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Guide to Reversal Candle Patterns 

12 Dec 2023

Introduction

What if you get to know when the market is about to change its direction and offer you a chance to make a profit? Well, there is a way if you learn reversal candlestick patterns. These are special formations of Japanese candlesticks that show you the end of an existing trend and the start of a new one. Before we dive into reversal candlestick patterns, let's first understand what candlestick charts are. 

What are candlestick charts?

These charts are a graphical depiction of the asset's price movements over time. They assist in the analysis of market behavior and psychology.

Each candle in this chart represents a specific period, such as a day, an hour, or a minute. Each candle has four components: the open, high, low, and close prices of the asset. 

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The open price is the first price at which the asset was traded, the high price is the highest price reached, the low price is the lowest price reached, and the close price is the last price at which the asset was traded.

The candle's body is the rectangular area between the opening and closing prices. A green body means that the asset has increased. A red body means that the asset value decreased. 

The wicks of the candle that show volatility are the thin lines above and below the body. The upper wick is the line between the high price and the close price (if green) or the open price (if red). The lower wick is the line between the low price and the open price (if green) or the close price (if red).

Understanding reversal candlestick patterns

Reversal candlestick patterns are combinations of one or more candles that indicate the end of an existing trend and the beginning of an opposite one. 

For example, if the market is in a downtrend, this pattern can signal that the downtrend is over and an uptrend is about to start. Conversely, if the market is in an uptrend, a reversal candlestick pattern can signal that the uptrend is over and a downtrend is about to begin.

By spotting these patterns, you can enter or exit the market immediately and avoid losses or maximize gains. 

Types of reversal candlestick patterns

Reversal candlestick patterns can be bullish or bearish. They are further subdivided into the following:

Bullish reversal candlestick patterns

  • Bullish engulfing: This pattern has two candles. The first candle is red and has a small body. The second candle is green and has a large body that completely engulfs the first candle. This pattern shows that the buyers have taken over the market and have reversed the bearish sentiment.
  • Hammer: This pattern has one candle with a small body (green or red) and a long lower wick. The upper wick is either absent or very short. This pattern shows that the market has reached a bottom, and the sellers have failed to lower the price. The long lower wick shows the buyers' firm rejection of lower prices.
  • Morning star: This pattern has three candles. The first candle is red and has a large body, the second candle is green or red and has a small body that gaps below the first candle, and the third candle is green and has a large body that closes over the midpoint of the first candle. This pattern shows a weakening downtrend and increasing strength among buyers.

Bearish reversal candlestick patterns

  • Bearish engulfing: Out of the two candles in this pattern, the first one is green and has a small body. The second candle is red and has a large body that completely engulfs the first candle. This pattern indicates sellers dominating the market, reversing bullish sentiment.
  • Shooting star: This is the opposite of the hammer. It has one candle with a small body (green or red) and a long upper wick. The lower wick is either absent or very short. This pattern shows that the market has reached the top, and the buyers have failed to increase prices. 
  • Evening star: Contrary to the morning star, this pattern has three candles. The first candle is green and has a large body; the second candle is green or red and has a small body that gaps above the first candle, and the third candle is red and has a large body that closes lower than the midpoint of the first candle. This pattern shows a diminishing uptrend, with sellers gaining strength.

Conclusion

Reversal candlestick patterns are vital to technical analysis and can offer valuable insights into probable market shifts. By recognizing these patterns and confirming them with other analysis tools, you can make more informed decisions and improve your chances of market success.

 

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