Bearish reversal candlestick patterns signify that sellers are momentarily in control.
Likewise, it doesn’t mean you should go short immediately when you spot such a pattern because it doesn’t offer you an “edge” in the markets.
Instead, you want to combine candlestick patterns with other tools so you can find a high probability trading setup.
For now, these are 5 bearish reversal candlestick patterns you should know:
• Shooting Star
• Bearish Engulfing Pattern
• Dark Cloud Cover
• Tweezer Top
• Evening Star
Let me explain…
Shooting Star
A Shooting Star is a (1-candle) bearish reversal pattern that forms after an advance in price.
Here’s how to recognize it:
• Little to no lower shadow
• The price closes at the bottom ¼ of the range
• The upper shadow is about 2 or 3 times the length of the body
And this is what a Shooting Star means…
1. When the market opens, the buyers took control and pushed price higher
2. At the buying climax, huge selling pressure stepped in and pushed price lower
3. The selling pressure is so strong that it closed below the opening price
In short, a Shooting Star is a bearish reversal candlestick pattern that shows rejection of higher prices.
Now, just because you see a Shooting Star doesn’t mean the trend will reverse immediately.
You’ll need more “confirmation” to increase the odds of the trade working out and I’ll cover that in detail later.
Moving on…
Bearish Engulfing Pattern
A Bearish Engulfing Pattern is a (2-candle) bearish reversal candlestick pattern that forms after an advance in price.
Here’s how to recognize it:
• The first candle has a bullish close
• The body of the second candle completely “covers” the body first candle (without taking into consideration the shadow)
• The second candle closes bearish
And this is what a Bearish Engulfing Pattern means…
1. On the first candle, the buyers are in control as they closed higher for the period
2. On the second candle, strong selling pressure stepped in and closed below the previous candle’s low — which tells you the sellers have won the battle for now
In essence, a Bearish Engulfing Pattern tells you the sellers have overwhelmed the buyers and are now in control.
Dark Cloud Cover
A Dark Cloud Cover is a (2-candle) reversal candlestick pattern that forms after an advance in price.
Unlike the Bearish Engulfing Pattern which closes below the previous open, the Dark Cloud Cover closes within the body of the previous candle.
Thus in terms of strength, the Dark Cloud Cover isn’t as strong as the Bearish Engulfing pattern.
Here’s how to recognize it:
• The first candle has a bullish close
• The body of the second candle closes beyond the halfway mark of the first candle
• The second candle closes bearish
And this is what a Dark Cloud Cover means…
1. On the first candle, the buyers are in control as they closed higher for the period
2. On the second candle, selling pressure stepped in and it closed bearishly (more than 50% of the previous body) — which tells you there are selling pressure around
Next…
Tweezer Top
A Tweezer Top is a (2-candle) reversal candlestick pattern that occurs after an advance in price.
Here’s how to recognize it:
• The first candle shows rejection of higher prices
• The second candle re-tests the high of the previous candle and closes lower
And this is what a Tweezer Top means…
1. On the first candle, the buyers pushed the price higher and were met with some selling pressure
2. On the second candle, the buyers again tried to push the price higher but failed, and was finally overwhelmed by strong selling pressure
In short, a Tweezer Top tells you the market has difficulty trading higher (after two attempts) and it’s likely to head lower.
Evening Star
An Evening Star is a (3-candle) bearish reversal candlestick pattern that forms after an advance in price.
Here’s how to recognize it:
• The first candle has a bullish close
• The second candle has a small range
• The third candle closes aggressively lower (more than 50% of the first candle)
And this is what an Evening Star means…
1. On the first candle, it shows the buyers are in control as the price closes higher
2. On the second candle, there is indecision in the markets as both the selling and buying pressure are in equilibrium (that’s why the range of the candle is small)
3. On the third candle, the sellers won the battle and the price closes lower
In short, an Evening Star tells you the buyers are exhausted and the sellers are momentarily in control.
