The first long black candlestick signals that significant selling pressure remains and could indicate capitulation.

The small candlestick immediately following forms with a gap up on the open, indicating a sudden increase in buying pressure and potential reversal. Micromuse (MUSE) declined to the mid-sixties in Apr-00 and began to trade in a range bound by 33 and 50 over the next few weeks. After a 6-day decline back to support in late May, a bullish harami (red oval) formed. The first day formed a long white candlestick, and the second a small black candlestick that could be classified as a doji. The next day's advance provided bullish confirmation and the stock subsequently rose to around 75. The hammer is made up of one candlestick, white or black, with a small body, long lower shadow and small or nonexistent upper shadow. The size of the lower shadow should be a least twice the length of the body and the highlow range should be relatively large. Large is a relative term and the highlow range should be large relative to range over the last 10-20 days. After a decline, the hammer's intraday low indicates that selling pressure remains. However, the strong close shows that buyers are starting to become active again. Further strength is required to provide bullish confirmation of this reversal pattern.

Nike (NKE) declined from the low fifties to the mid-thirties before starting to find support in late February. After a small reaction rally, the stock declined back to support in mid-March and formed a hammer. Bullish confirmation came two days later with a sharp advance. The morning star consists of three candlesticks: The black candlestick confirms that the decline remains in force and selling dominates. When the second candlestick gaps down, it provides further evidence of selling pressure. However, the decline ceases or slows significantly after the gap and a small candlestick forms. The small candlestick indicates indecision and a possible reversal of trend. If the small candlestick is a doji, the chances of a reversal increase. The third long white candlestick provides bullish confirmation of the reversal. After declining from above 180 to below 120, Broadcom (BRCM) formed a morning doji star and subsequently advanced above 160 in the next three days. These are strong reversal patterns and do not require further bullish confirmation, beyond the long white candlestick on the third day. After the advance above 160, a two-week pullback followed and the stock formed a piecing pattern (red arrow) that was confirmed with a large gap up. Bullish Abandoned Baby. The bullish abandoned baby resembles the morning doji star and also consists of three candlesticks: The main difference between the morning doji star and the bullish abandoned baby are the gaps on either side of the doji.

The first gap down signals that selling pressure remains strong. However, selling pressure eases and the security closes at or near the open, creating a doji. Following the doji, the gap up and long white candlestick indicate strong buying pressure and the reversal is complete. Further bullish confirmation is not required. In April, Genzyme (GENZ) declined below its 20-day EMA and began to find support in the low thirties. The stock began forming a base as early as 17-Apr, but a discernible reversal pattern failed to emerge until the end of May. The bullish abandoned baby formed with a long black candlestick, doji, and long white candlestick. The gaps on either side of the doji reinforced the bullish reversal. Forex Training Group. Knowing when to enter the market is one of the most important skills in Forex trading. We should aim to hop into emerging trends as early as possible in order to catch the maximum price swing. One of the best ways to do this is by predicting potential reversals on the chart. In this lesson, we will discuss some of the top Forex reversal patterns that every trader should know. What are Forex Reversal Patterns. Chart patterns can represent a specific attitude of the market participants towards a currency pair. For example, if major market players believe a level will hold and act to protect that level, we are likely to see a price reversal at that level.

Forex reversal patterns are on chart formations which help in forecasting high probability reversal zones. These could be in the form of a single candle, or a group of candles lined up in a specific shape, or they could be a large structural classical chart pattern. Each of these chart formations has a specific reversal potential, which is used by experienced traders to gain an early edge by entering into the new emerging market direction. Types of Reversal Chart Patterns. There are basic two types of trend reversal patterns; the bearish reversal pattern and the bullish reversal pattern. The Bullish reversal pattern forecasts that the current bearish move will be reversed into a bullish direction. The bearish reversal pattern forecasts that the current bullish move will be reversed into a bearish direction. Top Candlestick Reversal Patterns. We will start with four of the most popular and effective candlestick reversal patterns that every trader should know. Doji Candlestick Pattern.

The Doji candle is one of the most popular candlestick reversal patterns and it’s structure is very easy to recognize. First, the Doji is a single candle pattern. The Doji candle is created when the opening and the closing price during a period are the same. In this manner, the Doji candle has no body and it looks like a cross. The Doji can appear after a prolonged price move, or in some cases when the market is very quiet and there is no volatility. In either case, the Doji candle will close wherever it has opened or very close to it. The Doji candlestick is typically associated with indecision or exhaustion in the market. When it forms after a prolonged trend move, it can also provide a strong reversal potential. The candle represents the inability of the trend riders to keep pressuring the price in the same direction. The forces between the bears and the bulls begin to equalize and eventually reverse direction. In the case above, you see the Doji candle acting as a bearish reversal signal. Notice that the price action leading to the Doji candle is bullish but the upside pressure begins to stall as evidenced by the Doji candle and the two candles just prior to the Doji candle. After the appearance of the Doji, the trend reverses and the price action starts a bearish decent. Hammer Shooting Star Candlestick Patterns. The Hammer candlestick pattern is another single candle which has a reversal function. This candle is known to have a very small body, a small or non-existent upper shadow, and a very long lower shadow.

