Inverted Hammer Pattern
The inverted hammer pattern forms at the bottom of a downtrend, and is a reversal pattern consisting of two candlesticks. It looks just like a hammer pattern, but inverted. It has a small real body and a long upper shadow, and forms after a long black candlestick. Buyers were dominant at the beginning, but sellers prevailed in the end and closed the session near its opening price, creating a long upper shadow. The following chart shows what an inverted hammer looks like.
The engulfing pattern is a major candlestick pattern, which signals a possible reversal of the trend. It can be both bearish and bullish, depending on where the pattern forms and the combination of candlesticks involved. A bullish engulfing pattern forms at the bottom of a downtrend, with the second white candlestick totally engulfing the first black candlestick. It’s mandatory that the white candlestick’s body totally wraps around the first black candlestick’s body. A bearish engulfing pattern forms at the top of an uptrend, with the black candlestick’s body totally engulfing the previous white candlestick’s body. Examples of both the bullish and bearish engulfing patterns are shown on the following picture.
The Dark Cloud Cover
The Dark Cloud Cover is a top reversal, multiple candlesticks pattern. It is formed by two candlesticks of opposite colors. The second black candlestick opens above the prior white candlestick’s high, and then closes within the first candlestick’s white body. The more it penetrates into the white candlestick, the greater is the importance of the reversal formation. Some argue that the black candlestick needs to penetrate at least 50% into the prior white candlestick. An example of the dark cloud cover pattern is shown on figure 1.3.
This formation reflects that after a session where buyers dominated (the white candlestick of the formation), in the second session the price opened even higher, after which sellers regained their power and outperformed the buyers. In this situation, the buyers are not as much convinced in their long position as they were before. This is a signal that the uptrend could end and reverse. But bear in mind that the engulfing patters are more dominant than the dark cloud cover patterns. If the second session’s black body of the dark cloud cover pattern would totally cover (engulf) the prior white body, a bearish engulfing pattern would form.
The Morning Star
The morning star consists of three candlesticks, and is a bullish reversal pattern. The morning star appears after a downtrend, with a small candlestick forming with a gap away from the previous session’s close. The small real body of the candlestick represents an equilibrium between supply and demand, and a downtrend will likely reverse under such conditions. The third white candlestick of this pattern closes deep inside the first black candlestick’s real body. The following picture shows the morning star pattern.
The Evening Star
The evening star is the opposite formation of a morning star. It is a bearish reversal pattern, consisting of three candlesticks. The first of them is a white candlestick, which forms after an uptrend. This is the first candlestick of this pattern. Then, a small real body candlestick forms with a gap away from the first session’s close price. This is the evening star of our pattern. It signals that the uptrend might be over, and that a reversal is probably ahead. The third candlestick has a black body and closes deep inside the first session’s body. The next picture shows an evening star pattern.
Japanese Candlestick Cheat Sheet
There are a lot of Japanese candlestick patterns, and it might be hard for you to remember all of them. That’s why we will give you an overview of all the major and minor candlestick patterns, so you can easily identify them on the chart. The following cheat sheet will help you with this.