Bearish Reversal Candlestick Patterns
Highly Reliable Bearish Reversal Patterns
Evening Star, Evening Doji Star
Evening Star, Evening Doji Star
Evening Stars start with a continuation of the bullish move. The second day sees
a continuation of the move up, but a sell-off makes the market close at or near the open for the day. The first two candles meekly suggest a loss of bullish momentum. In fact up to day two this
formation matches the Bearish Shooting Star weak-to-moderate strength reversal pattern. Although the example above is a blue shooting star, the shooting star can really be any color. Bearish
Shooting Stars alone are decent signals for additional sell-offs on day three. Since the certainty for a shooting star indicator is low, the trend reversal should be confirmed by a red
candlestick the next day. Thus Bearish Evening Stars require on day three a sharp sell-off after the market open. Analysts want day threes high to be near equal to its open price, suggesting the
market sell-off has no uncertainty in the new direction.
With this pattern watch for sells offs the follow days. In non-FX markets gaps are quite common, and Evening Stars traditionally require a gap between the first and second day. In fact the wider the gap from day two to three the better the signal in non-FX markets, since the higher day-two goes the stronger day-threes bearish move is. Because FX offers 24 hour trading, no gaps should be expected. The Forex Market version of this formation would share the same market close price on day one, and then start day twos rally from there. Day twos close would be the same whether in FX or any other market restricted to fixed exchange hours. The formation would tend to see a shooting start on day two. Thus this formation might more aptly be called Evening Shooting Stay when applied to the Foreign Exchange Market.
Three Inside Down
Three Inside Down
Following an uptrend, a long blue day occurs
• The second day is a red day where the body is engulfed by the body of the first
• The third day is a red candle with a lower close than the previous day
During an uptrend a large upward price movement occurs, illustrated by a long blue candlestick. The price is then driven down, as shown by a red candlestick, reversing some of the upward movement from the previous day. The reversal pattern is confirmed with the third days red candle completes the bearish pattern.
This pattern is a confirmation of the Harami pattern.
Dark Cloud Cover
Dark Cloud Cover
The first day is a long blue day • The second day will
close below the midpoint of the previous candles body. The market continues the uptrend on the first day. By day two sellers take price down to close near the open of the previous day. In
FX, traders view the higher the second day high the better since the bigger the rally after the open, the more sellers were able to drive price back down. This formation suggests short sellers
have begun to take charge of the market, and longs have been shaken by the sudden lost of bullish momentum. Declining days are common after this formation as more short sellers confidently to
enter the market with a clear stop benchmark at the second day high.
The deeper day-two closes into the first day candlestick body, the greater the chance of the uptrend topping out. If the second day candle does not trade below the midpoint of the first day body, traders typically feel it safer to wait for confirmation on the third day. Some traders wait for confirmation regardless of how deep the Dark Cloud Cover penetrates the second day. In non-FX markets, traders want to see the second day gap up, opening above the close of the previous day. Because the Forex Market offers continues 24 hour markets, such gaps are not typically possible. But FX traders will turn to the high of the second day to indicate how strong the opening rally is, to gauge the strength of the subsequent bear move.
Three Outside Down
• After an established uptrend a clear bearish Engulfing pattern occurs (one blue candle and a second bear move that drives price below the prior day low and closes near the bottom of the range)
• The third day is a red day with an even lower close than the second day
In a market characterized by uptrend, day-twos red candle close completely below day-one, engulfing it completely. The first two days are a classic pattern that suggests a sell-off has taken over the market and is breaking the established trend. This bearish reversal is confirmed by a still lower day on day-three. • Connections to Bearish Engulfing PatternThe Bearish Three Outside Down pattern is just a continuation for Bearish Engulfing with the third day as confirmation for trend reversal. A Bearish Engulfing pattern by itself is a moderately reliable reversal signal, but when it is followed by a red day (forming the Bearish Three Outside Down), the pattern becomes much more reliable.
Day-one is a blue day. • Day-two is a doji or small candle. • Day-three is a large red day.
