Bullish and Bearish Candlestick Reversal Patterns
There are also several types of reversal candlestick patterns within Forex trading, as defined below.
- Dark Cloud Cover
- Engulfing
- Evening Star
- Harami
- Morning Star Doji
- Piercing Line
- Three Black Crows
- Three White Soldiers
Dark Cloud Cover Pattern
During an upward trend in the market gaps will begin to open, but they are not stable and will lose ground falling below the midpoint of the market the previous day. This pattern indicates the opportunity for investors to capitalize at the opening of the market the next day. This is actually a warning sign for bullish investors. This candlestick pattern is the exact opposite of the Piercing Line pattern. This pattern indicates a bullish trend and has a high reliability rate.
- A white body followed by a black body.
- The black body passes the midpoint of the prior white body.
- This candlestick pattern occurs in an uptrend.
Engulfing Pattern
This pattern occurs when a candle body of the days market completely engulfs the body of the previous day. There are also several engulfing patterns, white engulfing candles are bullish, black engulfing candles are bearish. A bullish engulfing commonly occurs when there are short term bottoms and a bearish engulfing will occur when the market is at the top. Many of the other candlesticks, such as Dojis, Hammers and Hanging Man, require the confirmation that a trend change has occurred that follows an engulfing pattern. This pattern indicates a bullish trend and has a high reliability rate.
- The first day’s color indicates the trend of the trading day.
- The second real body should have the opposite color of the first real body.
- The second day’s body should completely engulf the previous day’s body.
When engulfing occurs during an upward trend, it indicates the market will open with a new high. This high will be followed by a high volume of sell-offs, that result in the day closing at or below that of the previous days opening. This indicates that the upward trend has suffered and became weak and the bearish investors may be gaining some strength in the market. This pattern indicates a bullish trend, but has only a moderate rate of reliability..
- The first day’s color indicates the trend of the trading day.
- The second real body should have the opposite color of the first real body.
- The second day’s body should completely engulf the previous day’s body.
Evening Star Pattern
When an upward trends occurs the market will get stronger, but as it gets stronger on a long white day, gaps will begin to open on the second day. Second day trading on Forex, stays withing a small range and will close at or near what it opened at. This pattern generally indicates that confidence in the current trend has eroded. When this trend reversal is confirmed, the third day will be a black day. This pattern indicates a bullish trend and has a high rate of reliability..
- The first day is a long white day.
- The second day, gaps begin to open higher from the first day.
- The third day is a long black day and the close of market will be below the midpoint of the first white day.
Harami Pattern
At the end of an upward trend which has a long white day, a black candlestick opens that is lower than what the previous day closed at. Market trading is generally light and the day will close lower than what it opened at. This signals that the current upward trend is losing strength and this indicator is confirmed with the next trading day seeing candlesticks following the reversal trend. This pattern indicates a bullish trend, but it has a low rate of reliability..
- A long body followed by a short body with opposite color.
- A short body is completely within the previous day’s long body.
- The color of the second candle is not important.
Morning Star Doji Pattern
In a downward trend, the market will support the bearish investing trend with a long black day; gaps will begin to open on the second day of trading. The Forex market will see trades that stay within a small range and it will close at or near where it opened. This pattern generally indicates the potential for a rally since many of the positions have changed. Confirmation of this trend reversal is marked by the third day being a white day. This pattern also indicates a bullish trend and has a high rate of reliability.
- The first day is a black day which indicates the trend of the market.
- The second day must be a Doji day.
- The third day is a white day and supports the reversal of the trend.
Piercing Line Pattern
This pattern occurs when gaps open in the market during a downward trend, but the market gains enough strength to close above the midpoint of the previous day. This pattern is a good indication that the opportunity for the bullish investors to enter the market and help support the trend reversal. It’s also the opposite of the Dark Cloud Cover pattern. It’s a bullish trend that only has moderate reliability.
- A long black body followed by a white body.
- The white body peaks above the midpoint of the prior white body.
- This pattern occurs in a downward trend.
Three Black Crows Pattern
This pattern is indicated by three long black days that each end with consecutively lower closing rates. It generally indicates that the market rates have been too high for too long of a period and the investors are slacking off to compensate. This pattern is a bearish trend and has a high reliability rate.
- Three black days occur, each with a close below the previous day.
- Each day opens within the body of the previous day.
- Each day closes near or at the low of the day.
Three White Soldiers Pattern
With this pattern, there will be three long white days in a downward trend; each day will close at consecutively higher rates. This usually reflects fortitude in the future market, since a trend reversal is in progress that is building on moderate increases in the market. This bullish trend offers a high reliability rate.
- Three long white days occur, each with a higher close than the previous day.
- Each day opens within the body of the previous day.
- Each day closes near or at the high of the day.