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• Direction: Bearish • Type: Reversal • Reliability: Weak • In an uptrend, the first day is a long blue candle continuing the established bull trend. • The second day is a candle (red or blue) with a real body at the lower end, a long upper wick and no (or almost no) lower wick.
Occurring in an uptrend the Shooting Star formation is indicative of a bearish change of momentum. Shooting Stars show that traders have tested the highs and settle the day near the open and low price. This suggests the rally is unsustainable and sellers are retaking the market. Although this pattern is fairly weak, for those traders with existing longs in the market the Bearish Shooting Star serves as a signal for the deteriorating strength of their position.
• Confirmation Many traders will wait for a bearish move on the third day, forming a formation similar to the Evening Star three-candle pattern. If day three is a long red candle, that pattern combined with the shooting star is a very strong reversal signal.
• Direction: Bearish • Type: Reversal • Reliability: Weak • First day is long blue candle continuing an established uptrend. • Day-two is a small candle or start whose range is within the first days body, above its midpoint.
Bearish Haramis are characterized by a long blue day followed by a small candle, also refers to as a star. The trading range of the star stays within the body of the previous days candle. The significance of this formation is quite clear, as price continues its uptrend it is halted by a bearish candle.
Bearish Haramis are very weak in signal strength though, since even in a strong bull trend it is very reasonable to see a sell-off that pulls price back down from highs. Longs paring off their exposure may cause this. Thus candlestick analysts will watch for bearish days to come, but probably not bet on them.
In non-FX markets gaps seen above that allow the star to occur deep within the body of the first days candle are typical. Such gaps are just not possible in Foreign Exchange Markets. Since the Forex Market version of this candle is more nuanced, traders pay attention to several details.
This formation is very similar to the Bearhish Engulfing formation, except that the Harami move does not trade below the previous candles body. Because Harami sellers are not able to drive price much past the previous days midpoint, this patterns offers a weaker signal.
In range bound markets this formation will occur frequently with little significance. But if this pattern occurs after a protracted uptrend, analysts will attach greater importance to it.
Lastly if this does turn out to be a reversal pattern the high of the two candles will likely turn into a significant resistance level.
• Direction: Bearish • Type: Reversal • Reliability: Moderate to Weak • In a uptrend a red or blue day occurs with a body in the upper part of the sessions range, a long lower wick, and little to no upper wick • Analysts do not care of the small candle is red or blue
The Hanging Man formation indicates trend exhaustion, and suggests a bearish reversal. After a bullish rally the day opens with a significant sell-off, creating a long bottom wick. However, buyers are able to push prices back to the upper range, creating a short body.
The meaning of the candle is a bit ambiguous. Even though sellers brought the market to low lows, in the end buyers brought the close price back up near the market open price. Overall this candlestick serves as an early indication that buyers are losing control and bearish traders are gaining strength.
Since the signal alone is fairly weak, traders look for a number of characteristics to reinforce the bearish signal.
In ideal conditions traders want the wick length to be several times longer than the body of the candle. The longer the candle, the stronger sellers were able to drive price down and the stronger the bearish signal this candle provides.
Although above we state that most analysts do not care if the small candle is red or blue, traders will actually take a red candle to suggest a slightly stronger bearish signal. Sellers being unable to bring the close price below the open price suggest stronger bearish control.
The bearish Dragonfly Doji serves as a stronger sell signal than the Hanging Man pattern. Since a Dragonfly candle (where open and close are identical, but we see a low similar in length to the Hanging Man) reflects more uncertainly and lack of direction, candlestick analysts will usually take it as a stronger bear signal.
• Hammer vs Hanging Man. Alone, Hammer and Hanging Man candles look identical. Their difference lies in what type of trend the candle follows. If the market had been trending up for a while the formation is a Hanging Man. In fact the name, Hanging Man, suggest price is hanging over a precipice, ready for a fall. Hammers follow a bearish trending market and its name suggests price has already been weighted down.
Although traders will usually wait for confirmation the next day, look for selling opportunities to come.
• Direction: Bearish • Type: Reversal • Reliability: Moderate • In an established uptrend, an average to small sized blue candle occurs on day-one. • In the second day a longer red candle forms • Ideally with a red candles high is above the previous days high. • The strength of the signal is additionally increased by the further the red candle closes below the low of the blue day.
The Bearish Engulfing is one of the more clear-cut two day bearish reversal patterns. The formation reflects sellers overtaking buying strength, and often precedes a fall in price.
• Day-One Characteristics for Signal Strength The first day may even appear as a Doji, and the smaller day-one is and larger the second day is, the stronger the reversal signal. Dojis and small candles reflect uncertainty in the markets trend, thus the smaller the first days candle the better the signal of an end to the established bull trend.
• Day-Two Characteristics for Signal Strength The second day bear move acts to confirm the death to the bull trend. The bigger the red candle reflects the deeper the bear move and the better the reversal signal.
• Overall Characteristics for Signal Strength This pattern is also more meaningful if it follows a lengthy bull trend, or a recent fast move up. Both these cases suggest the market may be overbought and more apt for a reversal.
Bearish Engulfing patterns also provide resistance levels for where the highest level of price action reached. In the future this level may be difficult to break.
Evening Stars start with a continuation of the bullish move. The second day sees a continuation of the move up, but a sell-off makes the market close at or near the open for the day. The first two candles meekly suggest a loss of bullish momentum. In fact up to day two this formation matches the Bearish Shooting Star weak-to-moderate strength reversal pattern.
Although the example above is a blue shooting star, the shooting star can really be any color.
Bearish Shooting Stars alone are decent signals for additional sell-offs on day three. Since the certainty for a shooting star indicator is low, the trend reversal should be confirmed by a red candlestick the next day.
Thus Bearish Evening Stars require on day three a sharp sell-off after the market open. Analysts want day threes high to be near equal to its open price, suggesting the market sell-off has no uncertainty in the new direction.
With this pattern watch for sells offs the follow days.
In non-FX markets gaps are quite common, and Evening Stars traditionally require a gap between the first and second day. In fact the wider the gap from day two to three the better the signal in non-FX markets, since the higher day-two goes the stronger day-threes bearish move is.
Because FX offers 24 hour trading, no gaps should be expected. The Forex Market version of this formation would share the same market close price on day one, and then start day twos rally from there. Day twos close would be the same whether in FX or any other market restricted to fixed exchange hours. The formation would tend to see a shooting start on day two. Thus this formation might more aptly be called Evening Shooting Stay when applied to the Foreign Exchange Market.
• Direction: Bearish • Type: Reversal • Reliability: Strong • The first day is a long blue day • The second day will close below the midpoint of the previous candles body
The market continues the uptrend on the first day. By day two sellers take price down to close near the open of the previous day.
In FX, traders view the higher the second day high the better since the bigger the rally after the open, the more sellers were able to drive price back down.
This formation suggests short sellers have begun to take charge of the market, and longs have been shaken by the sudden lost of bullish momentum. Declining days are common after this formation as more short sellers confidently to enter the market with a clear stop benchmark at the second day high.
The deeper day-two closes into the first day candlestick body, the greater the chance of the uptrend topping out. If the second day candle does not trade below the midpoint of the first day body, traders typically feel it safer to wait for confirmation on the third day.
Some traders wait for confirmation regardless of how deep the Dark Cloud Cover penetrates the second day.
In non-FX markets, traders want to see the second day gap up, opening above the close of the previous day. Because the Forex Market offers continues 24 hour markets, such gaps are not typically possible. But FX traders will turn to the high of the second day to indicate how strong the opening rally is, to gauge the strength of the subsequent bear move.
