Reversal Candlestick Patterns: Here's All You Need to Know | Espresso

The Reversal Candlestick Patterns Explained

Every trader needs to run two different analyses during investment or trades. Without the analysis, it won't be possible to predict the price movement, decide the bid or ask price, and open or close the trade position.

Published on 17 October 2022

The first type of analysis is fundamental, which is the easier part. But when we consider the technical analysis concept in the trade market, the challenges escalate by ten folds.

Technical analysis usually includes understanding the price movements, the trends in the price movement, open and close positions, market highs and lows, and so on. While there are several technical analysis methods, most traders use the reversal candlestick pattern. In this article, we will introduce you to some of the most common reversal candlestick patterns and understand how to determine price movement.

What are reversal patterns, and what does it signify?

A Candlestick pattern is usually used to determine the price trends in the market graph. There are two types of trends we usually consider. These are:

  1. Uptrend is when the price increases consistently
  2. Downtrend is when the price continues to decrease over a certain period

Now, reversal happens when an existing uptrend or downtrend stops and the pattern reverses. For example, if the graph shows an uptrend and suddenly you see the prices going down, it means the uptrend is reversed into a downtrend. There are two types of candlestick reversal that you need to know to understand the patterns properly. These are:

  1. Bullish reversal is when the market has a downtrend, and suddenly it reverses to an uptrend. In other words, the point where the price starts to increase after the maximum low is known as the point of bullish reversal.
  2. Bearish reversal, on the other hand, explains the change from an uptrend to a downtrend in the market. In simplified terms, when the increasing price suddenly drops, we call it the bearish reversal.

Top reversal candlestick patterns to know for trade markets

Over 50 reversal candlestick patterns, traders use in stock and forex markets. Nowadays, these are also used to determine the price movement and understand the crypto market in-depth. Choosing the right pattern is not so easy, especially for an amateur. This is why we have picked the top reversal candlestick patterns often used in the trade market.

1. Abandoned baby

You can find the abandoned baby pattern in both downtrend and uptrend reversals. But for simplification, we will consider the downtrend reversal only. The pattern usually comprises three candles.

  1. The first candle is bearish, representing the downtrend. It has a large body with standard shadow length.
  2. The Doji star is at a gap from the first candle where the opening and closing points are almost the same. The Doji usually is located below the closing point of the first bearish candle.
  3. The third candle is bullish, confirming the reversal of the downtrend to an uptrend. Its opening position is higher than that of Doji star.

2. Piercing line

The piercing line pattern is usually the reversal from bearish to bullish or the change of a downtrend to an uptrend. It consists of two candles placed at a gap from each other. The first candle is always bearish and has a long body, indicating the huge distance between the opening and closing values.

The second bullish candle has its opening position lower than the below end of the bearish candle and closes midway. It signifies that the market had a downtrend start, but traders pulled the market to form an uptrend and an increase in the price movement.

3. Morning and evening stars

Three candles are involved in this reversal candlestick pattern, also known as stars. It can appear in both uptrend and downtrend reversal patterns. The first candle represents the end of a particular trend which can be bearish (downtrend) or bullish (uptrend).

The second candle is very small and is usually located below or at the top of the first candle's opening or closing position. It usually represents a change in the trend or indecision. The third candle is the confirmation candle, indicating a reversal of the previous trend.

4. Harami

In the Harami reversal pattern, the first candle is known as the parent and has a longer body, while the second candle adjacent to the first one features a smaller body. They are at the same level, and both candles indicate the trend reversal. Based on the candle colors, the Harami reversal pattern can be divided into two types:

  1. A bullish Harami reversal pattern is where the parent candle is bearish (downtrend) and the child candle is bullish (uptrend).
  2. The bearing Harami reversal pattern consists of the parent candle as bullish (uptrend) and the child as bearish (downtrend).

Conclusion

In this article, you have learned about what the uptrend and downtrend terms mean, followed by bearish and bullish patterns or candles. In addition, you have also learned about the four most important reversal Candlestick patterns used in trade markets, both stock and forex markets. With these, determining the price movement and action becomes easier, and a trader can alter the position according to the reversal pattern.

Chandresh Khona
Finoux0

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