Candlestick patterns provide some of the best ways of tracking and predicting the price movements of stocks. With a little practice, they become easy to understand and interpret. While the focus is always on trend following, it is also possible to predict price reversals from a prevailing trend when deciphering candlestick patterns.
Bullish Candlestick Reversal Patterns
Bullish candlestick reversal patterns form whenever the price of a stock is trending lower. While there are dozens of bullish reversal candlestick patterns, we will focus on just a few here:
A bullish engulfing candlestick reversal pattern occurs whenever the market is trending lower, and then there appears a big bullish candle, which engulfs a previous bearish candle. The bullish candle must be bigger than the preceding candle to indicate a buildup in buying pressure at a low.
Once an engulfing candlestick appears, followed by another big bullish candlestick, then it is highly likely that the market has reversed, and the price should start to edge higher. The emergence of a gap after a bullish engulfing candlestick can indicate even more bullish pressure, affirming a price reversal.
A piercing pattern can occur during a downtrend, whereby a candlestick opens below the previous candlestick close, then closes above its midpoint. In this case, the candlestick would be much bigger than the previous bearish candle, signalling an influx of buyers into the market.
A confirmation of the reversal pattern would occur once the piercing candle is followed by another big bullish candle, affirming an increase in buying pressure for the market.
The emergence of a hammer candlestick can also be relied upon to signal a potential reversal in the prevailing trend. Once a hammer candlestick appears in a market trading in a downtrend, a reversal to the upside is likely on its way.
The emergence of a hammer followed by a bullish candle indicates that buyers are slowly coming back, signalling a potential trend reversal. A hammer candlestick typically indicates that a price move has rejected further extension, signalling a possible rebound.
Bearish Candlestick Reversal Patterns
Bearish reversal patterns occur whenever the market is trending higher, then starts to reverse lower.
Bearish Engulfing Pattern
A bearish engulfing reversal pattern occurs whenever a bullish market hits a peak level, triggering an influx of sellers into the market. If this were to happen, a large bearish candlestick would occur, engulfing the previous bullish candlestick.
The emergence of a bearish engulfing candlestick followed by another strong bearish candlestick would affirm a trend reversal, signalling that price could start trending lower.
The emergence of a shooting star candlestick after a long uptrend could also signal the formation of a bearish trend on further confirmation. A shooting star is essentially a candlestick with a large upper shadow that is at least twice the length of the candlestick body.
However, for the candlestick to be at a start position, it must be a gap away from the previous candle. Confirmation of a reversal would happen once another solid bearish candlestick precedes the shooting star candlestick.
A gap lower after a shooting star would signal brewing bearish pressure, indicating that the price has reversed.