The Abandoned Baby is a rare bearish reversal pattern characterized by a large move up followed by a doji or small candle, and then a third candle heading in the opposite direction. The formation reflects a classic three period reversal of market sentiment where after a bullish trend; enough sellers enter the market to take control. They first stop the trends momentum (doji), and then ultimately reverse the direction of the market. This first bullish move suggests a continuation of the bull market. That move is followed by a doji, where markets trade in a small range suggesting uncertainty in trend and sell off potential. Up to day two we actually have a Doji Star, moderate strength bearish pattern. After the day of indecision, a large bearish candle confirms the sell-off and reversal. The stronger the move down day-three, the stronger the reversal signal. Watch for additional bearish price action in the next few days. In Foreign Exchange this pattern is near identical to the Bearish Evening doji Star pattern. Outside of the FX Market Abandoned Babies require gaps between the close and open prices of subsequent candles and shadows. In fact the name Abandoned Baby suggests the doji baby candle is disconnected from the rest of the formation. This is possible because gaping is common in other less efficient markets where trading is restrained by business hours. Since the currency market offers 24 hour trading, gaping is rare and is only seen to a minor degree after weekends.
• In an established uptrend, an average to small sized blue candle occurs on day-one.
• In the second day a longer red candle forms
•Ideally with a red candles high is above the previous days high.
• The strength of the signal is additionally increased by the further the red candle closes below the low of the blue day.The Bearish Engulfing is one of the more clear-cut two day bearish reversal patterns. The formation reflects sellers overtaking buying strength, and often precedes a fall in price.
• Day-One Characteristics for Signal StrengthThe first day may even appear as a Doji, and the smaller day-one is and larger the second day is, the stronger the reversal signal. Dojis and small candles reflect uncertainty in the markets trend, thus the smaller the first days candle the better the signal of an end to the established bull trend.
• Day-Two Characteristics for Signal StrengthThe second day bear move acts to confirm the death to the bull trend. The bigger the red candle reflects the deeper the bear move and the better the reversal signal.
• Overall Characteristics for Signal StrengthThis pattern is also more meaningful if it follows a lengthy bull trend, or a recent fast move up. Both these cases suggest the market may be overbought and more apt for a reversal. Bearish Engulfing patterns also provide resistance levels for where the highest level of price action reached. In the future this level may be difficult to break.
•First day is long blue candle continuing an established uptrend.
• Day-two is a small candle or start whose range is within the first days body, above its midpoint.
Bearish Haram is are characterized by a long blue day followed by a small candle, also refers to as a star. The trading range of the star stays within the body of the previous days candle. The significance of this formation is quite clear, as price continues its uptrend it is halted by a bearish candle. Bearish Haramis are very weak in signal strength though, since even in a strong bull trend it is very reasonable to see a sell-off that pulls price back down from highs. Longs paring off their exposure may cause this. Thus candlestick analysts will watch for bearish days to come, but probably not bet on them. In non-FX markets gaps seen above that allow the star to occur deep within the body of the first days candle are typical. Such gaps are just not possible in Foreign Exchange Markets. Since the Forex Market version of this candle is more nuanced, traders pay attention to several details. This formation is very similar to the Bearhish Engulfing formation, except that the Harami move does not trade below the previous candles body. Because Harami sellers are not able to drive price much past the previous days midpoint, this patterns offers a weaker signal. In range bound markets this formation will occur frequently with little significance. But if this pattern occurs after a protracted uptrend, analysts will attach greater importance to it. Lastly if this does turn out to be a reversal pattern the high of the two candles will likely turn into a significant resistance level.
• In an uptrend, the first day is a long blue candle continuing the established bull trend.
• The second day is a candle (red or blue) with a real body at the lower end, a long upper wick and no (or almost no) lower wick.
Occurring in an uptrend the Shooting Star formation is indicative of a bearish change of momentum. Shooting Stars show that traders have tested the highs and settle the day near the open and low price. This suggests the rally is unsustainable and sellers are retaking the market. Although this pattern is fairly weak, for those traders with existing longs in the market the Bearish Shooting Star serves as a signal for the deteriorating strength of their position. • ConfirmationMany traders will wait for a bearish move on the third day, forming a formation similar to the Evening Star three-candle pattern. If day three is a long red candle, that pattern combined with the shooting star is a very strong reversal signal.
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