The Hammer pattern is only considered a valid reversal signal if the candle has appeared during a bearish trend: This sketch shows you the condition you should have in order to confirm a Hammer reversal. It should be noted that the hammer candle itself could be bullish or bearish and this wouldn’t change its function. There are four similar variations of the Hammer candle, depending on the trend and the candle’s structure: In the first two cases, you have a bearish trend, which reverses to a bullish price move. The difference between the two candles is that in the second case the long wick it positioned in the opposite direction and this formation is called an Inverted Hammer. In the second two cases we have a bullish trend which turns into a bearish trend. If the long shadow is at the lower end, you have a Hanging Man. If the long shadow is at the upper end, you have a Shooting Star. In all four cases it doesn’t matter whether the reversal candle is bullish or bearish. This doesn’t change its function. Now let’s approach a Shooting Star example: The chart above shows you a Shooting Star candle, which is part of the Hammer reversal family described earlier.

The shooting star candle comes after a bullish trend and the long shadow is located at the upper end. The shooting star pattern would signal the reversal of an existing bullish trend. Engulfing Candlestick Pattern. The next pattern we will discuss is the Engulfing pattern. Note that this is a double candle pattern. This means that the formation contains two candlesticks. The engulfing formation consists of an initial candle, which gets fully engulfed by the next immediate candle. This means that the body of the second candle should go above and below the body of the first candle. There are two types of Engulfing patterns – bullish and bearish. The bullish Engulfing appears at the end of a bearish trend and it signals that the trend might get reversed to the upside. The first candle of the bullish Engulfing should be bearish. The second candle, the engulfing candle, should be bullish and it should fully contain the body of the first candle. The characteristic of the bearish Engulfing pattern is exactly the opposite.

It is located at the end of a bullish trend and it starts with a bullish candle, whose body gets fully engulfed by the next immediate bigger bearish candle. Take a moment to check out this Engulfing reversal example below: This chart shows you how the bullish Engulfing reversal pattern works. See that in our case the two shadows of the first candle are almost fully contained by the body of the second candle. This makes the pattern even stronger. We see on this chart that the price reverses and shoots up after the Bullish Engulfing setup. Trading Rules for Reversal Candle Formations. To trade reversing candles, you should remember a few simple rules regarding trade entry, stop loss placement, and take profit. We will go this in the following section: The confirmation of every reversal candle pattern we have discussed comes from the candle which appears next, after the formation. It should be in the direction we forecast. After this candle is finished, you can enter a trade. In the Bullish Engulfing example above, the confirmation comes with the smaller bullish candle, which appears after the pattern. You can enter a long trade at the moment this candle is finished. This would be the more conservative approach and provide the best confirmation. Aggressive traders may consider entering a trade when the high of the prior bar is taken out (in case of a bullish reversal pattern) or when the low of the prior bar is taken out (in case of a bearish reversal pattern). Never enter a candlestick reversal trade without a stop loss order.

You should place a stop order just beyond the recent swing level of the candle pattern you are trading. So, if you trade long, your stop should be below the lowest point of your pattern. If you are going short, then the stop should be above the highest point of the pattern. Remember, this rule takes into consideration the shadows of the candles as well. The minimum price move you should aim for when trading a candle reversal formation is equal to the size of the actual pattern itself. Take the low and the high of the pattern (including the shadows) and apply this distance starting from the end of the pattern. This would be the minimum target that you should forecast. If after you reach that level, you may decide to stay in the trade for further profit and manage the trade using price action rules. Top Reversal Chart Patterns.

Now let’s switch gears and talk a bit about some classical chart patterns that have a reversal potential. Two of the most popular and effective among this class would include the Double Top Double Bottom formation and the Head and Shoulder pattern. Double Top and Double Bottom. We will start with the Double Top reversal chart pattern. The pattern consists of two tops on the price chart. These tops are either located on the same resistance level, or the second top is a bit lower. The double top pattern typically looks like the letter “M”. The Double Top has its opposite, called the Double Bottom. This pattern consists of two bottoms, which are either located on the same support level, or the second bottom is a bit higher. The double bottom pattern typically looks like the letter “W”. These patterns are known to reverse the price action in many cases. Let’s see the Double Top formation on a price chart: Notice we have a double top formation and that the second top is a bit lower than the fist top. This is a usual occurrence with a valid Double Top Pattern. The confirmation of the Double Top reversal pattern comes at the moment when the price breaks the low between the two tops. This level is marked with the blue line on the chart and it is called a trigger or a signal line. The stop loss order on a Double Top trade should be located right above the second top. The Double Top minimum target equals the distance between the neck and the central line, which connects the two tops. The Double Bottom looks and works absolutely the same way, but everything is upside down. Thus, the Double Bottom reverses bearish trends and should be traded in a bullish direction.

