In the fast-paced markets of Forex and Cryptocurrency, identifying a potential price reversal early is the holy grail for traders. Candlestick charts, first developed by Japanese rice traders centuries ago, offer an indispensable visual language for understanding market psychology.
Understanding these strong reversal signals allows traders to exit losing positions or enter new, highly profitable trades right at the turn. As Backcom App , we guide our users to master these visual cues for superior decision-making.
What Makes a Reversal Signal "Strong"?
A strong reversal signal is one that appears at a significant support or resistance level and involves a sudden, decisive shift in momentum, often accompanied by high trading volume. The most reliable patterns often involve two or three candles that explicitly contradict the preceding trend.
The Best Bullish Reversal Patterns (Bottom Reversals)
These patterns signal that selling pressure is exhausted, and buyers are taking control, typically appearing after a prolonged downtrend in a Forex pair or a Crypto asset.
Hammer / Hanging Man (Single Candle)
- Appearance: A small body (green or red) near the top of the candle, with a long lower shadow that is at least twice the length of the real body.
- Signal: The long lower shadow shows that sellers initially drove the price down aggressively, but strong buying pressure stepped in and pushed the price back up before the candle closed. This indicates a powerful rejection of lower prices.
- Context: When appearing after a downtrend, it’s called a Hammer and is highly bullish. When it appears after an uptrend, it’s a bearish Hanging Man.
Bullish Engulfing (Two Candles)
- Appearance: A small bearish (red) candle is immediately followed by a large bullish (green) candle whose body completely engulfs the body of the previous red candle.
- Signal: This is a definitive power shift. On the second day, buyers pushed the price lower than the previous day's open but finished the period higher than the previous day's high. The market has fully absorbed the selling pressure and reversed it entirely.
- Reliability: Considered one of the most reliable two-candle patterns, especially when the second candle closes with high volume.
Morning Star (Three Candles)
Appearance:
- A large bearish (red) candle (confirming the downtrend).
- A small-bodied candle (red or green) that gaps down or has a body below the first candle (the "star"). This shows indecision.
- A large bullish (green) candle that closes well into the body of the first candle.
Signal: The market moves from strong selling (1) to uncertainty (2), and finally to a strong surge of buying (3). The Morning Star is a clear sequence illustrating the exhaustion of the downtrend and the forceful arrival of the bulls.
The Best Bearish Reversal Patterns (Top Reversals)
These patterns signal that buying momentum is fading, and sellers are seizing control, typically appearing after a prolonged uptrend.
Shooting Star / Inverted Hammer (Single Candle)
- Appearance: A small body (green or red) near the bottom of the candle, with a long upper shadow that is at least twice the length of the real body.
- Signal: The long upper shadow shows that buyers tried to push the price higher but were met with overwhelming selling pressure that drove the price back down near the open. This signals a powerful rejection of higher prices.
- Context: When appearing after an uptrend, it’s called a Shooting Star and is highly bearish. When it appears after a downtrend, it’s a bullish Inverted Hammer.
Bearish Engulfing (Two Candles)
- Appearance: A small bullish (green) candle is immediately followed by a large bearish (red) candle whose body completely engulfs the body of the previous green candle.
- Signal: The reverse of the Bullish Engulfing pattern. Sellers have overpowered the previous session's buying, driving the price lower than the previous low. This indicates strong selling conviction.
- Reliability: Like its bullish counterpart, this is a strong signal, confirming the end of the uptrend and the start of a likely decline.
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Context is Key: The Backcom App Perspective
While these patterns are powerful, no candlestick pattern should ever be traded in isolation. As Backcom App, we emphasize the concept of confluence—multiple factors aligning to validate a signal.
- Level Confirmation: The reversal pattern must occur at a critical price level (e.g., a major support/resistance zone, a Fibonacci retracement level, or a moving average). A Hammer in the middle of a trend is meaningless; a Hammer at a yearly low is a screaming signal.
- Volume Confirmation: The candle that completes the reversal (e.g., the engulfing candle or the third candle of the Morning/Evening Star) should ideally exhibit above-average trading volume. High volume confirms that a large number of participants are backing the shift in trend, adding reliability.
- Risk Management: Even the strongest patterns can fail. Always use these signals to place a tight stop-loss just beyond the pattern's extreme (e.g., below the low of the Hammer for a bullish reversal).
Conclusion
Mastering these core reversal candlestick patterns the Hammer/Shooting Star, the Engulfing Patterns, and the Morning/Evening Stars will significantly enhance your ability to read the psychology of the Crypto and Forex markets. By confirming these patterns with key support/resistance levels and high volume, you move from guessing to making high-probability trades.
Author: Takah Rahman
