With dozens of bearish reversal patterns, beginners may feel a bit confusing when choosing the one to use for trading. To make your life easier, we decided to narrow that list down to several most popular bearish candlestick patterns featuring detailed explanations and market characteristics.
Before we get to our top 3 list, we want you to consider several important guidelines that refer to bearish reversal patterns. First of all, all of them require confirmation to avoid false signals. Secondly, they all must be formed during the uptrend. Last but not least, traders should use them considering other aspects and tools relating to technical analysis.
What Is Bearish Reversal?
A bearish reversal occurs within an existing uptrend at least for a short period (does not generally have to be a major uptrend). If it lasts for the last few days, it may be considered an uptrend. In case of a downtrend, bearish patterns will only be able to confirm the selling pressure within continuous patterns.
To ensure the uptrend, traders may benefit from several simple methods. They may include utilizing moving averages as well as through and peak analysis. When deemed in the uptrend, the security usually follows several crucial conditions:
- It is traded above the 20-day EMA.
- Through and reaction peaks are always higher if compared to the previous ones.
- A traded security is always above the trendline.
Those are only a few methods to identify the uptrend. However, other criteria can be taken for consideration depending on a preferable trading tactic and style. Now, let’s get to our list of the top 3 bearish reversal patterns.
1. Bearish Shooting Star
The pattern comes with a blue-colored body and Inverted Hammer followed by the interval. The pattern has a small body with a long upper shadow. Some may take it for the Bullish Inverted Hammer. However, the pattern is different, as it delivers a bearish reversal signal when occurring during the uptrend.
How to identify on the chart:
- The pattern occurs during the existing uptrend.
- The pattern comes with a blue-colored body during the first day.
- The next day, traders can spot a smaller body located at the trading range lower end. At this stage, it does not matter what color the candlestick has.
- During the second day, traders are supposed to observe a shadow at least two times longer than the body.
- It has no or minor lower shadow.
Because the pattern generally occurs during the bullish uptrend, it usually makes bulls feel uncomfortable, as the buying interest is witnessing a rally keeping bulls unable to succeed when sustaining that rally, especially considering the price closes at or near the day low.