What are Reversal Candlestick Patterns?

Reversal candlestick patterns are specific formations of Japanese candlesticks indicating that an ongoing trend is about to end. It can appear in both bullish and bearish markets. The patterns are formed with the opening, high, low, and closing prices of a security in a certain timeframe. Traders can identify them through price movements within one or more candles and confirm the trade signal with other indicators or chart patterns. This article explains the important trend reversal candlestick patterns.   

Bullish Reversal Candlestick Patterns 

The following are the bullish reversal candlestick patterns: 

Hammer 

• What It Is: A single-candle pattern that appears after a downtrend, showing strong buying interest. 
• How to Identify: 
  Small real body near the top. 
  Long lower shadow at least twice the body size. 
  Little to no upper shadow. 
• When It Gives Confirmation: When the next candle closes above the Hammer’s high. 
• Why It Happens: Sellers may pull the price down at first, but by the time the session ends, buyers manage to take charge again. 

Morning Star 

• What It is: This is a three-candle pattern that often suggests the market is turning from a bearish phase towards a more bullish sentiment. 
• How to Identify: 
  First candle: large bearish. 
  Second: small body (star) showing indecision. 
  Third: Strong bullish candle closing above the midpoint of the first. 
• When It Gives Confirmation: The third candle closes above the midpoint of the first candle, it suggests the momentum has clearly shifted. 
• Why it happens: The selling pressure weakens, the bears start to lose momentum, and the bulls steadily take control. 

Bullish Engulfing 

• What it is: A two-candle pattern that reflects strong buying interest, where buyers completely overpower the previous session’s selling pressure.  
• How to Identify: 
  First candle: Small bearish candle. 
  Second: Large bullish candle that fully engulfs the previous candle’s body. 
  When It Gives Confirmation: When the price closes above the engulfing candle’s high. 
• Why It Happens: Buyers overwhelm sellers within one session. 

Piercing Line 

• What It Is: A two-candle pattern signalling potential upside reversal. 
• How to Identify:
  First candle: Strong bearish.  
  Second: A bullish candle opens below the previous low but manages to close above the midpoint of the first candle. 
• When It Gives Confirmation: When the bullish candle closes above the first candle’s midpoint. 
• Why It Happens: Buyers enter the market strongly after a gap-down open. 

Bullish Harami 

• What It Is: A two-candle formation showing a slowdown in downward momentum. 
• How to Identify: 
  First: large bearish candle. 
  Second: small bullish candle fully within the previous body. 
• When It Gives Confirmation: When the price breaks above the Harami candle’s high. 
• Why it happens: The earlier selling pressure begins to decrease, and buyers gradually enter the market. 

Inverted Hammer 

• What It Is: A single-candle pattern that usually forms at the bottom of a downtrend. 
• How to Identify: 
  Small body near the bottom. 
  Long upper shadow.
  Very small lower shadow. 
• When It Gives Confirmation: When the next candle closes above the pattern’s high — that’s when the bullish attempt finally breaks through. 
• Why it happens: Buyers make a strong push, and although there’s some resistance along the way, their intent becomes clear as momentum shifts in their favour. 

Three White Soldiers 

• What It Is: A strong three-candle pattern indicating sustained buying pressure. 
• How to Identify: 
  Three consecutive bullish candles are formed. 
  Each candle opens within the previous body and closes higher. 
• When It Gives Confirmation: When the pattern completes and stays above support levels. 
• Why It Happens: Consistent buying over multiple sessions. 

Bearish Reversal Candlestick Patterns 

The bearish reversal candlestick patterns are: 

Shooting Star 

• What It Is: A single bearish warning candle at the end of an uptrend. 
• How to Identify: 
  Small body at the bottom. 
  Long upper shadow. 
  Minimal lower shadow. 
• When It Gives Confirmation: The next candle closes below the shooting star’s low - that’s the point where sellers clearly take over. 
• Why it happens: Buyers push the price up at first, but the sellers may quickly reduce it. 

Evening Star 

• What it is: A three-candle pattern that signals the market may be moving towards a downward move. It often appears after an uptrend and suggests that buying momentum is reducing while selling pressure starts to build.  
• How to Identify: 
  First: Strong bullish candle. 
  Second: Small body showing indecision. 
  Third: Strong bearish closing below the midpoint of the first. 
• When It Gives Confirmation: After the third candle confirms downward pressure. 
• Why It Happens: Buying momentum weakens, followed by rising selling interest. 

Bearish Engulfing 

• What It Is: A two-candle reversal formation that appears after an uptrend and signals increasing selling pressure. It often indicates a decisive shift in market sentiment. 
• How to Identify: 
  First: Small bullish candle. 
  Second: Large bearish engulfing the previous one. 
• When It Gives Confirmation: When the price closes below the engulfing candle’s low. 
• Why It Happens: Sellers overpower buyers decisively. 

Dark Cloud Cover 

• What It Is: A two-candle bearish reversal pattern that emerges near the top of an uptrend, suggesting a potential change in direction. It usually signals a rejection of higher prices.  
• How to Identify: 
  First: A strong bullish candle. 
  Second: Bearish candle opening above the previous high but closing below its midpoint. 
• When It Gives Confirmation: When bearish follow-through appears after the pattern. 
• Why It Happens: The market rejects higher prices with a sharp bearish drive. 

Bearish Harami 

• What It Is: A two-candle pattern indicating a slowdown in upward momentum and a possible reversal. It reflects reduced buying strength. 
• How to Identify: 
  First: Large bullish candle. 
  Second: Small bearish candle inside the previous body. 
• When It Gives Confirmation: When the price falls below the Harami candle’s low.  
• Why It Happens: Buying strength weakens as sellers enter.  

Hanging Man 

• What It Is: A single-candle bearish warning formation that appears after a sustained uptrend and highlights the emergence of selling pressure. It indicates an intraday attempt by sellers to push prices down. 
• How to Identify: 
• Small body near the top. 
• Long lower shadow. 
• Little to no upper shadow. 
• When It Gives Confirmation: When the next candle closes below the pattern’s low. 
• Why It Happens: Selling pressure develops despite the overall upward movement of the market. 

Three Black Crows 

• What It Is: A strong three-candle bearish reversal pattern that indicates a persistent shift in sentiment after an uptrend. It suggests a sustained selling interest across multiple sessions. 
• How to Identify: 
  Three consecutive bearish candles. 
  Each opens within the previous body and closes lower. 
• When It Gives Confirmation: After the pattern completes and breaks support levels. 
• Why It Happens: Persistent selling pressure across multiple sessions. 

Disclaimer: All investments are subject to market risks, economic conditions, regulatory changes, and other external factors. Returns are not guaranteed and may vary based on market performance and investment tenure. Investors should assess their risk tolerance and financial objectives, conduct their own research, and consult a qualified financial advisor before making any investment decisions. 

Conclusion 

Reversal candlestick patterns provide insight into potential market direction changes by highlighting shifts in sentiment during key price movements. Understanding both bullish and bearish formations may help traders interpret price action and refine their analysis for decision-making. For those tracking the markets, studying such patterns of price charts alongside reliable tools available on an online trading app may help in proper evaluation of market behaviour.