Bear Reversal Signals - Japanese Candlesticks

Japanese candlesticks began in Japan and spread quickly around the world as traders realised the advantage of using them to plot charts.  They can give an added edge regardless of the market or instrument you trade.

Short-term traders who use candlesticks charts can quickly see the power that they offer to those who understand them. Like all trading techniques, they have limitations. The big problem with the candletsticks is that traders can jump in early before the candlestick formation has been completed at the end of a trading session, be it an hour, a morning, a full day or weekly time span. Please click here to view the common trap of candlestick charting.

The bearish patterns are also better employed in conjunction with other indicators such as at resistance or on breaking an uptrend rather than blindly in an uptrend. To view the bear flag formation click here or to take in an overview of bullish candlestick patterns, please click here.

Bearish Patterns

Long Black candle:

This is a bearish candle. It occurs when prices open near the high and close significantly lower near the period's low.

Hanging Man:

These candles are bearish if they occur after a significant uptrend. If this pattern occurs after a significant downtrend, it is called a Hammer. They are identified by small real bodies (i.e. a small range between the open and closing prices) and a long lower tail (i.e. the low was significantly lower than the open, high, and close).

Dark Cloud Cover:

The Dark Cloud Cover Pattern is a bearish reversal pattern found at the top of an uptrend. It is a two-candle pattern where the first day shows a bullish green candle continuing the uptrend, the second candle opens higher than the previous day, the red candle pushes lower and closes below the open price. The key requirement for the Dark Cloud Cover pattern is that the bearish day (red candle) closes at least half way down the previous day’s candle. The lower the closing price of the red candle, the more powerful is the bearish reversal signal.

Bearish Engulfing pattern:

This pattern is a reversal pattern, that is, there must be an existing prior uptrend in existence before the formation of this pattern. It's important that the second candle's body 'engulfs' the body of the first candle. Once this pattern has been identified it suggests that the stock will reverse its uptrend. This pattern suggest that the bulls have been pushing the price higher for a while before the momentum have been exhausted and the bears seem ready to take over. A confirmation candle is needed to confirm the reversal on the following day, which  may include another red candle, a gap down or a lower close than the second candle.

Evening Star:

The Evening star formation, which is the opposite of the Morning Star formation, is a three candle formation that signals an reversal, usually occurring at the top of a clearly identifiable uptrend.

As shown in the diagram (above). The first candle must be a strong up candle with a tall body, it shows that the bulls are in control, with their buying pushing the price upwards. The second candle should have a higher opening (gap) and a small red or green body, this signals a top in the market and the end of the up trend where the buyers and sellers are evenly balanced, the 'Star' refers to the gap from the open to the previous days close. The third candle is the confirmation of a trend reversal and its red body should extend at least half way into the green body of the first candle, this shows the bears have taken control and the selling should cause any bulls to sell to cover their positions

Evening Doji Star;

refers to the Doji formation in which the second candle has no 'body' as the open is the same price as the close, it is suggested that the presence of the Doji increases the potential, and possibly the severity of the reversal signal.

Doji Star:

A star indicates a reversal and a doji indicates indecision. Therefore, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (for example; the evening star) before trading a doji star.

Shooting Star:

This pattern suggests a minor reversal when it appears after a rally. The star's body must appear near the low price and the candle should have a long upper tail.

Long-Legged Doji:

This candle is often regarded as a turning point. It occurs when the open and close are the same, and the range between the high and low is relatively large.

Dragon-Fly Doji:

This candle is another that signifies a turning point. It occurs when the open and close are the same, and the low is significantly lower than the open, high, and closing prices.

Gravestone Doji:

This candle signifies a turning point, defined when the open, close, and low are the same, and the high is significantly higher than the open, low, and closing prices.

Star:

Stars indicate reversals. A star is a candle with a small body that occurs after a candle with a larger body, Although the tails may overlap the bodies should not.