The overwhelming majority of Japanese candlesticks patterns are trend reversal patterns; in fact, there are more than fifty reversal patterns in Japanese candlestick chart theory. These reversal patterns indicate that the current trend is either overextended or running out of momentum and could transition to a trend reversal in the near future, though this reversal may be a short-term reversal, or a long term reversal. Candlestick reversal candlestick patterns have the added advantage of only requiring very few candlesticks, sometimes only one, to form the pattern. They, thus, tend to offer early opportunities to enter new, contrary position where the trader's protective stop can be relatively close to the entry price. The ability to enter a trade close to the reversal point and with a stop that is relatively close helps the trader to maximize potential profits. This is why being able to identify candlestick reversal patterns is an important weapon in a trader's arsenal, especially among short-term intra-day traders and swing traders.
Obviously, a trend reversal pattern must appear in a well-established trend. This can be a bullish uptrend or a bearish downtrend, but it must be an established trend. Furthermore, a reversal pattern that appears near or on a support or resistance area has a greater probability of success, as do reversal patterns that appear in a strong, extended uptrend or downtrend where they may lead to a V-reversal. Sometimes the same candlestick pattern can be a bullish or a bearish reversal pattern, depending on the trend that it appears in.
However, a trend reversal seldom occurs abruptly with one trend being replaced by another. Instead, they transition gradually from one to the other as the underlying market forces and sentient shifts. At times the market forces may remain in equilibrium for extended periods with neither buyers nor sellers able to dominate, resulting in a non-trending, sideways market.
Bullish Trend Reversal Candlestick Patterns:
Bullish trend candlestick reversal patterns must appear in an established downtrend where it marks the probable end of the downtrend and the possible start of a bullish uptrend. Bullish trend candlestick reversal patterns that consist of a single candlestick and are single candlestick patterns include:
Bullish trend reversal patterns that consist of two candlesticks and are double candlestick patterns include:
- Bullish Engulfing
- Piercing Line
- Bullish Harami Line / Bullish Harami Cross
- Bullish Homing Pigeon
- Bullish Kicker Pattern
- Tweezer Bottom
Bullish trend reversal patterns that consist of three candlesticks and are triple candlestick patterns include:
Bullish trend reversal patterns that consist of more than three candlesticks include:
Bearish Trend Reversal Candlestick Patterns:
Bearish trend reversal candlestick patterns must appear in an established uptrend where it marks the probable end of that uptrend and the possible start of a bearish downtrend. Bearish trend reversal candlestick patterns that consist of a single candlestick include:
Bearish trend reversal patterns that consist of two candlesticks include:
- Bearish Engulfing
- Dark Cloud Cover
- Bearish Harami Line / Bearish Harami Cross
- Bearish Homing Pigeon
- Bearish Kicker Pattern
- Tweezer Top
Bearish trend reversal patterns that consist of three candlesticks include:
- Abandoned Baby
- Evening Star / Evening Doji Star
- Tri-Star Top
- Three Black Crows
- Advance Block
- Upside Gap Two Crows
Bearish trend reversal patterns that consist of more than three candlesticks include:
Of these reversal candlestick patterns, the patterns that appear most frequently and are most commonly found are:
- The bullish and bearish Engulfing pattern.
- The bullish and bearish Harami pattern.
- The bullish Piercing Line pattern.
- The bearish Dark Cloud Cover pattern.
- The umbrella line patterns, namely:
- The bullish and bearish Doji pattern.
- The Tweezer Top pattern.
- The Tweezer Bottom pattern.