Forex Reversal Candlestick Patterns: The Most Powerful

Using Reversal candlestick patterns in Forex correctly can have a noticeable positive impact on a trader’s performance. And key to identifying trend reversal in Forex or confirm a trade.

If you don’t know what’s a candlestick pattern, you can refer to our comprehensive Forex technical analysis tutorial.

Trading success is all about following your trading rules. Therefore, before outlining my top Forex reversal candlestick patterns, let me introduce a few rules on how to use them.

Rule #1: Use candlestick patterns to trade in the direction of the underlying trend not against it.

Rule #2: Candlestick patterns should fit within a trading strategy, and not to be traded upon solely.

Rule #3: The longer the body and shadows of the candle the more reliable it is. Ignore shorter candlestick patterns. (See figure below).

Rule #4: A breakout is only valid if it happens on a closing basis. If you need further explanation refer to the breakout part in our technical analysis basics tutorial.

Forex Reversal candlestick pattern quality

Are we set on our rules? great, let’s get started.

1. Bullish Hammer

Reversal Candlestick pattern: Hammer.
Prior trend: Down.
Likely implication: Bullish reversal.
Alternative implication: Bearish continuation.

Explanation: The Hammer forms in a down trend. The price moves sharply lower after the open, but rebounds to close significantly higher. Typically, in the upper third of the candle. The body can be white(up) or black(down).

Hammer candlestick pattern

The hammer candle suggests that trading action was strong during the period. As selling pushed the price lower, buyers managed to regain and push the price to close the period near the open.

The sharp rebound from the low indicates rejection at that price, and hints it could be a support level.

Implications:

  • Bullish reversal: The hammer candlestick pattern must be preceded by down trend. And it indicates that although strong selling with within the trend happened. Buying entered the market and was strong enough to reverse the price higher, to close just above or below open price. In most cases, the pattern has bullish implication.
 reversal candlestick patterns - hammer example 1
  • Bearish continuation: In case the main scenario fails. As the price breaks out below the low of the hammer candle within the following 2 to 3 candles. Bearish continuation of the downtrend is likely.
 hammer candlestick failure chart example

Remember: The body should be small relative to the shadows. A general rule of thumb is that the shadow must be at least twice the size of the body.

2. Hanging Man

Reversal Candlestick pattern: Hanging Man.
Prior trend: Up.
Likely implication: Bullish continuation or bearish reversal.

Explanation: The hanging man candlestick pattern has the exact shape of the hammer candlestick. The only difference is that it forms in an uptrend. 

The sharp rebound from the low indicates rejection at that price, and hints it could be a support level.

Implications: The chances of a bearish reversal or bullish continuation for a hanging man is roughly equal, and depends on the following price action.

  • Bullish continuation: The hanging man indicates that although strong selling entered the market, buying was strong enough to reverse the price higher, and close just above or below open price. Wait for the price to break the high of the hanging man candle to confirm the continuation of the uptrend.
 forex-reversal candlestick patterns- hanging man example 1
  • Bearish reversal: A bearish reversal will be the most likely outcome If we don’t get a follow through above the high of the hanging man. And the price retreats to close below the hanging man low.
Hanging Man candlestick failure chart example - forex reversal candlestick pattern

3. Shooting Star

Reversal Candlestick pattern: Shooting Star.
Prior trend: Up.
Likely implication: Bearish reversal.
Alternative implication:  Bullish continuation.

Explanation: The shooting star forms in an uptrend. As the price moves sharply higher after the open but reverses to close significantly below the high of the session. Typically, in the upper third of the candle. The body can be white(up) or black(down).

The sharp reversal from the high indicates rejection at that price, and hints it could be a resistance level.

Shooting star candle

Implications:

  • Bearish reversal: The shooting star indicates that although buyers continued to push the price to new highs within the context of the uptrend, strong selling pressure forced the price to reverse. Thus, the pattern indicates further selling ahead.
 shooting star candlestick chart example
  • Bullish continuation: If the price closes above the high of the shooting star, further upside within the context of the uptrend is likely.
 shooting star candlestick chart example

The breakout above the first shooting star in the chart example above led to an extension of the uptrend. However, another shooting star pattern formed later, and was followed by a bearish reversal.

4. Inverted Hammer

Reversal Candlestick pattern: Inverted Hammer
Prior trend: Down
Likely implication: Bearish continuation or bullish reversal

Explanation : Has the exact shape of a shooting star. But forms in an uptrend. Also, the sharp reversal from the high suggests rejection at that price, and hints it could be a resistance level.

The sharp rebound from the low indicates rejection at that price, and hints it could be a support level.

Implications: The chances of a bearish continuation or bullish reversal for a inverted hammer is roughly equal, and depends on the following price action.

  • Bearish continuation: The inverted hammer indicates that although strong buying pushed the price higher against the main downtrend, selling pressures remained in control and forced the price lower again. The pattern can be interpreted that the bearish trend may continue.
 bearish inverted hammer candlestick chart example
  • Bullish reversal: If we do not get a follow through below the inverted hammer low, and the price break the high of the candle, further upside will be the likely outcome.
 bullish inverted hammer candlestick chart example

5. Gravestone Doji

Reversal Candlestick pattern: Gravestone Doji.
Prior trend: Up or Down
Likely implication: Bearish Reversal.
Alternative implication: Bullish continuation.

 gravestone doji candlestick pattern

Explanation: The Gravestone doji is similar to the Shooting Star candle. But the opening and closing price are equal or almost equal and near to the high. Also, it can form in both, up and downtrend.

The sharp reversal from the high indicate rejection at that price, and hints it could be a resistance level.

