Nick Goold
Candlestick Reversal Patterns: Key Signals Every Trader Should Know
Candlestick patterns provide traders with an easy way to visualize price movements and identify potential turning points in the market. Certain reversal candlestick patterns can flash an early warning when a trend is weakening or reversing. Mastering these signals is essential for forex, stock, and CFD traders looking to improve timing and accuracy.
Below are some of the most powerful multi-candlestick reversal patterns and how they can be combined with indicators for more reliable trading signals.
Three White Soldiers
The Three White Soldiers pattern forms after a downtrend and signals a strong bullish reversal. It consists of three consecutive bullish candles, each opening within the body of the previous candle and closing higher. This steady upward momentum often indicates the start of a new uptrend.
Three Black Crows
The Three Black Crows is the bearish opposite of the Three White Soldiers. It shows three successive bearish candles after a rally, each closing lower. This pattern suggests building downside pressure and the likelihood of a continued decline.
Three Outside Up
The Three Outside Up is a bullish reversal pattern that confirms an earlier engulfing pattern. It features a strong upside move, usually with little or no wick below the candle body, reinforcing the likelihood of a reversal to the upside.
Three Outside Down
The Three Outside Down is the bearish counterpart, often forming after a bearish engulfing pattern. It signals that selling pressure is strengthening and a downtrend may follow.
Tweezer Bottom
A Tweezer Bottom is a classic bullish reversal pattern. It occurs when two consecutive candles share the same low, often forming at the end of a downtrend. This equal low indicates strong buying support and a potential trend reversal upward.
Tweezer Top
The Tweezer Top is the bearish equivalent. It forms when two consecutive candles share the same high, showing strong resistance and signaling a potential downward reversal.
Bullish Harami
The Bullish Harami pattern indicates a possible reversal from bearish to bullish. It forms when a small bullish candle is completely contained within the previous larger bearish candle. This shows selling pressure is weakening and buyers are stepping in.
Bearish Harami
The Bearish Harami is the reverse scenario, where a small bearish candle is contained within the prior bullish candle, suggesting momentum is shifting downward.
Combining Candlestick Patterns with Indicators
While candlestick reversal patterns are powerful on their own, combining them with technical indicators makes signals more reliable. Tools such as RSI, Stochastics, and divergence analysis help confirm overbought or oversold conditions.
Moving averages also play a role. For example, traders may use the 100-period moving average to confirm that the long-term trend remains bullish before acting on a Bullish Harami signal. This combination reduces false signals and increases confidence in trades.
By mastering these candlestick patterns and combining them with technical tools, traders can significantly improve their ability to spot and confirm market reversals.
