Reversal Patterns

Introduction

Swing traders earn money at turning points. Candlestick reversal patterns help you spot these turning points early. This lesson covers the most useful reversal patterns: hammer, hanging man, inverted hammer, shooting star, bullish engulfing and bearish engulfing.

Hammer (Bullish)

• Appears after a downtrend.
• Small body near the top, long lower shadow at least twice the body, little or no upper shadow.
• Meaning: sellers pushed the price down, but buyers came back strongly and closed near the high.

Hanging Man (Bearish)

• Same shape as the hammer, but appears after an uptrend.
• Meaning: heavy selling appeared during the day. Even though the price recovered, buyers are getting tired.

Same shape, different location, opposite meaning. This is why the trend before the candle is so important.

Inverted Hammer (Bullish)

Small body at the bottom and a long upper shadow, after a downtrend. Buyers tried to push up. A strong green candle the next day confirms the reversal.

Shooting Star (Bearish)

Same shape as the inverted hammer, but after an uptrend. Buyers pushed higher but sellers slammed the price back down. A common signal near resistance.

Bullish Engulfing

A two-candle pattern after a downtrend. Day 1 is a small red candle. Day 2 is a larger green candle whose body completely covers the day 1 body. Buyers have taken full control.

Bearish Engulfing

After an uptrend. Day 1 is a small green candle. Day 2 is a bigger red candle that completely covers it. Sellers have taken control.

Example 1: Bullish Engulfing

YZA Ltd falls for three days: Rs 330, Rs 322, Rs 316.

• Day 4: small red candle, open Rs 316, close Rs 312.
• Day 5: open Rs 310, close Rs 325. The green body fully covers the red body.
• Plan: buy Rs 326, stop-loss Rs 308, target Rs 345.
• Risk Rs 18, reward Rs 19 to the first target. If the stock breaks Rs 345, the target can be trailed higher.

Example 2: Hammer at 50 DMA

BCD Ltd is in an uptrend and pulls back to its 50 DMA at Rs 1,110. A hammer forms with a low of Rs 1,095 and close at Rs 1,118. The next day closes at Rs 1,130. Buy at Rs 1,131 with a stop-loss at Rs 1,092.

Example 3: Shooting Star Exit

You hold EFG Ltd bought at Rs 700. It rises to Rs 758 near resistance at Rs 760 and forms a shooting star. You book profit at Rs 752 instead of waiting and watching gains disappear.

How to Improve Accuracy

• Pattern + support/resistance + volume = strongest signal.
• Ignore patterns in the middle of a range.
• Wait for confirmation the next day when possible.
• Place the stop-loss beyond the pattern's low (for buys) or high (for sells).

Common Mistakes

• Calling every small candle a hammer. The lower shadow must be long.
• Trading a hammer in a strong downtrend with no support nearby.
• Ignoring the overall market. If Nifty is falling sharply, bullish patterns fail more often.

On GoPocket

Once a bullish engulfing or hammer is confirmed at support, place a Delivery Limit buy order on the GoPocket app, then place your stop-loss sell order just below the pattern low.

Frequently Asked Questions

Which reversal pattern is the strongest?

Engulfing patterns at strong support or resistance with high volume are considered among the most reliable.

Do these patterns work on intraday charts?

Yes, but for swing trading, daily chart patterns are more reliable.

Key Takeaways

• Hammer and bullish engulfing signal possible upward reversals.
• Hanging man, shooting star and bearish engulfing signal possible downward reversals.
• Location and confirmation are essential.

Disclaimer: Hypothetical examples. Investments in the securities market are subject to market risks.