Reversal Candlestick Pattern for traders

By | August 3, 2013

 Lets discuss 2 Candlestick Pattern Engulfing and Kicker which will help you in understanding the reversal pattern.

Bearish engulfing pattern:

The bearish engulfing pattern consists of two candlesticks: the first is white and the second black. The size of the white candlestick is not that important, but should not be a doji, which would be relatively easy to engulf. The second should be a long black candlestick. The bigger it is, the more bearish the reversal. The black body must totally engulf the body of the first white candlestick. Ideally, the black body should engulf the shadows as well, but this is not a requirement. Shadows are permitted, but they are usually small or nonexistent on both candlesticks.

After an advance, the second black candlestick begins to form when residual buying pressure causes the security to open above the previous close. However, sellers step in after this opening gap up and begin to drive prices down. By the end of the session, selling becomes so intense that prices move below the previous open. The resulting candlestick engulfs the previous day’s body and creates a potential short-term reversal. Further weakness is required for bearish confirmation of this reversal pattern.

This can be considered a stronger version of the dark cloud cover because the two resemble each other in the initial stage. The rule that the first day’s candle has to be green in color (closing should be higher than the opening) is applicable in both the cases.

Also,the counters open with an upward gap on the second day, indicating that the bulls are still in control of the market. The bearish engulfing pattern, , occurs when the selling pressure is heavy and the bears manage to take the day’s closing to a value less than the previous day’s opening.

Yes Bank Bearish Engulfing

Since the second day’s Black  candle completely overwhelms the White candle, which is clearly visible in the chart above,Do note we will not consider the Doji Candlestick we will compare from the previous white candle as its is fully  it is called an engulfing pattern.

Bullish engulfing pattern: This is the inverted form of the bearish engulfing pattern and, hence, can be considered the stronger version of the piercing pattern. In this case, the first day’s red/Black candle is completely overwhelmed by the green/White candle, which is evident from the bullish engulfing pattern chart.

Tech Mahindra Bullish Engulfing

Since bearish and bullish engulfing patterns are much stronger, investors and traders can take positions after these are formed and there is no need to wait for further confirmation. The normal practice is to wait for the completion of the pattern and take a new position at the opening of the third day. Aggressive traders, however, can take a position at the close of the second day after confirming that the engulfing pattern is emerging.

 

Bearish kicker: The first day’s candle is green/White and its body is reasonably long, a normal bull market phenomenon. As per Bearish Kicker the directional change in trend is almost visible at the time of the second day’s opening. The market opens significantly lower on the second day, even lower than the previous day’s opening.

Kotak Bank Bearish Kicker

This downward gap is clearly visible in the bearish kicker chart. This sudden drop shocks the short-term traders and the price start falling due to the long unwinding. To confirm the bearish kicker, the close should be lower than the opening, that is, a red bodied candle, on the second day.

Bullish kicker: This is the mirror image of the bearish kicker. In this case, the first candle will be a reasonably long red one, which is a common occurrence in a bear market. However, the sentiment turns around drastically and the market opens significantly higher the next day, even higher than the previous day’s opening.

STER

 

 Let us consider some rules that are applicable for Candlestick Pattern :

  • The Candlestick Pattern pattern’s strength increases when the body of the second candle is significantly longer compared to the first candle.
  • The Candlestick Pattern pattern should be formed after a long rally or crash.
  • These signals are highly accurate if the pattern is witnessed in the overbought/oversold regions.
  • The rise in volume during the pattern formation also increases its trading significance.

2 thoughts on “Reversal Candlestick Pattern for traders

  1. Bramesh Post author

    Dear Jigneshji,

    Thanks a lot !! How is your trading going on.Any improvement observed ?

    Rgds,
    Bramesh

  2. jignesh vadoliya

    thank you sirji …Good Mkt Gyan.

    Regards

    Jignesh Vadoliya

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