Charting University » Candlesticks » Major Candlestick Reversals
The patterns listed below are the strongest reversal patterns known to the Japanese Candlestick charting system. They can be utilized across any chart timing that you choose, whether a fast term day trading chart or a longer term investing set up. With practice you will begin to see that trend turns have a much higher probability of being read than you ever thought possible!
Here are two basic principles that are consistent in all but the "Kicker' patterns.
- A "bullish reversal" requires a downtrend before we look for the turning point.
- A "bearish reversal" requires that an uptrend has been in-place for some time.
The direction of the prior trend can be determined by using moving averages, trend lines, or other aspects of technical analysis.
Hammer and Hanging Man
The Hammer and Hanging Man candles look identical. Their difference lies in where they lie in relationship to the current trading trend.
- Hammer bodies always form during a downward trend; signifies a possible bottom or base.
- Hanging Man bodies always form during an upward trend; signifies a possible top.
The Hammer was so named by the Japanese because it is said the market is "hammering out a bottom".
The long lower shadow indicates that sellers pushed prices lower, but buyers were able to overcome this selling pressure and closed price near the Open.
What to look for:
- Market in a downtrend.
- Little or no upper shadow.
- The color of the real body is not important.
- The real body is at the upper end of the trading range.
- The long shadow is two or three times of the real body.
- Confirmation: a green (bullish) candlestick to close above the Open of the candlestick on the left side of the Hammer.
The Hanging Man was named because it is said that "buyers have been left hanging".
When price is trending higher, the formation of a Hanging Man indicates that sellers are beginning to outnumber buyers. The long lower shadow shows that sellers pushed prices lower during the session. Buyers were able to push the price back up, but only near the Open. This is the first pattern signal that there are no buyers left to provide the necessary momentum to keep raising the price.
What to look for:
- Market in an uptrend.
- Little or no upper shadow.
- The real body is at the upper end of the trading range.
- A long lower shadow which is two or three times of the real body.
- The color of the body is not important, though a black body is more bearish than a white body.
- Confirmation: a red (bearish) candlestick to close below the Open of the candlestick on the left side of the Hanging Man.
Inverted Hammer and Shooting Star
The Inverted Hammer and Shooting Star patterns also look identical. Again, the difference here lies in where they are in relationship to the current trading trend.
- Inverted Hammer bodies always form during a downward trend; signifies a possible bottom or base.
- Shooting Star bodies always form during an upward trend; signifies a possible top.
The Inverted Hammer got its name because it looks like an "upside down hammer".
After a strong downtrend and bearish atmosphere, price opens and trades lower. However, before the end of the day, buyers step in and take the price back up. A higher Open or a green candle the next day reinforces bullishness.
What to look for:
- Market in a downtrend.
- Little or no lower shadow.
- A long upper shadow which is two or three times of the real body.
- Confirmation: a green (bullish) candlestick to close above the Open of the candlestick on the left side of the Inverted Hammer.
The Shooting Star got its name from the resemblance of "a star falling from the sky".
After a strong uptrend and bullish atmosphere, price opens and trades higher. However, before the end of the day, sellers step in and take the price back down.
What to look for:
- Market in an uptrend.
- Little or no lower shadow.
- The real body is at the upper end of the trading range.
- A long lower shadow which is two or three times of the real body.
- Confirmation: a red (bearish) candlestick to close below the Open of the candlestick on the left side of the Shooting Star.
Piercing Line and Dark Cloud Cover
The Piercing Line and Dark Cloud Cover patterns look similar but are not identical. Remember, the difference in reversals directly depends on where they are in relationship to the current trading trend.
- Piercing Line bodies always form during a downward trend; signifies a possible bottom or base.
- Dark Cloud Cover bodies always form during an upward trend; signifies a possible top.
The Piercing Line got its name because it's Close pierces above the previous day's Real Body midpoint.
A long red candlestick is followed by a gap lower during the next day while the market is in downtrend. However, the day ends positive as a strong green candlestick forms, which closes more than halfway into the prior red candlestick’s real body.
What to look for:
- Market in a downtrend.
- Long red candlestick the previous day; on day one.
- Long green candlestick that has an Open price below the previous day's low.
- The green candlestick, the second day, has a Close price above the midpoint of the previous day's Real Body.
- Although favoring a new upward bias, the second day's green candlestick should not be above the previous day's candlestick.
- Confirmation: a large upside gap or a higher close on the third trading day.
The Dark Cloud Cover got its name from "a dark cloud above a previously sunny/positive stretch of weather".
A strong green candlestick followed by a gap early the second day suggests that bulls retain control. However, the rally does not continue. Price Close the second day is at or near the lows of the session, with the Real Body moving well into the first day’s Real Body. Longs now have reason for concern, and short sellers have a clear line to place a stop. This is at the peak price - the high of the new red candlestick.
What to look for:
- Market in an uptrend.
- Long green candlestick the previous day; on day one.
- Long red candlestick has an Open price above the previous day's high.
- The red candlestick, the second day, has a Close price below the midpoint of the previous day's Real Body.
- Although favoring a new downward bias, the second day's red candlestick should not be below the previous day's candlestick.
- Confirmation: a large downside gap or a lower close on the third trading day.
Bullish Kicker and Bearish Kicker
The Bullish and Bearish Kicker patterns look similar but are not identical. Remember, the difference in reversals directly depends on where they are in relationship to the current trading trend.
The "Kicker signals" are regarding by top Candlestick technicians as the most powerful that this Japanese charting system has to offer. They absolutely demand respect.
- Bullish Kicker patterns always form during a downward trend; signifies a possible bottom or base.
- Bearish Kicker bodies always form during an upward trend; signifies a possible top.
The Bullish Kicker got its name because of it's ability to create dramatic change in investor sentiment. It "kicks the trend into the opposite direction".
The Bullish Kicking pattern is a strong sign showing that the market is headed upward. Unlike almost every other Candlestick pattern, market direction is not important to the Kickers. The prices never enter into the previous day's range, they close with another gap.
What to look for:
- Up or downtrend does not matter.
- Price must not enter into the previous day's range at all.
- The longer the Real Bodies, the more dramatic pattern effect.
- Cause is generally from positive surprise news; timed during pre or post market hours.
- Both Candles must have very small or preferably no shadows at all ; dominating Real Body candles named a "Marubozu"
- Confirmation: gapping away from the previous day’s Open further enhances the reversal.
- Cautionary note: If the third day gaps back into the original direction, the pattern has failed. This does not happen very often, but when it does - get out immediately.
The Bearish Kicker like it's bullish counter part, was named because of it's ability to create dramatic change in investor sentiment. It "kicks the trend into the opposite direction".
A strong green candlestick followed by a gap early the second day suggests that bulls retain control. However, the rally does not continue. Price Close the second day is at or near the lows of the session, with the Real Body moving well into the first day’s Real Body. Longs now have reason for concern, and short sellers have a clear line to place a stop. This is at the peak price - the high of the new red candlestick.
What to look for:
- Up or downtrend does not matter.
- Price must not enter into the previous day's range at all.
- The longer the Real Bodies, the more dramatic pattern effect.
- Cause is generally from negative surprise news; timed during pre or post market hours.
- Both Candles must have very small or preferably no shadows at all ; dominating Real Body candles named "Marubozu".
- Confirmation: gapping away from the previous day’s Open further enhances the reversal.
- Cautionary note: If the third day gaps back into the original direction, the pattern has failed. This does not happen very often, but when it does - get out immediately.