Bullish and Bearish Reversal Candlestick Patterns

The Shooting Star is a straightforward way to spot bearish momentum and potential reversals. Obviously, the prediction for a bearish candlestick pattern is to the downside. For this reason, it would behoove you to understand how to short sell, or to use these bearish strategies to know when to take profits or expect pullbacks in your long positions. It commonly forms in overbought zones, where buyers lose strength and sellers begin to dominate.

This pattern is considered a strong bearish signal and traders often use it as a signal to enter short positions. Bearish reversal patterns work best when they align with the broader market environment. Consider factors like overall market sentiment, bearish reversal candlestick patterns recent news, timing, and historical price behavior to improve the reliability of your trades 2.

All candlestick patterns for Trading : Bullish reversal patterns

• At the end of the day, good candlestick reversal patterns Forex traders can use are the one that fits cohesively into their own trading plan.
• How to spot the pattern, what it means, how to trade it, and where it breaks down.
• Traders use confirmation signals like trading volumes or resistance levels to validate the pattern.
• For the bullish Harami pattern, put the stop-loss right below the low of the first bearish candlestick.
• The close at the highs can be misleading in that the selling pressure is mostly overcome as it rallies.
• Its multi-candlestick structure provides stronger evidence of a reversal compared to simpler patterns.
• The Evening Star is a bearish reversal pattern that signals the end of an uptrend.

Buyers are in control, momentum is strong, and the price pushes higher right out of the gate. Unlike the Bullish Harami, which forms near support, the Bearish Harami forms at the top of the uptrend, near resistance. An uptrend can be established using moving averages, peak/trough analysis, or trend lines. The body of the second candle is completely contained within the body of the first one and has the opposite color. Inside the formation of the candle, there is considerable selling pressure to begin with. Momentum is being lost as gravity, supply in this case, strangles this rocket off the morning lows.

Shrinking candles are a classic example of effort vs result. It is a bearish reversal candlestick pattern usually accompanied by a huge volume signature below. FUBO provides a fantastic opportunity to see this bearish candlestick pattern in action right at the opening of the market. Morning and Evening Doji Star patterns also tend to be high probability reversal candlestick patterns.

Bearish reversal patterns

However, it’s important to wait for confirmation from another bearish candle since the signal can otherwise be false. In this article, we will explore bearish patterns to learn to predict a possible reversal of the trend and the beginning of a downward movement. Trading using these bearish patterns, along with other strong signals, helps to accurately project price movements and reduce risks, especially amid high volatility.

Bearish Engulfing Pattern

The first is a green (bullish) candlestick, indicating a continuation of the uptrend. The third is a red (bearish) candlestick that closes below the middle of the first candlestick’s body, signaling a trend reversal to the downside. The best way to trade bearish candlestick patterns is by combining them with price action trading strategies. With the right tools and confirmation, trading bearish candlestick patterns can give you an edge in gauging sentiment shifts.

A great place to enter, risking off the highs of the doji candle. Off the open, the stock tries to push higher, but we notice some selling pressure in the upper wick of that first green 5-minute candle. The price then moves lower, engulfing that candle with ease of movement to the downside.

What the Pattern Really Says

The understanding is that the amount of effort to push the stock to new highs is increasing. This gives the attentive trader an opportunity to capitalize by going short. When it occurs, it will be at the height of a current uptrend — typically an extended trend.

It is now time to enter the trade and you can take up a short position once the price breaks below the low point of the second candlestick. Alternatively, you can take a long position as the price breaks above the high point of the second candlestick. By the close, that big bullish candle has shrunk into a modest body with a long shadow above it. In this guide, you’ll learn exactly what a shooting star candlestick is, why it matters, and how to read it like a pro.

The reliability of this pattern is very high, but still, a confirmation in the form of a bearish candlestick with a lower close or a gap-down is suggested. This pattern produces a strong reversal signal as the bullish price action completely engulfs the bearish one. The bigger the difference in the size of the two candlesticks, the stronger the buy signal. Below you can find the schemes and explanations of the most common reversal candlestick patterns. A proper education in price action wouldn’t be complete without understanding when, how, and where to go long on a stock.

What Is the Most Reliable Bearish Candlestick Pattern

This indicates sellers have the advantage, and the asset’s value has decreased over a specific period. High trading volume during the bearish candle adds weight to the pattern. It indicates strong selling pressure and broader market participation, making the signal more dependable 2. Tall green candle followed by a higher small candle, either filled or unfilled, with a gap between the two bodies. Then a gap down leads to a third, tall red candle that closes below mid-point on the body of the first candle.

The signal is stronger if a hammer forms after a long decline in the price. Trading without candlestick patterns is a lot like flying in the night with no visibility. Sure, it is doable, but it requires special training and expertise. The 1st element is the wide body bullish candle signaling potential exhaustion in an uptrend. This is followed by weak or no effort to continue higher, hence the reversal.

• While the Abandoned Baby is a strong bearish signal, its success depends on proper confirmation and its alignment with broader market trends.
• These patterns can provide valuable information for traders, as they can signal a potential selling opportunity.
• You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
• Acting on candlesticks alone increases the odds of premature entries and false signals.
• High trading volume during the formation of the Shooting Star underscores strong selling pressure, boosting its dependability 2.
• High volume during bearish candles often indicates strong selling pressure.

To limit potential losses, place stop-loss orders 1-2% above the pattern’s high. This pattern features a small body positioned near the lower end of the price range, accompanied by a long upper shadow and little to no lower shadow. It reflects a scenario where buyers initially drive the price upward, but sellers regain control, pushing the price down by the close. The second candle is quite small and its color is not important, although it’s better if it’s bullish. The third bullish candle opens with a gap up and fills the previous bearish gap.

FCEL is a perfect example of this bearish candlestick pattern on the 5-min chart. Notice that the stock is trending downward from the pre-market. It is also struggling with VWAP, the red indicator line on the chart below.

For the first hour+ of the morning, there have been few, if any pullbacks. The stock then reclaims vwap, its downward trajectory, and the bulls submit to the bears one more time. This gives us the confidence to go short, risking toward the highs. The effort (volume) increased and the result (price) was a complete retracement downward (link to effort/result).

If you aren’t fast enough to enter on the close of the Hanging Man and risk to the highs, it does offer a right shoulder for entry later. Ideally the next candle after the close of the Hanging Man would provide the nearest risk/reward entry at the top. If longs who bought on the way back up are overcome on the next candle, they are likely trapped from their entries and will add to the selling pressure as the stock capitulates.