Candlestick Reversal Patterns

Candlestick charts can be used to predict potential trend reversals in the trendline. There are various candlestick reversal patterns, each with varying degrees of significance.

Candlestick patterns are important technical tools that traders use to identify underlying asset price movement. These are similar to bar charts, but they are more revealing. Candlesticks record an underlying asset's opening, closing, high, and low in a single bar pattern, eliminating the need to compare numerous trading charts to comprehend asset price movement.

Here mentioned are some of the most strong and prevalent reversal patterns, as well as how to interpret them when trading.

What are Candlestick Reversal Patterns?

Reversal patterns are formed when candlesticks suggest the end of an existing trend (uptrend or downtrend). When this configuration develops in a downtrend, it denotes a bullish reversal or the conclusion of a selling binge and the beginning of a purchasing spell. 

When a trend reversal pattern occurs in an uptrend, it alerts traders to the possibility of the bullish run coming to an end and the commencement of a collapse.

Candlestick patterns are visual patterns that assist traders see when market sentiment is changing, which is why many traders prefer candlestick charts to other trading tools. Any trend reversal indicator, however, must be consistent with other popular technical trading tools.

Significance of Trend Reversal Candlestick Patterns

A Candlestick pattern is commonly used in market graphs to detect price trends. We typically evaluate two types of trends. They are as follows:

  • An uptrend occurs when the price constantly rises.
  • A downtrend occurs when the price continues to fall over a set period of time.

A reversal occurs when a current uptrend or downtrend comes to an end, and the pattern reverses. For example, if the graph indicates an uptrend and then quickly drops, it means the upswing has reversed into a downtrend.

To effectively grasp the patterns, you must be familiar with two types of candlestick reversals. They are as follows-

  • A bullish reversal occurs when the stock market is in decline and then abruptly reverses to an uptrend. In other words, the point of bullish reversal is the moment at which the price begins to rise following the maximum low.
  • Bearish reversal, on the other hand, explains the market's transition from an uptrend to a downtrend. In layman's terms, a bearish reversal occurs when a gaining price abruptly collapses.

Top Reversal Candlestick Patterns

Here are all the necessary details-

a) Piercing Line

The piercing line pattern is typically associated with a bearish to bullish trend reversal or the transition from a downtrend to an uptrend. It is made up of two candles separated by a space. The first candle is always bearish with a long body, showing the large gap between the opening and closing values.

The second bullish candle opens lower than the bottom end of the bearish candle and closes in the middle. It indicates that the market began in a downturn, but traders pushed the market to form an uptrend and increase in price movement.

b) Harami

The first candle in the Harami reversal pattern is known as the parent and has a longer body, while the second candle adjacent to the first has a smaller body. They are both at the same level, and both candles show a trend reversal.

The Harami reversal pattern is classified into two versions based on the colours of the candles:

  • The parent candle is bearish (downtrend), and the child candle is bullish (uptrend) in a bullish Harami reversal pattern.

  • The parent candle is bullish (uptrend), and the child candle is bearish (downtrend) in the bearing Harami reversal pattern.

c) Abandoned Baby

The abandoned baby pattern can be found in both downtrend and uptrend reversals. The pattern is usually made up of three candles.

  • The first candle is bearish, indicating a downward trend. It has a large body and normal shadow length.
  • The Doji star is located at a distance from the first candle, where the opening and closing points are nearly identical. The Doji is typically found beneath the closing point of the first bearish candle.
  • The third candle is bullish, indicating the downtrend's turnaround to an uptrend. It has a higher opening position than the Doji star.

d) Morning Star and Evening Star

This reversing candlestick pattern, commonly known as a star, involves three candles. It can appear in reversal patterns in both uptrends and downtrends. The first candle signifies the end of a specific trend, which can be bullish (uptrend) or bearish (downtrend).

The second candle is quite small and is normally situated below or above the opening or closing position of the first candle. It usually denotes a shift in the trend or indecision. The third candle is the confirmation candle, which indicates a trend reversal.

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