The reversal candlestick pattern is one of the important technical analysis tools on the forex floor. Thanks to this model, investors can recognize whether the market trend is fluctuating or not. To better understand this model, refer to the article below from Forex Trading!
General exploration of reversal candlestick pattern
Reversal candlestick pattern is a tool to analyze market fluctuations. Helps investors easily make transactions. Let’s read the following information to gain knowledge about candlestick patterns.
What is a Reversal candlestick pattern?
Reversal candlestick pattern is also known as the Japanese candlestick reversal pattern. This candlestick pattern is a tool used for technical analysis and predicting market trends. This type of model signals to investors that the current trend is gradually weakening. Be prepared for price changes that are about to happen in the future. Besides, this candlestick pattern also signals to investors that the current trend is gradually weakening.
Why should traders clearly understand the reversal candlestick pattern?
Candlestick patterns are an important technical analysis tool in Price Action trading. To help traders identify potential trend reversal points on the price chart. Understanding candlestick patterns helps you grasp potential trading opportunities, and improve trading efficiency…
How to read candlestick reversal charts quickly
A Japanese candlestick can represent price fluctuations over a certain period. The candlestick pattern consists of two parts: the candle body and the candle shadow.
- The candle body represents the range of price fluctuations between the closing time and the opening time.
- Candle shadows represent the price range above and below the trading product.
If the opening price is lower than the closing price, the candle shows an uptrend -> The candle is usually green.
If the opening price is higher than the closing price, the candle represents a bearish trend -> This candle is usually red.
See more: Master the Forex “game” with Price action
Common types of reversal candlestick patterns
Bullish Japanese candlestick patterns signal that the price will reverse from a decrease to an increase. At this time, traders will grasp this reversal point to enter a buy order. Below are some types of bullish reversal patterns:
Engulfing Pattern inverted hammer candlestick pattern
The inverted hammer candlestick pattern is also known as Engulfing Bullish. This is a strongly bullish reversal candlestick pattern that appears in Price Action trading. It is likened to a mighty warrior signaling the potential for strong price increases after the previous period of decline.
Characteristics of the Engulfing Bullish pattern:
- Appears at the end of a downtrend: When the price is in a downtrend and shows signs of forming a bottom.
- Includes 2 candles: The first candle is a bearish candle, with a short candle body and long lower shadow. The second candle is a bullish candle whose body completely covers the first candle’s body and its lower shadow.
- This may be accompanied by increased trading volume: This feature helps add credibility to the model.
Meaning of the Engulfing Bullish candlestick pattern:
- This pattern helps signal an uptrend reversal. After the falling period, buying pressure increased sharply, pushing prices up and eliminating the previous bearish candle. To create buying opportunities for potential efficiency.
- Shows the dominance of buyers: The long lower shadow of the bearish candle shows strong selling pressure. But the buyers won and pushed the price up, helping to form a strong bullish engulfing candle.
- Encourage investors to buy: This model helps create optimistic psychology for investors. To encourage them to buy when the price shows signs of increasing.
Piercing Line and Dark Cloud Cover candlestick pattern
The Piercing Line and Dark Cloud Cover candlestick pattern have the name of the dark cloud cover. This is one of the Japanese candlestick patterns that signal a change in direction from bullish to bearish. At the same time, this is also a candlestick pattern signaling a downtrend shortly. So it will often appear at the end of rising directions. This dark cloud cover pattern is composed of a blue candle. Intended to show a strong price increase and a red candle represents a strong decrease.
Japanese candlestick patterns Morning Star and Evening Star
- Morning Star Candle:
Morning Star is also known as the Japanese Venus candlestick. This is a pattern with 3 candles: the first candle is a long bearish candle, the second candle is a bullish or bearish Doji candle, and the third candle is high. This candlestick often appears in a downtrend.
Starting to use this candlestick helps investors recognize that the sellers are controlling the situation, pushing prices down to low levels. At this time, the market will have a neutral stream of thoughts, so some insiders will take profits. At this time, if you enter a sell order on the first and second candlesticks, you will suffer a large loss.
