What is a Reversal Candle Pattern and How to Trade with it?

What is a Reversal Candle Pattern and How to Trade with It?

September 19, 2022

Reading Time: 5 minutes

Crypto trading can be overwhelming and tough. You will face challenges with regular trading and battle the volatility present in the crypto market.

Reversal Candle Pattern is one of the relevant tools you can use as a trader to navigate the Crypto market. The patterns help identify bearish and bullish reversals and see rewarding trading opportunities.

This article talks about Reversal Candle Pattern and how to trade with it.

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What is a Reversal Candle Pattern?

A reversal Candle Pattern is a Japanese candlesticks formation arranged to indicate the stoppage of an existing trend for the opposing one.

The patterns are visuals that help traders find the market sentiment and when the sentiment may shift. They’re simple to spot and allow traders to make effective quick decisions.

Reversal candle patterns are helpful because the Crypto market could make violent trend changes that can cause big losses in traders’ accounts.

There are strong reversal candle patterns, once observed, they can be used for strategic trading.

For a start, what’s the difference between Bullish and Bearish Reversal Candles?

A Bullish reversal can occur if the Crypto market changes from a downtrend to an uptrend. A Bearish reversal happens when the Crypto market changes from an uptrend to a downtrend.

How can you distinguish between bullish and bearish reversal patterns? A major difference factor is the pattern shape.

The candles’ sequence and arrangement give rise to the shape of the pattern. While some patterns create big candle bodies, others cause big wicks or shadows.

Another distinguishing difference or factor is the pattern location within a trend. When a pattern shows in a downtrend, it’ll indicate a potential rally that changes the trend from downward to upward.

On the other hand, if a reversal pattern goes uptrend, it’ll offer a warning that the price might be correct or crash.

Popular Bullish Reversal Candle patterns

Bullish reversal candle patterns are utilized to predict the reversal of the Crypto market’s present downtrend. Spotting these patterns implies an alert that the market might start a rally. The patterns help traders get to the rallies quickly.

These are top Bullish Reversal Candle patterns that help in Crypto trading:

Three White Soldiers

They’re patterns with three consecutive long-bodied candlesticks. The shadows or wicks should be small, meaning the market has continuously rallied via each candle’s timeframe under minimal setback.

In other words, the bulls take the rally and close to the candle’s high for 3 sessions in a row.

Dragonfly Doji

This is a unique Doji pattern where the high, close, and open prices are the same. Its candle finishes with a tall lower shadow or tail without a body.

The shape of this pattern appears like a dragonfly, and it’s simple to spot on the chart. The dragonfly doji is a strong bullish signal that implies the lower-trading market has quickly rebounded, ending at the same price as it opened.

Morning Star

This pattern is a three candlestick formation with a first candle that’s big and bearish. Its second candle pushes or goes to a fresh low while rebounding a little and leaving a small body behind.

Its third candle is big and bullish, and it retraces most formations. It closes beyond the first candle midpoint.

Here are other top Bullish Reversal Candle patterns to use: Three-Line Strike, Morning Doji Star, Bullish Engulfing, Bullish Abandoned Baby, Piercing Line, Hammer Candlestick, Bullish Harami, and Inverse Head and Shoulders.

Popular Bearish Reversal Candles

These patterns are used to predict the market reversals when an uptrend is changing into a downtrend. If these patterns form, they show the market wants to correct them, suggesting that traders should do something.

In this period, traders might consider closing long positions, like moving up stop losses or putting in short positions.

Here are the most important bearish reversal patterns:

Shooting Star Candlestick

This pattern appears at the uptrend-end with a small body and long wick to its upside.

The candle forms due to prices rallying to new highs at the candle opening. The prices then reverse close to where the candle is opened.

The long topside wick implies a powerful batch of sellers as the Crypto market trades higher, though not for too long.

Three Black Crows

This bearish pattern features three downward candlesticks painted black or red.

Each candle has a minimal tail or wick, implying that the price is open near the high and closes near the low. This pattern is a strong start to a bigger correction.

Dark Cloud Cover

This is a two-candle formation pattern. Its first candle features a strong bullish one, while the second comes with a strong bearish candle.

It implies that the second candle would continue to push towards a new high and later reverse lower. The second candle also would finish under the body lower portion of the first candle.

Other popular Bearish Reversal Candles are Bearish Abandoned Baby, Evening Star, Hanging Man Candlestick, Bearish Engulfing, and Evening Doji Star.

Final Analysis

A reversal candle pattern itself doesn’t mean that a trend would change. It largely depends on the candlestick pattern location.

For instance, while a bullish pattern at a long rally top does not show the rally would continue, a bullish pattern after a long decline has a greater chance of success.

Meanwhile, know that not all patterns are exact and 100% accurate, so manage your risk with a stop loss on all trades.

How can you spot a reverse candle? To spot a reserve candle, memorize the most popular patterns like the bearish and bullish engulfing, three black crows, and three white soldiers.

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