1.3.2 Bearish Reversal Patterns
Bearish candlestick patterns are formations on a price chart that suggest a higher probability of a downward price movement or trend reversal. These patterns are important tools for technical analysis in trading and investing
Bearish Engulfing
The bearish engulfing pattern is a significant two-candlestick reversal pattern that occurs after an uptrend. It suggests a potential shift in sentiment from bullish to bearish and is often used by traders for identifying possible trend reversals.
Here's how the bearish engulfing pattern is formed and what it signifies:
First Candle: The first candle in the bearish engulfing pattern is a relatively smaller bullish candle. It indicates that buyers have been in control and the price has been moving higher.
Second Candle: The second candle is a larger bearish candle that follows the first bullish candle. It completely engulfs, or "engulfs" the body of the first candle, meaning it opens above the previous candle's close and closes below the first candle's open.
The key characteristics of the bearish engulfing pattern are:
The second bearish candle is typically larger than the first bullish candle.
The open of the second candle is higher than the close of the first candle.
The close of the second candle is lower than the open of the first candle.
The bearish engulfing pattern is considered a strong bearish reversal signal due to its implication that the bullish momentum has been overcome by strong selling pressure. The pattern suggests that sellers have become dominant and are pushing the price lower, potentially reversing the previous uptrend.
Evening Star
The evening star pattern is a three-candlestick reversal pattern that typically appears at the end of an uptrend. It suggests a potential shift from bullish to bearish sentiment and is often considered a strong signal for traders to be cautious about further long positions or even consider short positions.
Here's how the evening star pattern is formed and what it signifies:
First Candle: The evening star pattern begins with a strong bullish candle. This candle indicates that buyers have been in control and the price has been moving upward.
Second Candle: The second candle is a smaller-bodied candle (can be bullish or bearish) that follows the first bullish candle. This candle often has a gap up from the previous candle and is often characterized by indecision in the market, with both buyers and sellers unsure about the next move.
Third Candle: The third candle is a larger bearish candle that follows the indecision candle. It closes significantly below the midpoint of the first bullish candle's body. This bearish candle suggests that sellers have taken control and are pushing the price lower.
The evening star pattern is considered a powerful bearish reversal signal because it demonstrates a clear shift in market sentiment from bullish to bearish. The pattern suggests that the initial momentum of the uptrend is fading and that bearish pressure is building up.
Traders who spot an evening star pattern might interpret it as a warning sign to consider taking profits on existing long positions, tightening stop-loss orders, or even initiating short positions. However, like any candlestick pattern, it's important to confirm the pattern's validity with other technical analysis methods, as false signals can occur.
Hanging Man
The hanging man is a bearish reversal pattern that occurs at the top of an uptrend and suggests a potential shift from bullish to bearish sentiment. It is characterized by a single candlestick with a small body and a long lower wick. The pattern's name comes from the resemblance of the candlestick to a person hanging by their feet.
Here's how the hanging man pattern is formed and what it signifies:
Candlestick Characteristics:
The hanging man candlestick has a small real body (the difference between the open and close prices) near the top of the candle's range.
It has a long lower wick (also known as the shadow) that extends downward.
The upper wick (if present) is usually short or nonexistent.
Placement in an Uptrend:
The hanging man pattern occurs after a sustained uptrend, indicating that buyers have been in control.
Signal for Potential Reversal:
The long lower wick indicates that despite an attempt to push prices higher, sellers managed to push the price down significantly by the end of the session.
This wick suggests that selling pressure is increasing, which could lead to a reversal.
The hanging man is a bearish warning sign, suggesting that the bullish momentum is potentially weakening and a reversal might be on the horizon. While the pattern alone is indicative of a potential shift, it's often considered stronger when it is followed by confirmation in the form of a bearish candle in the subsequent session(s).
Shooting Star
The shooting star is a bearish reversal pattern that typically occurs at the top of an uptrend. It suggests a potential shift from bullish to bearish sentiment. The pattern is characterized by a single candlestick with a small body and a long upper wick. The appearance of the candlestick resembles a star with a long tail, like that of a shooting star.
Here's how the shooting star pattern is formed and what it signifies:
Candlestick Characteristics:
The shooting star candlestick has a small real body (the difference between the open and close prices) near the bottom of the candle's range.
It has a long upper wick (also known as the shadow) that extends upward.
The lower wick (if present) is usually short or nonexistent.
Placement in an Uptrend:
The shooting star pattern occurs after a sustained uptrend, indicating that buyers have been in control.
Signal for Potential Reversal:
The long upper wick indicates that despite an attempt to push prices higher, sellers managed to push the price down significantly by the end of the session.
This wick suggests that selling pressure is increasing, which could lead to a reversal.
The shooting star is a bearish warning sign, suggesting that the bullish momentum is potentially weakening and a reversal might be imminent. However, like other candlestick patterns, the shooting star's significance increases when it is followed by confirmation through further bearish price action.
Last updated
