The Three Key Candlestick Reversal Patterns
The following three Candlestick Reversal Patterns are very important to professional traders when it comes to market price analysis and trend change.
Volatility Index and Forex analyst/traders patiently wait for any one of these candlestick reversal patterns to form at the end of a trend to confirm price retracement or reversal.
These candlestick patterns are Trend reversal patterns and they do occur at the end of minor or major trends.
However, Price action traders make use of these three candlestick patterns to confirm and execute sniper entry trades on regularly basis.
These three candlestick patterns are best identified on higher time frames (Daily, Weekly and Monthly Time Frames).
Basically, it is best to use these Candlestick Patterns at areas of Support and Resistance, near ascending or descending trendlines or channels.
The three key candlestick reversal patterns are listed below;
- Engulfing Patterns
- Morning and Evening Star
- Hammer and Shooting Star
Other important candlestick reversal patterns are Tweezers, Inside Bars, Inverted hammer, Hanging Man e.t.c
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The Engulfing Candlestick Patterns are very reliable and they show traders when market force push price against the current trend.
These type of patterns make price to either form a temporary U-turn (retracement) or a total reversal at the end of the Trend.
Engulfing patterns occur when the body of the candlestick on the right side covers the entire body of the candlestick on the left.
However, in cases where the two candles have wicks (or shadows), the wick/shadow of the candle on the right will cover the wick/shadow of the candlestick on the left.
Bullish Engulfing patterns usually occur at the bottom of a downtrend, and the formation is created by a sharp increase in Buying pressure.
Bearish Engulfing pattern also form at the top of an uptrend, and the formation is caused by a sharp increase in Selling pressure.
Traders go long when the Bullish Engulfing Candlestick pattern appears at the support area of a Bearish market structure.
They (traders) also go short when a Bearish Engulfing Candlestick Pattern appears at the Resistance area of a Bullish market structure.
Technically, trade entry will be placed at the closing price of the Engulfing candlestick on the Right.
For Bullish Engulfing Pattern, stop loss will be at the low of the Bullish candle, while for Bearish Engulfing Pattern, stop loss will be at the High.
Morning and Evening Star Patterns;
These are common price reversal patterns and they are very reliable at Support or Resistance areas.
Morning Star usually forms at the base of a Bearish trend while Evening Star forms at the top of a Bullish trend.
Traders go long when the Morning Star Candlestick pattern appears at the support area of an uptrend market structure.
They also go short when an Evening Star Candlestick Pattern appears at the Resistance area of a downtrend market structure.
Hammer and Shooting Star Patterns;
These patterns are not common on the price chart unlike Engulfing pattern or Morning and Evening star candlestick patterns.
Hammer candlestick pattern usually form at the base of a Bearish trend while Shooting Star forms at the top of a Bullish trend.
Traders go long when the Hammer Candlestick pattern appears at the support area of an uptrend market structure.
They also go short when an Shooting Star Candlestick Pattern appears at the Resistance area of a downtrend market structure.
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