Candlestick Patterns Which Can Predict a Reversal

When we look at candlestick pattern names, you will discover they tend to have unconventional names. These names are actually very accurate as they describe the sentiment the candlestick pattern is representing. Remember, candlesticks tell us the story of what’s happening between the bulls and the bears on any given trading day. Some of the main candlestick patterns which predict a reversal pattern are spinning tops, shooting stars, and hammers.

Spinning Top Candlesticks

When we look at candlestick pattern names, you will discover they tend to have unconventional names. These names are actually very accurate as they describe the sentiment the candlestick pattern is representing. Remember, candlesticks tell us the story of what’s happening between the bulls and the bears on any given trading day. Some of the main candlestick patterns which predict a reversal pattern are spinning tops, shooting stars, and hammers.

Spinning top candles are a broad classification of candlesticks that fit the following criteria:

  • Small real body
  • Real body may be black or white
  • May have an upper, lower, or no shadow

This is what a spinning top looks like:

The name spinning top comes from the idea of balance. Like the child’s spinning top toy, the candlestick shows there is a balance of buyers and sellers. A spinning top toy must spin in balance. Once it gets out of balance, it falls over. In a similar fashion, when the buyers and sellers are somewhat agreed on price, the price action slows, and we have a “balance” in the market.

Balance in the marketplace reflects that a stock is at a turning point, and the old guard is preparing to shift. Very often, a spinning top pattern marks the high day of an upswing, or the low day of a bear swing.

A spinning top, black or white, at resistance is a bearish signal, and a spinning top, black or white, at support is a bullish signal. Pull up a stock you like to trade and take a look at its history. The vast majority of swing points include one or more spinning tops. It’s almost uncanny when you start to notice it.

Spinning tops very often mark the very first day of a swing reversal. So, when you see a spinning top, you should take note, because this may be the very day of the turn.

Shooting Stars and Hammers

Spinning tops are great candles to recognize because they are very often the first candle in a swing reversal. The sooner you can recognize that swing, the sooner you can either enter a new position or get out of an existing position. So, it’s safe to say spinning tops are one of the most valuable candle patterns to recognize. There are a few specific types of spinning tops that are even more telling.

Shooting Stars

The shooting star candlestick is a specific type of spinning top. It’s named a shooting star because it looks like a star falling from the sky, and that’s what the trade is about to do, fall.

Here are the details of the Shooting Star:

  • Occurs after an upswing
  • Has a small real body
  • Body color may be black or white
  • Has a long upper shadow that is 2-3x the size of the real body
  • Very little or no lower shadow
  • A strong bearish reversal signal

Here’s what a shooting star looks like:

There are two criteria that really make this candlestick particularly bearish:

  • It’s after an upswing and at a known resistance is even better
  • The long upper shadow

The long upper shadows are a strong bearish signal in and of themselves because they reflect buying pressure that could not sustain through the day, instead the bears pushed the buyers back down. Even if this candle has a white candle body, it is a very bearish signal because of the long upper shadow.

Hammers

The hammer candlestick is basically the inverse version of a shooting star. But instead of occurring at resistance, it will occur at support. It’s named a hammer because it looks like a hammer, and it is said that the stock is hammering out support.

Here are the details of the Hammer:

  • Occurs after a downswing
  • Has a small real body
  • Body color may be black or white
  • Has a long lower shadow that is 2-3x the size of the real body
  • Very little or no upper shadow
  • A very strong bullish reversal signal

Here’s what a hammer looks like:

There are two criteria that make this candlestick particularly bullish:

  • It’s after a downswing and at a known support is even better
  • The long lower shadow

Just like long upper shadows are a strong bearish signal, long lower shadows are a strong bullish signal. They reflect selling pressure that could not sustain through the day, and instead, the bulls pushed the sellers back. Even if this candle has a black candle body, it is a very bullish signal because of the long lower shadow.

On its own merit, a shooting star or hammer or any other candle is not a strong enough signal to actually reverse your position such as flipping from bullish to bearish. However, it is strong enough to adjust your stops and get out of the previous trade to protect your capital.

