Key candlestick patterns for predicting market reversals

A modern trader must understand the language of the market — and that is the language of Japanese candlesticks. Reversal patterns are not an exact science, but they reflect market participants’ psychology and help identify moments of trend change. The more elements in a pattern and the more confirming signals, the higher the probability of a significant reversal rather than just a short-term price fluctuation.

One-day patterns — early reversal signals

One-day models provide initial warnings of a possible shift in market control but require confirmation on the next candle.

Hammer appears at lows in a downtrend. Its characteristic features: a small body at the top of the candle and a long lower shadow (twice or more the length of the body). The essence of the pattern is that sellers initially pushed the price down, but buyers managed to buy back the decline. Entry is made only after the close of the next bullish candle, especially effective at support levels. Stop-loss is set below the hammer’s low.

Shooting Star is a mirror image of the hammer and forms at the peaks of an uptrend. It has a small body at the bottom and a significantly longer upper shadow. This indicates that buyers attempted to push the price higher, but the market rejected the high levels. The signal is stronger when RSI is in overbought territory. Entry should be after a bearish confirmation candle appears.

Hanging Man visually resembles a hammer but forms at the top of a trend. It’s important to understand that this pattern alone does not signal an entry. It should be considered only as a preliminary warning, with a real entry made after a strong bearish candle, especially at resistance levels.

Two-day patterns — engulfing and their predictive power

Two-day models already provide clear confirmation of a shift in control between bulls and bears, as the second candle clearly dominates the first.

Engulfing is one of the most effective patterns. The second candle completely covers the body of the first, demonstrating a full change in market sentiment. In bullish engulfing (after a decline), entry is made at the close of the second candle or on a 30-50% retracement. In bearish engulfing (at market highs), the pattern is especially powerful near resistance levels.

Piercing Line signals an upward reversal. The second candle opens below the first candle’s low but closes above its midpoint. This shows increasing buying activity. Entry is recommended at the close of the second candle, with additional confirmation when RSI exits oversold territory. Stop-loss is set below the entire pattern’s low.

Dark Cloud Cover indicates a downward reversal. The second red candle opens above the first and closes below its midpoint, showing a shift of control to sellers. This pattern is especially effective at local highs.

Harami differs from the other two-day patterns in that it signals a potential weakening of the current trend rather than an immediate reversal. A small candle is fully contained within the body of a larger candle. This pattern works well as a preparatory signal before a major move — wait for a breakout of the harami range to enter.

Three-day patterns — the most reliable reversal signals

Three-day models are considered the most reliable because they include a complete cycle of doubt (the middle candle) and subsequent confirmation.

Morning Star shows a strong bullish reversal and consists of three elements: a long bearish candle, a small indecision candle (often a doji), and a strong bullish recovery candle. Entry is made after the close of the third candle, most effectively at support levels. These patterns often lead to medium-term price movements.

Evening Star is a mirror image of the morning star and signals a reversal downward. This pattern is especially powerful at resistance levels, particularly when RSI divergence is present.

Three White Soldiers represents a powerful shift of control to the bulls. The pattern consists of three consecutive large green candles with minimal lower shadows. Entry is recommended on a retracement after the second or third candle, but avoid entering at local highs without a correction.

Three Black Crows is an aggressive bearish reversal with three strong red candles closing near their lows. This pattern works best after a long upward trend and at key resistance levels.

Abandoned Baby is a rare but highly accurate pattern. The middle candle is a doji, with gaps on both sides formed by the first and third candles. Due to its rarity, this pattern often works flawlessly and is well-suited for positional trading.

Increasing pattern reliability with technical indicators

No pattern works with absolute certainty in isolation. Additional analysis tools are used to strengthen signals. Support and resistance levels identify zones of maximum probability. RSI shows divergences and helps confirm trend weakening. EMA with periods 21 and 50 serve as dynamic support levels. Volume analysis confirms the seriousness of market participants’ intentions.

Applying patterns in real trading

The best trading opportunities arise when a candlestick pattern coincides with a support or resistance level, and confirming indicators provide an additional signal. Do not treat a candlestick pattern as an automatic entry button — it is merely an indicator of a shift in the balance of power among market participants. Proper integration of patterns into a trading strategy requires discipline, risk management, and patient waiting for optimal entry conditions.