Candlestick

11 reversal patterns
every trader
should know

Introduction
A key advantage of candlestick patterns is that
they give a quick visual representation of
whether buyers or sellers are in control of the
market. In this eBook, we will focus on how
candlestick patterns can be used specifically to
identify potential trend reversals.

Just because a reversal pattern appears on a chart,

doesn’t mean price will suddenly reverse, merely
that there may be a change in momentum or
sentiment. We will also examine methods to
confirm a reversal candlestick so it becomes
more reliable. Experienced traders will wait for
confirmation of a potential reversal before
looking for trade entry opportunities.

11 Candlestick reversal patterns every trader should know | P1

CANDLESTICKS 101

Before looking at the patterns, let us remind The OANDA Candlestick Patterns Graph tool
ourselves of some important candlestick basics. helps reduce the time required to scan the
Every candle reveals four essential data points multitude of available market rates for
relating to price: open, close, high and low. candlestick patterns.

If the close is higher than the open, the candle is Technical traders use candlestick patterns to help
bullish (usually colored green or white). If the close predict future price movements. This graph marks
is lower the candle is bearish (usually colored red or some commonly used candlestick patterns over
black). recent market rates.

The colored center of the candle is known as the For more information on this useful tool, visit
“real body”. The lines above and below the real body https://www.oanda.com/forex-
are known as “shadows.” trading/analysis/candlestick-patterns

HIGH
UPPER SHADOW
CLOSE OPEN

BULLISH BEARISH
REAL BODY
CANDLE CANDLE

OPEN CLOSE
LOWER
LOW SHADOW

We will now examine 11 patterns and how they can be interpreted. Although the analysis can be
applied in any timeframe, for simplicity we will assume it is the daily chart.

11 Candlestick reversal patterns every trader should know | P2

1. HAMMER 2. HANGING MAN

Reversal type: from bearish to bullish Reversal type: from bullish to bearish

Appearance Appearance

• The hammer candle is characterized by a very

• This candle is characterized by a very small
small real body at the top of the candle,
real body at the top, preferably with no upper
preferably with no upper shadow.
shadow.
• The lower shadow should be at least twice the
• The lower shadow should be at least twice the
length of the real body.
length of the real body.
• The color is not important with this
• The color is not important.
candlestick.

Meaning Meaning

The hammer appears in the context of a The hanging man appears in the context of an
downtrend. Bears took control resulting in a sell- uptrend. A rally followed a sell-off as bulls
off. Bulls then entered, and price rallied off the entered the market. Despite the bulls managing
lows. This bullish strength overpowered the to regain lost ground, the candle suggests
previous bearish momentum, resulting in a close weakening bullish momentum, as depicted by
near the open and high of the session. the lower shadow.

11 Candlestick reversal patterns every trader should know | P3

3. SHOOTING STAR

Reversal type: from bullish to bearish

Appearance

• The shooting star is characterized by a small real body at the bottom of the candle, preferably
with no lower shadow.

• The upper shadow should be at least twice the length of the real body.

• The color is not important.

Meaning

The shooting star appears in the context of an uptrend when bulls have taken control, resulting in a
rally. Bears then enter and price sells off the highs. This bearish strength overpowers the previous
bullish momentum, resulting in a close near the open and low of the session.

11 Candlestick reversal patterns every trader should know | P4

4. INVERTED HAMMER

Reversal type: from bearish to bullish

Appearance

• The inverted hammer is characterized by a small real body at the bottom, preferably with no lower
shadow.

• The upper shadow should be at least twice the length of the real body.

• The color is not important.

Meaning

An inverted hammer at the bottom of a trend indicates bulls are entering the market. Price went
higher, but bears entered and were able to move prices down, leaving an upper shadow. The fact that
bears had to overcome bullish strength in the context of a downtrend is an indication bearish
dominance may be decreasing.

11 Candlestick reversal patterns every trader should know | P5

5. BULLISH ENGULFING Reversal type: from bearish to bullish
Appearance
• A two-day pattern where day one is a bearish
candle and day two is a bullish candle.

• The open of day two gaps down from the

close of day one.

• Price then rallies and closes above the open of

day one.

• The real body of the day two candle

completely engulfs the body of day one.
Meaning
The bullish engulfing pattern is a strong reversal
signal, indicating that sellers are decreasing as
price moves lower. When the market gaps down
on day two, buyers enter with momentum,
marking a change from bearish to bullish.

6. BEARISH ENGULFING
Reversal type: from bullish to bearish

Appearance
• A two-day pattern where day one is a bullish,
and day two a bearish candle.

• The open of day two gaps above from the

close of day one.

• Price then sells off and closes below the day

one open.

• The result is the real body of the day two

candle completely engulfs that of day one.
Meaning

The bearish engulfing pattern is a powerful

reversal signal. It indicates a large number of
sellers entering in proportion to the previous
day’s buying, within the context of the uptrend.

