5- Engulfing Reversal Pattern
In the image below, engulfing patterns are represented by the last two candlesticks of the illustration.
Formation
Engulfing patterns
consist of two candlesticks. The first one is usually a small candle,
and must be in direction of the prevailing trend (in an uptrend the
short candlestick must be white and in a downtrend the candlestick must
be black) while the second candlestick must be against the prevailing
trend and is usually a long candlestick. Candles should have little or
no shadows at all. The body of the second candlestick must cover or
embrace the body of the first candle (shadows are not taken into
consideration).
Psychology behind the Shooting Star and Examples
In a downtrend or downside movement where bulls have control over the markets, a bullish engulfing pattern
indicates that bulls finally took total control over prices, they were
attracted by the lower prices (and intend to sell back at higher prices)
and pushed the market up above the open price. This could signal a
trend reversal, a correction or a consolidation period.
In an uptrend or upside movement where bulls have control over prices, a bearish engulfing pattern
indicates that bears finally took total control over the market; they
were attracted by the higher prices and pushed the market down below the
open price. This might signal a short-term reversal pattern as clearly
bears or sellers have taken control of the market. .
Bullish Engulfing Patterns are signals to go long!
Bearish Engulfing Patterns are signals to go short!
Bullish Engulfing in Action
In
the 5 min EURJPY chart a bullish engulfing pattern appears at the
bottom of the range signaling a possible change in direction. The market
goes up because of the bullish sentiment at lower prices. Bears notice
bulls are really confident at those levels.
Bearish Engulfing in Action
In
the AUDUSD 5 min chart, an engulfing pattern appears at the top of the
range signaling a “change in direction”. Remember that reversal pattern
not always forecast trend reversals, correction or consolidation periods
are always a possibility.
6- Piercing Reversal Patterns
In the image below, piercing patterns are represented by the last two candlesticks of the illustration.
*
The bearish piercing pattern is also called “Dark Cloud Cover”. For the
sake of simplicity, in this course we will always refer to this pattern
as bearish piercing pattern.
Formation
Piercing patterns,
as engulfing patterns, are also made from two candlesticks. Both
candlesticks should have long bodies and small or no shadows. The first
candlestick must be in direction of the prevailing trend and the second
against it. The further the second candle goes against the trend the
more significant the pattern is. Candlesticks could have small or no
shadows at all.
Psychology behind Piercing Patterns and Examples
In a downtrend or downside movement where buyers have control over the markets, a bullish piercing pattern
indicates that buyers finally took total control over prices, they were
attracted by the lower prices and pushed the market up near the highs
of the day. This could signal a trend reversal, a correction or a
consolidation period.
A bearish piercing pattern,
or most commonly called dark cloud cover indicates that bears liked to
sell on those higher prices, gaining temporary control. If the move is
strong enough, bulls will close their longs making the price sell off.
The close price of the second candle must be below the midpoint of the
first candle body.
Bullish Piercing Patterns are signals to go long!
Bearish Piercing Patterns are signals to go short!
Bullish Piercing in Action
Hey,
forget about the red box! We will get to that a few lines below. The
bullish piercing pattern at the yellow box illustrates what the balance
of supply and demand in this scenario: bears make a final push down, but
bulls take command of the market pushing them up again.
What’s the red box?
It
was the result of the Interest rate announcement from Canada. Consensus
was no change but the Bank of Canada decided to cut .25%, it’s a 100
pip 5 min candlestick.
Bearish Piercing in Action
This
is a valid bearish piercing pattern at the GBPUSD 30 min chart. Small
shadows, first candle in direction of the movement and second candles
against it. This pattern marks the end of the retracement.
7- Morning Star & Evening Star
In the image below, morning and evening stars are represented by the last three candlesticks of each illustration.
Formation
Morning and evening stars are made from three candlesticks. The first candlestick is always in the
direction of the trend or current direction, the second candlestick
could be a black or white one while the third must be against the
prevailing trend or direction. Usually candlesticks in these formations
have small or no shadows at all.
Psychology behind Evening and Morning Stars and Examples
The morning star
pattern begins with a long bearish candlestick or big sell off (in
direction of the prevailing trend). At the second candle, the bears are
not sure anymore about the downtrend continuing its path. At this point,
the buyers feel a little stronger than before. Buyers take total
control of prices on the next candle making the market rally. The closer
the candlestick closes from the first candlestick open price, the
stronger the pattern.
Evening stars begin
with a long white candlestick in direction of the prevailing trend. At
this point, the bulls are still confident about the uptrend. At the next
candle though, the bears start selling attracted by the higher prices.
This candle represents a short period of indecision or a fierce battle
between bulls and bears. On the third candlestick, bears take total
control of the situation making the price sell off. The larger the third
candle is, the stronger the reversal.
Morning Stars are long signals.
Evening Stars are short signals.
Morning Star in Action
In
this USDCHF 1 min chart we see two morning stars patters that finally
capped the downside movements. The trend wasn’t reversed, at least there
some support is found around those levels.
Evening Star in Action
GBPJPY
1 min chart, the evening star at the beginning of the chart makes the
market head down to reach lower levels. Bearish pressure is self
evident: bears start selling and bulls take profits (sell back), this
makes the market drop like a rock.
8- Harami Reversal Patterns
In the image below, Harami patters are represented by the last two candlesticks of each illustration.
Formation
Both, bearish and bullish harami
are made from two candlesticks. The first one is always a large
candlestick in direction of the trend or current move and the second one
against the direction of the trend or current move. Candlesticks could
have small or no shadow at all. The body of the second candlestick must
be inside the body of the first one.
Although
the size of the body of the second candlestick is smaller than the size
of the first one, it should be “larger” than usual.
Psychology behind Bearish and Bullish Harami and Examples
In
the bullish harami, bulls stop bear dominance and take temporary
control over the market. The first candlestick of the bullish harami is
the final push of bears while the second one means bears are feeling
more confident about further upside movements.
In
the bearish harami, bears step in after a high volume bull push. Prices
are high enough to start opening their short positions. The closer the
second candlestick closes to the open of the first one, the stronger the
short sentiment.
Bullish Harami are long signals
Bearish Harami are short signals
Bullish Harami in Action
As
we have mentioned before, reversal patterns not only signal trend
reversals, they also signal possible retracements and consolidation
periods. In this case, the harami pattern signals a correction period.
Now, take in consideration this is a weekly chart, from the top of the
pattern to the bottom of the retracement there are around 500 pips.
Bearish Harami in Action
In
the USDCHF 4H chart above, a bearish harami pattern appears after the
retracement. It could signal the end of the retracement; traders could
resume their short positions.