- Evening Star candlestick pattern:
This candlestick pattern includes 3 types of candles. Candle 1 is bullish, the candle body and shadow are short or long. Candle 2 is bearish, the candle body and shadow are short. Candle 3 is a bearish candle, with a long candle body and short candle shadow. This type of candle signals a possible bearish reversal. After the increasing period, sellers showed positive signals, pushing prices down and forming an evening star candlestick pattern. Helps create potential warnings for buyers.
Reversal gap candlestick pattern
The gap reversal candlestick pattern is an important technical analysis tool in trading. To help traders identify potential trend reversal points on the price chart. This candlestick pattern often appears at key times. Helps signal sudden changes in market sentiment and potential trading opportunities.
Characteristics of the pattern include 3 candles:
- Candle 1: This is the candle that represents the current trend (up or down).
- Candle 2: The gap candle usually appears right after candle 1. And there is no trading for a certain period.
- Candle 3: This candle promotes a trend reversal
Meaning of the gap reversal candlestick pattern:
- Signaling a sudden change in market sentiment: Price gaps represent an imbalance between supply and demand. Aims to lead to a potential trend reversal.
- Provides potential trading opportunities: Traders may have to buy when a Bullish Gap Reversal appears or sell when a Bearish Gap Reversal appears.
- Confirmation of trend reversal: Candlestick 3 acts as a confirmation of the trend reversal signaled by the price gap.
Instructions for trading with reversal candlestick pattern
To trade with the reversal candlestick pattern, you can refer to the following steps:
Step 1: Evaluate and identify trend lines
You need to determine whether the current market trend is increasing or decreasing. Is this trend showing signs of weakening? If you see a deep downward trend, absolutely do not make a transaction.
You can use charts, price channels, trendlines, hedging … to identify trends and time frames of market fluctuations.
Step 2: Determine the appearance of the candlestick pattern type
Based on identifying characteristics, you can accurately identify Japanese candlestick patterns. Note, that this Japanese candlestick pattern only has high predictive accuracy when appearing in strong resistance and support areas.
Step 3: Use in combination with other types of tools
Instead of just relying on signals from this type of model, investors should combine it with other analytical tools. To make trading decisions that ensure high efficiency.
You can combine it with several tools such as technical indicators RSI, MACD, double peak model…
Step 4: Place a trading order with the candlestick pattern
Place a buy order when seeing signs from a bullish candlestick pattern and execute a sell order when understanding the trend from a bearish reversal candlestick pattern.
Place stop loss a few pips away from the nearest top or bottom of the Japanese candlestick pattern.
Set take profit at a ratio of about 1:2 to 1:3
See more: XTB: The most reputable and quality broker in UK
Some notes when trading inverted hammer candlesticks
Before trading with the inverted hammer candlestick pattern. You need to master the concept of what is hedging to minimize risks during the investment process. Include:
- Need to wait for the candle to close to confirm the accuracy of the candle pattern.
- The time-frames you should trade are M1, M5, M15, M30, H1, W1, MN. These are the time frames where it is easy to determine the candle closing time.
- The H4 and D1 trading time frames are one of the most difficult time frames to determine the candle closing time.
- Transaction time should be from April to 9 am. Then D1 will close at 4:00 am, and H4 candlestick will close at 0:00, 4:00, 8:00, 12:00, 16:00, and 20:00.
- Trading in the months from October to March. Candle D1 will close at 5 am and candle H4 will close at 1 am, 5 am, 9 am, 1 pm, 5 pm, and 9 pm.
- Always set Stop Loss and Take Profit to minimize risks and optimize profits.
Conclude:
Above is all the information about the reversal candlestick pattern you can refer to. It can be said that this candlestick pattern is one of the supporting tools that helps traders. However, the advice for investors is to pay attention to the rules while trading the model. To make the foreign exchange investment process as convenient and safe as possible. In particular, don’t forget to follow Forex Trading to update more useful information!
FAQs
Is trading with the reversal candlestick pattern profitable?
Trading with the inverted hammer candlestick pattern can be potentially profitable. But it also has high potential risks if not done properly.
What tools should the Japanese candlestick model be combined with?
This candlestick pattern needs to be combined with many different types of tools such as current trends, trading volume, technical indicators…
At what ratio to set profit taking in the inverted hammer candlestick pattern?
So that the process of placing profit taking on the Japanese candlestick pattern goes smoothly. Placing should be done at a ratio of 1:2 to 1:3.