Implications: The Gravestone doji pattern should be treated exactly like a Shooting Star pattern.

  • Bearish Reversal
 bearish gravestone doji candlestick chart example - forex reversal candlestick patterns
  • Bullish continuation
 bullish gravestone doji candlestick chart example

6. Dragonfly Doji

Candlestick pattern: Dragonfly Doji.
Prior trend: Down or Up.
Likely implication: Bullish reversal.
Alternative implication: Bearish continuation.

 dragonfly doji candlestick pattern-

Explanation : The Dragonfly doji is similar to the Hammer pattern. But the opening and closing price are equal or almost equal, and near the low. Also, it can form in both, up and downtrends.

The sharp rebound from the low indicate rejection at that price, and hints it could be a support level.

Implications: The Dragonfly should be treated exactly like a Hammer pattern.

  • Bullish Reversal
 bullish dragonfly doji candlestick chart example
  • Bearish continuation
 bearish dragonfly doji candlestick chart example

7. Bullish Engulfing

Reversal Candlestick pattern: Bullish Engulfing.
Prior trend: Down.
Likely implication: Bullish reversal.

Explanation : The engulfing is a long candle with a body that covers the preceding candle(s) whole range(body and shadow). It engulfs the prior candle or candles.

 bullish engulfing candlestick pattern

Bullish engulfing candle must be preceded by a down trend. The candle open at the price of the close of the prior candle, and closes above the high of the prior candle.

The bullish engulfing candle suggests that trading was active during the period. Where buying was in control and pushed the price higher to surpass prior candles open to high range.

Implication: The bullish engulfing pattern indicates that the prior down trend could be reversing.

 bullish engulfing candlestick chart example

8. Bearish Engulfing

Candlestick pattern: Bearish Engulfing.
Prior trend: Up.
Likely implication: Bearish reversal.

 bullish engulfing candlestick pattern

Explanation: The exact opposite of a bullish engulf. The candle is a down red candle that opens at or above the close of prior candle and closes below the low of the prior candle(s).

Implication: The candle forms in an uptrend and suggests a bearish reversal may have started.

 bearish engulfing candlestick chart example

BONUS Forex Reversal Candlestick Patterns:

9. Long-legged Doji

Reversal Candlestick pattern: Long-legged Doji
Prior trend: Up or Down
Main implication: All outcomes are possible.

Explanation: The long-legged doji forms when the opening and closing prices are equal or near equal. And upper and lower shadows are noticeably long.

 long legged doji candlestick pattern -

The long-legged doji suggests that trading was very active during the period. Both buyer and sellers pushed the price in both directions. However, the price was rejected at the high and the low. And at the end it settled near the middle, indicating equilibrium and indecision.

Implications: If forms after an uptrend, the pattern suggests the buying pressure is no longer in full control. It is fifty-fifty now between buyers and sellers. Therefore, the uptrend may stop for correction or reversal. The opposite is true if the pattern forms following a down trend.

  • Bullish reversal
 bullish long legged doji candlestick chart example
  • Bearish reversal
 bearish long legged doji candlestick chart example -
  • Bullish continuation
 bullish continuation long legged doji candlestick chart example
  • Bearish continuation
 bearish continuation long legged doji candlestick chart example
 long legged doji as support and resistance

10. High Wave Candle

Reversal Candlestick pattern: High Wave Candle.
Prior trend: Up or Down.
Likely implication: Bearish or bearish reversal. The outcome depends on the candle shape and the preceding trend.

The high wave candle is a gigantic candle. Its range can be longer than a whole month of trading. Usually happens following an unexpected and unscheduled significant news event. Most if the move happens in the initial spike in the few minutes following the news.

 high wave candlestick pattern


To be a high wave candle, the candle range must be MORE than 6 times the average range for the past 14 periods. (The longer the better). If you can’t decide manually, you can use the Average True Range (ATR) indicator to measure this:

1- Add the ATR indicators with settings period set to 14.
2- Add another ATR for the same chart with setting period set to 1.
3- Find the value of ATR(1) for the suspected high wave candle
4- Find the value of f ATR 14 one candle before the high wave.
5- Compare the two values, if the value of ATR(1) is 6 times or more the value of ATR(14), then its a valid high wave candle.

 reversal candlestick patterns- high wave candle measuring

Implications:

Bullish reversal if(and ONLY if):

1- Forms following a downtrend.

2- The candle has a long bullish body(up), with a short upper shadow compared to the body. Typically, the body should be more than twice the size of the shadow.

 bullish reversal high wave candle

3- Or, the candle has a small body(can up or down) with a long lower shadow compared to the body. Typically, the body should be longer than 60 percent of the the whole candle..

 bullish high wave candle example

Bearish reversal if(and Only if):

1- Forms following an uptrend.

2- The candle has a long bearish body(up), with a short lower shadow compared to the body. Typically, the body should be more than twice the size of the shadow. The likely outcome is reversal of the uptrend.

 bearish high wave candle

3- Or, the candle has a small body(can up or down) with a long upper shadow compared to the body. Typically, the body should be more than 60 percent of the whole candle. The likely outcome is reversal of the uptrend.

 bearish high wave candle 2

Hint: DO NOT rush to short the price. As usually, the the price will attempt to revisit the candle high before reversing lower. Wait for a shorter time frame confirmation signal.

Extra Forex Reversal Candlestick Patterns Chart Examples

 chart example 1
 chart example 2

Combining candlestick patterns with other technical tools, such as price action patterns, in addition to support and resistance levels would provide high probability trade setups with strong conviction.

To see the reversal candlestick patterns in action, applied in real-life trading conditions, check out A Trend Following Strategy to Swing Trade Forex Like a Pro.