Candlestick patterns are widely used by traders to identify potential trend reversals and make trading decisions. Here are some essential candlestick reversal patterns:
- Hammer and Hanging Man:
- The hammer and hanging man patterns look identical but have opposite implications depending on their location within the trend.
- Both have a small body and a long lower shadow (wick) with little or no upper shadow.
- The hammer appears after a downtrend and signals a potential bullish reversal.
- The hanging man appears after an uptrend and suggests a potential bearish reversal.
- Bullish Engulfing:
- This pattern occurs during a downtrend and consists of two candlesticks.
- The second candlestick’s body completely engulfs the body of the previous bearish candlestick.
- It indicates a potential shift from bearish to bullish sentiment.
- Bearish Engulfing:
- Similar to the bullish engulfing, but it appears during an uptrend.
- The second candlestick’s body engulfs the body of the previous bullish candlestick.
- It suggests a potential shift from bullish to bearish sentiment.
- Doji:
- A doji has almost equal open and close prices, resulting in a very short body.
- It indicates uncertainty in the market and potential trend reversal.
- A bullish doji suggests a potential reversal from a downtrend, and a bearish doji suggests a reversal from an uptrend.
- Evening Star:
- The evening star is a three-candlestick pattern that appears at the end of an uptrend.
- It starts with a bullish candle, followed by a small-bodied candle (doji or spinning top) indicating indecision.
- The pattern concludes with a large bearish candle, signaling a potential trend reversal.
- Morning Star:
- The morning star is the bullish counterpart of the evening star.
- It appears at the end of a downtrend and starts with a bearish candle, followed by a small-bodied candle indicating indecision.
- The pattern concludes with a large bullish candle, suggesting a potential trend reversal.
Remember that candlestick patterns are not foolproof and should be used in conjunction with other technical indicators and analysis tools for more reliable trading decisions. Always practice risk management and use stop-loss orders to protect your capital.