11 Candlestick reversal patterns every trader should know | P6

7. BULLISH PIERCING LINE 8. DARK CLOUD COVER

Reversal type: from bearish to bullish Reversal type: from bullish to bearish

Appearance Appearance

• A two-day pattern where day one is a bearish • A two-day pattern where day one is bullish
candle and day two is bullish. candle and day two is bearish.

• It appears in the context of a downtrend. • It appears in the context of an uptrend.

• The open of day two gaps below the close of • The open of day two gaps above the close of
day one. day one.

• Day two closes in between the open and the • Day two closes in between the open and the
midpoint of day one. midpoint of day one.

Meaning Meaning

The bullish piercing line forms in the context of The dark cloud cover pattern forms during an
heavy selling from day one. In day two, selling extended uptrend. Buying essentially dries up on
dries up and bulls enter the market with force, day one. In day two, the remaining buyers cause
and manage to close the session well into the real price to gap up on the open, after which sellers
body of the prior session. enter in numbers, causing the candle to close
deep into the real body of day one.

11 Candlestick reversal patterns every trader should know | P7

9. BULLISH HARAMI

Reversal type: from bearish to bullish

Appearance

• A two-day pattern where day one is bearish

and day two is bullish.

• It appears in the context of a downtrend.

• The day two candle’s real body is entirely

contained within the real body of day one.

Meaning

On day 2, price gaps up as more buyers step in.

The bulls are able to rally, but not above the
opening price of day one.

10. BEARISH
HARAMI

Reversal type: from bullish to bearish

Appearance

• A two-day pattern where day one is bullish

candle and day two is bearish.

• It appears in the context of an uptrend.

• The day two candle’s real body is entirely

contained within the real body of day one.

Meaning

On day two price gaps down as more sellers

enter. The bears are able to push prices lower,
but not lower than the opening of day one.

11 Candlestick reversal patterns every trader should know | P8

11. DOJI

THE STANDARD DOJI

Reversal type: indecision

Only a horizontal line as a real body, because the

opening and closing prices are exactly (or almost
exactly) the same.

The Doji signifies neither buyers nor sellers

dominated within the session. The upper and
lower shadows indicate that both tried but were
unable to hold on to their gains. If this doji
occurs at extremes, then it can result in a trend
reversal.

DRAGONFLY DOJI GRAVESTONE DOJI

Reversal type: from bearish to bullish Reversal type: from bullish to bearish

A doji where the body forms at, or near, the very When the body forms at, or near, the very
top of range is considered a bullish candle. bottom of the range, it is considered a bearish
candle.

11 Candlestick reversal patterns every trader should know | P9

CONFIRMATION OF REVERSAL
As good as candlesticks are for illustrating the balance of power and momentum shifts, experienced traders will
always prefer to confirm a potential reversal with additional technical analysis. Other components that can be
used to forewarn of a potential reversal are:
• Price at support / resistance
• Indicators at overbought / oversold levels
If a candlestick pattern appears in conjunction with any of these, it can increase the likelihood of a reversal.

STOP-
LOSS
C
SHORT
ENTRY
B

A STOP-
LOSS

LONG
ENTRY SHORT
ENTRY

STOP- B C
LOSS ’ ’

A’
The chart above shows candlestick reversals, in conjunction with support/resistance levels and RSI overbought
and oversold conditions. At A, we have bullish engulfing pattern in the context of the short-term downtrend. RSI
is oversold (A’) and price has just broken support, but is attempting to get back through this old support. These
factors could indicate a high probability that price is running out of bearish steam. A trade strategy could be to
buy the break above the high of the bullish engulfing pattern with a stop loss below the swing low. This would
allow for a simple trade and risk management plan.
At B, price is at resistance in the context of a short-term uptrend and a series of dojis suggests indecision. But
combined with overbought RSI (B’), the outlook seems less bullish, and a short entry at the break of the doji
lows could be a viable trade strategy.
At C, price is again at resistance in the context of an uptrend. A shooting star combined with overbought RSI
(C’) suggests bullish momentum is weakening, with the possibility of a reversal. A shorting opportunity presents
itself with the shooting star defining the trade entry and stop-loss.

CONCLUSION
Studying candlestick patterns can reveal market psychology at any given moment. However, candles
should be used in combination with other technical analysis tools to make their signals more potent.
This could allow prudent traders to potentially capitalize on impending trend reversal.

11 Candlestick reversal patterns every trader should know | P10

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© 1996 - 2019 OANDA Corporation. All rights reserved. “OANDA”, “fxTrade”

and OANDA’s “fx” family of trademarks are the trademarks or registered
trademarks of OANDA Corporation. All other trademarks appearing here are
the property of their respective owners. Certain content has been licensed
from Western Union Holdings, Inc.