Reversal Patterns
Reversal Patterns
Reversal Patterns
JAPENESE CANDLESTICKS
Every candlestick pattern has four sets of data that help to define its shape.
Analysts are able to make assumptions about price behaviour based on the
shape.
The filled or hollow bar created by the candlestick pattern is called the
body.
The lines that extend out of the body are called shadows.
An instrument that closes higher than its opening will have a hollow or
green candlestick.
If the instrument closes lower, the body will have a filled or red candlestick.
Technical
Analysis
Japanese Candles
DOJI
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LONG-LEGGED DOJI
The Long-legged Doji is composed of long upper and lower shadows.
FORMATION: Throughout the time period, the price moved up and down dramatically before it
closed at or very near the opening price. This reflects the great indecision that exists between
the bulls and the bears.
SIGNAL: Bearish trend traders look to enter the market after a Long-Legged Doji closes and are
best used on wider timeframes like the daily chart.
DRAGONFLY DOJI
A candle that is formed when the open and closing prices are equal to, or near, the high of the
candle.
FORMATION: Bears begin to sell causing the price to fall. Bullish buyers begin to buy causing the
price to increase.
SIGNAL: If the Dragonfly Doji is found in an downtrend, it may signal a bullish trend reversal when
confirmed by a subsequent bullish candle.
GRAVESTONE DOJI
A candle that is formed when the open and closing prices are equal to, or near, the high of the
candle
FORMATION: Bulls begin to buy causing the price a rally. Bears begin selling causing the price to
decrease.
SIGNAL: If the Gravestone Doji is found in an uptrend, it may signal a bearish trend reversal if
confirmed by a bearish decision candle.
Spinning Top
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Spinning Top & Bearish
Spinning Top
Candlestick lines that have small bodies with upper and lower
shadows that exceed the length of the body. Spinning tops signal
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indecision.
Engulfing
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The Hammer &
The Hanging Man
The Hammer
FORMATION: In a downtrend, the sellers push the price to a
level where the buyers step in and begin to lift the price higher.
SIGNAL: If the Hammer is found in an extended downtrend, it
may signal a bullish trend reversal when confirmed by a
subsequent bullish decision candle.
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Double Top
The time between the two peaks is also a determining factor for
the existence of a double top pattern. If the tops appear at the
same level but are very close in time, then the probability is high
that they are part of the consolidation and the trend will resume.
The double bottom pattern always follows a major or minor down trend in a
particular security, and signals the reversal and the beginning of a potential
uptrend.
Also, volume should be closely monitored during the formation of the pattern.
A spike in volume typically occurs during the two upward price movements in the
pattern.
15 These spikes in volume are a strong indication of upward price pressure and serve
as further confirmation of a successful double bottom pattern.
There is way more to understanding candlestick patterns than
just identifying them it’s about what is going to happen next?
Knowing what is in front of you on the charts, understanding price action, the trend and volatility of the asset class will
put you in the best position possible as the opportunity arises!
BULLS VS BEARS Every candlestick is a battle of the buyers against the sellers. From candlesticks we can see the data
of who is in control who is pulling back.
What will happen next?
“I can’t emphasize enough that we should always look at the bigger picture. a single candlestick alone is not enough.
PAST TRENDS? KEY LEVELS ? PARAMETERS? HIGHS? LOWS? FORMATIONS?”
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Head and Shoulders
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Head and Shoulders
Prior Trend: It is important to establish the existence of a prior uptrend for this to be a reversal pattern. Without a prior uptrend to reverse, there
cannot be a Head and Shoulders reversal pattern (or any reversal pattern for that matter).
Left Shoulder: While in an uptrend, the left shoulder forms a peak that marks the high point of the current trend. After making this peak, a decline
ensues to complete the formation of the shoulder The low of the decline usually remains above the trend line, keeping the uptrend intact.
Head: From the low of the left shoulder, an advance begins that exceeds the previous high and marks the top of the head. After peaking, the low of
the subsequent decline marks the second point of the neckline. The low of the decline usually breaks the uptrend line, putting the uptrend in
jeopardy.
Right Shoulder: The advance from the low of the head forms the right shoulder. This peak is lower than the head (a lower high) and usually in line
with the high of the left shoulder. While symmetry is preferred, sometimes the shoulders can be out of whack. The decline from the peak of the right
shoulder should break the neckline.
Neckline: The neckline forms by connecting low points 1 and 2. Low point 1 marks the end of the left shoulder and the beginning of the head. Low
point 2 marks the end of the head and the beginning of the right shoulder. Depending on the relationship between the two low points, the neckline
can slope up, slope down or be horizontal. The slope of the neckline will affect the pattern's degree of bearishness - a downward slope is more
bearish than an upward slope. Sometimes more than one low point can be used to form the neckline.
Support Turned Resistance: Once support is broken, it is common for this same support level to turn into resistance. Sometimes, but certainly not
always, the price will return to the support break, and offer a second chance to sell.
Price Target: After breaking neckline support, the projected price decline is found by measuring the distance from the neckline to the top of the
head. This distance is then subtracted from the neckline to reach a price target. Any price target should serve as a rough guide, and other factors
should be considered as well. These factors might include previous support levels, Fibonacci retracements, or long-term moving averages
Morning Star
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Evening Star
Evening Star
A bearish reversal pattern that continues an
uptrend with a long white body day followed by a
gapped up small body day, then a down close with
the close below the midpoint of the first day
Larger or smaller than the previous ones? Is the size changing meaningful or not?
The ratio between wicks and bodies do you see longer wicks or bodies?
In a high momentum trend, you can often see long bodies with small wicks. When uncertainty
rises, the volatility picks up and bodies become smaller while wicks become larger. The position
of the body this is an extension of the previous point.
Can you see a long wick with a body on the opposite side?
This is often showing a rejection When you have a small body in the middle of a candle with long
wicks, it means indecision
You can see that once we start combining the information that wicks and bodies provide, we can
practically analyse all candlestick formations
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