Top 3 Bearish Reversal Patterns to Look for in 2021

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:

  1. The pattern occurs during the existing uptrend.
  2. The pattern comes with a blue-colored body during the first day.
  3. 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.
  4. During the second day, traders are supposed to observe a shadow at least two times longer than the body.
  5. It has no or minor lower shadow.

Interpretation:

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.

2. Bearish Harami

It has a blue-colored body while the candlestick is red and small absorbed by the blue one.

How to identify on the chart:

  1. The pattern occurs during the existing uptrend.
  2. The pattern comes with a blue-colored body during the first day.
  3. On the second day, a smaller red body is formed totally absorbed by the bigger blue one.

Interpretation:

When occurring on the first day featuring a bigger blue-colored body, it may support the market bullishness. However, the situation changes the next day. Prices generally open and close at day’s lows making bulls doubt whether the market is strong enough, as the trend suddenly starts deteriorating.  

3. Bearish Engulfing

Unlike the two previous bearish reversal patterns, this one appears with a larger red-colored body that appears on the second day and engulfs the prior-day smaller blue-colored body that makes its debut within the first day’s uptrend. Although the red body absorbs the blue one it does not necessarily have to engulf the lower or upper shadow.

How to identify on the chart:

  1. The pattern occurs during the existing uptrend.
  2. A smaller blue-colored body can be spotted on the first trade during the bullish uptrend.
  3. On the second day, the bigger red-colored body is formed to completely absorb the blue one.

Interpretation:

When the blue body makes its debut on the first day during the uptrend, low volume buying positions can be spotted. A new gap at new highs takes place the next day when the bigger red-colored body appears on the chart. At this point, the bullish uptrend is about to lose momentum making it possible for the bears to keep the market under control for the rest of the day. It is also a sign of the trend’s reversal. 

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.