Course Content
Reversal Signals
Reversal signals are candlestick patterns that indicate a change in the current trend. They are the most powerful tools in a candlestick trader's arsenal.
Key vs Reversal Patterns
Engineers make a distinction between: - Reversal patterns — signal the current trend may end - Continuation patterns — signal the current trend will resume
The most reliable reversals happen at key support/resistance levels.
Major Reversal Signals
A single candle with a very long wick and small body. It represents a clear rejection of price.
Bullish pin bar: long lower wick in a downtrend — rejection of lows Bearish pin bar: long upper wick in an uptrend — rejection of highs
Two candles showing a complete reversal of the previous session's sentiment.
A three-candle pattern:
- For Three Outside Up: bearish candle, then a bullish engulfing, then a higher close
- For Three Outside Down: bullish candle, then a bearish engulfing, then a lower close
Two candles with matching highs (tweezer top) or matching lows (tweezer bottom).
Tweezer top: two consecutive candles with the same high — resistance level confirmed Tweezer bottom: two consecutive candles with the same low — support level confirmed
A rare but powerful reversal pattern similar to a morning/evening star but with a gap:
- The middle candle is a doji that gaps away from the previous candle
- The third candle gaps in the opposite direction
This pattern is very reliable but rarely appears.
False Signals and How to Avoid Them
No pattern works 100% of the time. Here is how to filter false signals:
2. Check the trend — patterns against the major trend are less reliable
3. Look at the size — tiny patterns in low volatility are noise
4. Consider the context — a reversal pattern at a major level is more significant than one in the middle of nowhere
5. Use multiple timeframes — a reversal on the 5-minute chart is less meaningful than the same pattern on the daily chart
Reversal Trading Plan
2. Wait for price to reach a key support or resistance level
3. Look for a reversal candlestick pattern
4. Wait for confirmation (next candle closes in the expected direction)
5. Enter with a stop loss beyond the pattern's wick
6. Target the next major level
Putting It All Together
When you combine: - Trend direction (from higher timeframe) - Support/resistance (from candle clusters) - Reversal pattern (pin bar, engulfing, etc.) - Confirmation (next candle)
You have a high-probability trade setup. This is the foundation of price action trading.
In the final lesson, we will bring everything together into a practical framework.