Reversal Candlestick Formations

• Definition: Candle formations that signal potential turning points in trend, most effective at key support/resistance zones.

• Why it Matters: Helps identify exhaustion and sentiment flips before structure shifts.

• When to Use: Only in context (VWAP, S/R, Playbook levels). Never in isolation.

• Key Patterns:
Hammer / Inverted Hammer – bullish reversal at lows.
• Appearance: Small body, long wick (2x body). Forms at bottom of downtrend.
• Meaning: Sellers pushed down but buyers absorbed and reversed.
• Trade: Long after bullish confirmation candle. Stop below hammer low.
Shooting Star – bearish reversal at highs.
• Appearance: Small body, long upper wick. Forms at top of uptrend.
• Meaning: Buyers lost control, sellers pressed back.
• Trade: Short after bearish confirmation. Stop above high.
Engulfing (Bullish/Bearish) – sentiment flip candle.
• Bullish Engulfing: Large green candle engulfs prior red → buyers seize control.
• Bearish Engulfing: Large red candle engulfs prior green → sellers seize control.
• Trade: Enter after engulfing close. Stop beyond engulfing extreme.
Morning / Evening Star – 3-candle reversal sequences.
• Morning Star (Bullish): Red → indecision → big green closing above midpoint of first.
• Evening Star (Bearish): Green → indecision → big red closing below midpoint of first.
• Trade: Enter on 3rd candle. Stops beyond pattern low/high.
Doji – indecision, needs confirmation.
• Appearance: Open ≈ Close → small/no body.
• Meaning: Neither side in control; reversal risk high depending on context.
• Trade: Enter only after confirmation candle.
Piercing / Dark Cloud Cover – 2-candle reversal signals.
• Piercing (Bullish): Green candle closes above midpoint of prior red → buyers regaining control.
• Dark Cloud (Bearish): Red candle closes below midpoint of prior green → sellers regaining control.
• Trade: Enter on second candle close.

• Execution: Always wait for confirmation candle. Stops placed beyond pattern extreme.

• Invalidation: Trading mid-range, ignoring level context, or entering without confirmation.

Trading Application

• Entry: Wait for confirmation candle after pattern.

• Stop Placement: Beyond the pattern’s extreme wick.

• Exit: Based on nearby support/resistance or Playbook target rules.

Conditions That Improve Odds

• Appearing at strong support/resistance, VWAP, or Playbook key levels.

• Confirmation volume aligned with direction of reversal.

• Broader market trend supports the reversal.

Conditions That Kill the Setup

• Choppy mid-range action with no clear level.

• Pattern without confirmation.

• Over-extended moves where stops are too wide for clean R/R.

Stats (General Tendencies)

• Win rate: Moderate, depends heavily on context.

• Reward-to-Risk: Strong if paired with structure + Playbook levels.