Japanese candlestick reversal patterns play an important role in the technical analysis of financial markets. They are indicative of price fluctuations between opening and closing times, providing information about the supply and demand balance as well as subsequent price trends. Join Forex Trading to learn more about Japanese candlestick reversal patterns through the article below.
Overview of Japanese candlestick reversal patterns
Japanese candlestick reversal patterns are an important tool in technical analysis. Provides important information to make trading decisions in the financial markets.
What is a candlestick reversal pattern?
Reversal candlestick patterns are one of the popular technical analysis tools in stock and forex trading. It is based on looking at candlestick charts to predict changes in price trends.
A candlestick reversal pattern is often identified when a candlestick reverses the direction of the current trend. For example, if the market is in a downtrend and a reversal candlestick appears. It can indicate a market reversal from a downtrend to an uptrend, and vice versa.
Traders often use candlestick reversal patterns. Combine with technical indicators and other factors to confirm trading signals.
Besides, there is also an inverted hammer candlestick (Inverted Hammer) which is also a candlestick pattern in technical analysis. Considered a potential reversal sign.
Types of reversal candlestick patterns
Here are some popular candlestick reversal patterns:
- Hammer reversal candlestick: A Hammer candlestick appears at the opening price, the lowest price. And prices closed close together, with a strong buying force at the end of the session. Hammer candles are often seen as a sign of a reversal from a downtrend to an uptrend.
- Shooting Star reversal candlestick: Shooting Star has a similar shape to the Hammer candlestick. But appears in an uptrend. It is considered a sign of a reversal from an uptrend to a downtrend.
- Doji Reversal Candle: Doji is a candle where the opening price and closing price are almost the same. Creates a very small candle body or even no candle body. Doji often appears when the market is losing direction and can be a sign of a reversal.
- Evening Star reversal candle: A candlestick pattern consisting of three candles, starting with a bullish candle. This is followed by a Doji candle or a withdrawal candle and ends with a strong bearish candle. This pattern often appears at the top of an uptrend and is considered a sign of a reversal from bullish to bearish.
- Morning Star reversal candle: In contrast to the Evening Star, the Morning Star is a three-candle pattern that appears at the bottom of a downtrend. It starts with a strong bearish candle, followed by a Doji candle or a pullback candle, and ends with a strong bullish candle. Morning Star is considered a sign of a reversal from decreasing to increasing.
See more: Read candlestick charts: Basic & advanced material
The strongest candlestick reversal patterns
Below are details about the strongest candlestick reversal patterns that you should know.
Chart Japanese candlestick reversal patterns bullish
Bullish reversal candlestick patterns are a sign that a downtrend is about to end and may turn into an uptrend. Some popular bullish reversal candlestick patterns include:
Dragonfly Doji
Identifying characteristics:
- Shaped like a dragonfly with a wingspan.
- The body of the candle is flat like a horizontal line.
- The upper shadow is long, the lower shadow is short.
- Usually appears at the end of a downtrend.
Meaning:
- Appears when the opening price is equal to the closing price.
- Signaling a strong reversal in trend.
Bullish Engulfing
Identifying characteristics:
- This pattern includes 2 candles: the first is a bearish candle, and the second is a bullish candle.
- The second candle must have a longer body, completely covering the first candle.
Meaning:
- Indicates the buyer’s control of the market.
- The bullish reversal trend will be recognized more clearly if the first candle is a Doji candle.
Piercing Pattern
Identifying characteristics:
- Consists of 2 candles: the first candle is a bearish candle, and the second candle is a bullish candle.
- The length of the second candle must be greater than or equal to 50% of the length of the first candle.
Meaning:
- The appearance of a strong green candle immediately after the red candle indicates that the buyers have the upper hand.
- If the Piercing Pattern is followed by a green candle, the upward reversal trend will become clearer.
Bearish reversal candlestick pattern
In contrast to the Forex Japanese candlestick patterns bullish reversal, and bearish reversal candlesticks show that a downtrend is about to begin. Below are some common bearish reversal candlestick patterns:
Gravestone Doji
Identifying characteristics:
- It is a single candle, without a candle body.
- The upper shadow is very long, with no lower shadow.
- The opening price and closing price are both at the lowest level.
Meaning:
- The Gravestone Doji reversal candlestick pattern appears, showing that buyers still dominate, and it is expected that the price will continue to increase.
- The longer the length of the upper shadow, the stronger the bearish reversal trend.
Bearish Engulfing
Identifying characteristics:
- Includes a reversal candle cluster consisting of 2 candles: the first candle is a green candle, and the next candle is a red candle.