Very often, shooting stars and hammers are the actual high or low point of the swing. If you look at enough charts often you will see these candles marking the actual day of the swing.

Other Spinning Top Candles

The Shooting Star and Hammer are the most powerful spinning top candlesticks. They show the balance of power is shifting, and the long upper shadow, shooting star, and lower shadow, hammer, also put the weight of the momentum on the side of the opposite direction. But these candles are not the only specific classification of spinning tops as there are a few more worth noting.

The Hangman

The hangman candle is a very popular formation, probably because of the name. It looks like a hanging man. As the name suggests, it indicates this trade is hung. It is considered a bearish reversal signal because of the spinning top. The interesting thing about this pattern is that it is a poor predictor of market conditions. We have found it to sometimes lead to a swing reversal, but just as frequently the swing does not reverse.

Here’s are the details of the Hangman:

  • Occurs after an upswing
  • Has a small real body
  • Body color may be black or white
  • Has a long lower shadow that is 2-3x the size of the real body
  • Very little or no upper shadow
  • An “okay” bearish reversal signal

Here’s what a hangman looks like:

The spinning top part of this candlestick makes it a reversal signal. The fact that it must occur at a resistance, and it has a spinning top, would certainly lead one to believe it is bearish. However, the long lower shadow on this candle is a bullish signal. It shows the bears could not hang on, and the bulls are continuing to push forward. These mixed signals explain why the hangman, despite its name, is actually not a death wish for an upswing.

In practice, what we have found is the hangman often leads to maybe a sideways move, or it may be the first in a cluster of candles that ultimately lead to a reversal. We would suggest to tighten a stop a bit after a hangman, but we rarely panic when seeing one as they aren’t that strong of an indicator.

Inverted Hammer

The bullish version of the hangman is what we call an inverted hammer. It’s essentially an upside-down hammer which is found at support.

Here are the details of the inverted hammer:

  • Occurs after a downswing
  • Has a small real body
  • Body color may be black or white
  • Has a long upper shadow that is 2-3x the size of the real body
  • Very little or no lower shadow
  • An “okay” bullish reversal signal

Here’s what an inverted hammer looks like:

Similar to the hangman, the inverted hammer is a candlestick that sends mixed signals. The spinning top portion, occurring at support, is a bullish signal, but the long upper shadow is actually a bearish signal. Like the hangman, the inverted hammer is considered a bullish reversal signal, but in practice, it is not a strong reversal signal. Like its counterpart, this candle is best seen as part of a cluster, which may ultimately lead to a reversal, but on its own is not that strong of a signal.

​High Wave Candle

The High Wave Candle is a mix of everything. It’s a spinning top, but it has both long upper and lower shadows, and it shows downright confusion.

Here’s are the details of the High Wave Candle:

  • Has a small real body
  • Body color may be black or white
  • Has a long upper shadow and a long lower shadow
  • Bearish if occurring at resistance
  • Bullish if occurring at support

Here’s what a High Wave Candle looks like:

The high wave candle indicates confusion in the marketplace. If the spinning top indicates balance and indecision of the bulls and bears, the high wave indicates an all-out battle that no one seems to have won and for a high wave candle to be formed, something like the following must occur:

The candle opens the day, and in order to create the long lower shadow, at some point, the candle must have looked extremely bearish. But at another point in the day, the candle has evolved, and now the bulls are in control. At that moment the day is looking extremely bullish. Then by the end of the day everything returns to balance and it would appear no one has really won. While technically someone won this battle based on the candlestick color, the reality is we have a shifting of the guard that is occurring.

If this battle takes place at a resistance level, very often, the follow-through will be in favor of the bears. If this battle takes place at a support level, very often, the follow-through is in favor of the bulls.

​Check out this example:

By now, you should have a pretty decent understanding of the spinning top candle, and its power to predict a shift in momentum. If you take the time to study enough charts you will certainly see how this one candle and its specific varieties are probably at the center of more swing reversals than any other candle signal. It is definitely worth your time to learn how to identify these candles and to recognize them in the context of your trades.

As always, remember the location means the most. This candlestick in the middle of a move may mean nothing, but at a resistance or support may very well represent the very day a reversal is about to happen.

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