The Head and Shoulders pattern is a very interesting and unique reversal figure. The shape of the pattern is aptly named because it actually resembles a head with two shoulders. The pattern forms during a bullish trend and creates a top – the first shoulder. After a correction, the price action creates a higher top – the head. After another correction, the price creates a third top, which is lower than the head – the second shoulder. So we have two shoulders and a head in the middle. Of course, the Head and Shoulders reversal pattern has its upside down equivalent, which turns bearish trends into bullish. This pattern is referred to as an Inverted Head and Shoulders pattern. Now let me show you what the Head and Shoulders formation looks like on an actual chart: In the chart above we see price increasing just prior to the head and shoulders formation. This is an important characteristic of a valid head and shoulders pattern. The confirmation of the pattern comes when the price breaks the line, which goes through the two bottoms on either side of the head. This line is called a Neck Line and it is marked in blue on our chart. When the price breaks the Neck Line, you get a reversal trading signal. This is when you would want to initiate a trade to the short side. You should put your stop loss order above the last shoulder of the pattern – the right shoulder.

Then you would trade for a minimum price move equal to the distance between the top of the head and the Neck Line. The Inverted Head and Shoulders pattern is the upside down version of the Head and Shoulders. The pattern comes after a bearish trend, creates the three bottoms as with a Head and Shoulders and reverses the trend. It should be traded in the bullish direction. Forex Reversal Strategy. When using a reversal trading system, it is always a good idea to wait for the pattern to be confirmed. I will present some confirmation ideas for you to apply when trading trend reversals in Forex. In the following chart example, I will illustrate five reversal trades for you. The image above is the H4 chart of the USDJPY Forex pair for Sep, 2016. The chart shows 5 potential trades based on a reversal trading strategy using candlestick and chart patterns. Each of the trades is marked with a black number at the opening of the trade. The first trade comes when we get a small Hammer candle, which gets confirmed by a bullish candle afterwards.

Note that after the confirmation candle, price quickly completes the minimum target of the pattern. Then we see a big Hanging Man candle (because it comes after an increase), but the following candle is bullish, which provides no reversal confirmation. Therefore, this pattern should be ignored. Soon the price action creates a Head and Shoulders pattern. At the top of the last shoulder we see another Hanging Man pattern, which this time gets confirmed and completed. This is another nice trading opportunity. The stop loss order should be located above the top of the upper shadow of the Hanging Man. This trade could actually be extended by the confirmation of the big Head and Shoulders pattern. Simply hold the Hanging Man trade with the same stop loss order until the price action moves to a distance equal to the size of the Head and Shoulders structure as calculated by the measured move. You can close the trade after the target is completed at the end of the big magenta arrow. The price then consolidates and creates a Double Bottom pattern – another wonderful trading opportunity. You can buy the USDJPY when the price breaks the magenta horizontal trigger line.

Your stop should be located below the second bottom of the pattern as shown on the image. You hold the trade until the size of the pattern is completed. The price action reverses afterwards and starts a bearish move. On the way down we see a Hammer candle in the gray rectangle. However, the next candle after the Hammer is bearish, which does not confirm the validity of the pattern. For this reason, this Hammer candle should be ignored. The next trading opportunity comes after an upward price swing. In the last blue rectangle you see a Shooting Star candle pattern with a very big upper shadow. This increases the reliability of the pattern. You could open a short trade when the next bearish candle completes to confirm the shooting star pattern, or if you want a more aggressive entry, you could have entered short when the low of the shooting star candle was taken out. The stop loss order should be placed above the upper shadow of the candle. Then you would want to hold the trade for at least the minimum price move equal to the size of the Shooting Star. Forex reversal patterns are on chart candlestick formations of one or more candles or bigger chart patterns which forecast price reversals. Every chart pattern has a mass sentiment component that can help a trader in gauging potential price swings.

There are two types of reversal chart patterns: Bullish Reversal Chart Patterns – reverse the bearish move and starts a bullish move Bearish Reversal Chart Patterns – reverse the bullish move and starts a bearish move The top candlestick reversal patterns are: Doji – The price closes wherever it has opened and creates a candle with no body. Hammer – It has a small body, one big shadow and another small shadow. There are four variations of the Hammer candle depending on the previous trend and the position of the candle. Engulfing – It consists of two candles – a small candle and another candle, whose body fully engulfs the body of the first candle. There is a bullish and a bearish Engulfing. The top reversal chart patterns are: Double Top – The price creates two tops on approximately the same resistance level. The price is likely to start a bearish move afterwards. The opposite equivalent of this pattern is the Double Bottom. Head and Shoulders – The price creates a top, a higher top, and a lower top afterwards. The price is likely to start a bearish move afterwards. The opposite equivalent of this pattern is the Inverted Head and Shoulders. When using a Forex reversal strategy you would want to open a trade when you get a pattern confirmation and to hold for at least the minimum price projection based on the structure of the pattern. Take Your Trading to the Next Level, Accelerate Your Learning Curve with my Free Forex Training Program.



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