- The red candle must completely cover the green candle.
Meaning:
- The first green candle signals that the uptrend is losing momentum, the red candle that follows is a sign that a downtrend is about to begin.
- The longer the length of the red candle, the stronger the bearish signal.
Shooting Star
Identifying characteristics:
- Has a similar shape to the Doji candlestick, but the candle body is small.
- The upper shadow is 2-3 times longer than the candle body, the lower shadow is very short or absent.
- Can be red or green candles.
Meaning:
- Shooting Star candlestick requires patience from investors. You need to wait until the candlestick pattern is complete and wait for a bearish candlestick to appear before making a trading decision for the most effective results.
Trade with Japanese candlestick reversal patterns
How to trade with Japanese candlestick reversal patterns? Follow along with Forex Trading to learn more.
Tips for trading with reversal candles
Based on the candlestick reversal pattern, investors can grasp price trends early to execute buy/sell orders at the most appropriate time, thereby optimizing investment efficiency.
Evaluate and identify trends:
- Investors need to evaluate and determine the current market trend. Whether it is in a bullish or bearish phase.
- Use tools such as charts, price channels, trendlines, etc. To identify trends in many different time frames.
Identify the appearance of a reversal candlestick pattern:
- Based on identifying characteristics to accurately identify reversal candlestick patterns.
- Note that candlestick reversal patterns are only highly accurate when they appear in strong resistance, support, or important price zones.
Use in combination with other tools:
- Instead of just relying on signals from candlestick reversal patterns, investors should combine them with other analytical tools to make more effective trading decisions.
- Tools such as technical indicators RSI, MACD, double top model, candle appearing after a cluster of reversal candles,… can be referred to.
Execute trading orders:
- But when you see signs from a bullish candlestick reversal pattern and sell when you see a bearish candlestick reversal trend.
- Place stop loss a small distance away from the most recent high or low of the reversal candlestick pattern.
- Set take profit according to the larger risk/reward ratio, usually 1:2 to 1:3.
Japanese candlestick trading strategies
Here are some strategies you can refer to:
- Enter an order: Instead of entering an order right when a reversal candlestick pattern appears. Investors should patiently wait for the appearance of the next candle to more clearly determine the market trend. Because prices always fluctuate unpredictably. Reversing immediately after a cluster of candlestick reversals can cause great risk. Patience in entering orders can help avoid unnecessary mistakes.
- Cut losses: Cut losses are a measure to limit unavoidable risks and should be done in all situations. Placing stop loss 2 to 3 pips away from the wick can be a good choice to protect invested capital.
- Take Profit: Set a take profit target equivalent to the size of the reversal candlestick pattern or follow a risk/reward (R:R) ratio of 1:1 or 1:2. This helps limit risks and maximize profits from trading.
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Analyze Japanese candlestick charts
Session opening price
Located at the top of the candlestick pattern, depending on the bullish or bearish context occurring within the 5-minute timeframe. In case of an upward trend in price. The candle color begins to turn blue or white at the bottom of the opening price. If there is a downtrend, the candle color will change to red or black at the top of the opening price
The highest price in the session
Indicated through the top of the upper candle shadow. When the opening price or closing price is also the highest price, the base pattern will no longer have candle shadows above
The lowest price of the session
Indicated through the top of the upper candle shadow. When the opening price or closing price is also the lowest price, the base pattern will no longer have a lower shadow
Closing price
This is the last effective price in the trading session. It is represented through the top candle for bullish candles and the bottom for bearish candles
Conclude
In short, with the ability to deeply analyze supply and demand. Along with characteristic shapes and expressions. Japanese candlestick reversal patterns help traders effectively determine entry and exit points in trading. So through the above article, we hope Forex Trading has provided you with complete information about Japanese candlestick reversal patterns. Don’t forget to follow our upcoming articles for more interesting knowledge!
Frequently asked questions
What is a Japanese candlestick reversal patterns and why is it important in trading?
It appears after a series of candles following a certain trend. And signals a reversal of the price trend. Important because it provides signals to traders about changing market sentiment and helps forecast the next price trend.
How to recognize a candlestick reversal?
Recognize by observing its structure and shape. Usually has a large candle body and long shadow. Appears after a series of candles following a certain trend, indicating a market reversal.
How to use Japanese candlestick reversal patterns in trading?
Used to determine entry and exit points in a transaction. Combine with other technical indicators and analyze support and resistance zones. Carefully determine stop loss and take profit levels to protect invested capital and maximize profits.
