- Bullish/Bearish Engulfing Patterns
- Trading Bullish And Bearish Engulfing Patterns
- Bullish/Bearish Pin Bars
- How To Trade Pin Bars
One of the toughest tasks we face as traders is timing when and where large reversals will begin.
We all want to get into those massive trends that last for weeks and weeks, of course we do we. But accomplishing that is easier said than done, especially for new traders who lack experience in the markets.
Luckily, I’m here to help…
In this post, I’m going to teach you 5 powerful reversal patterns.
These 5 patterns will help you spot when and where a reversal could take place, both in the short term (i.e small reversals) and the huge long-term trend reversals that last for days, weeks, or months.
Ready to get started? Let’s jump in…
Overview – What Are Reversal Patterns?
In forex, reversal patterns are chart formations that appear when the underlying psychology of the market signals price should move in the opposite direction.
If price is trending higher, and traders believe it should move lower, a reversal pattern may form.
Their selling will create a pattern that signals a reversal to the downside.
– A pattern you can use to enter the reversal.
The pattern may resemble a simple structure or shape (like a triangle) or may appear as one–four candlesticks appearing in a set sequence.
Many different reversal patterns exist in forex, all with their own rules and guidelines for trading. The pattern may resemble a simple structure or shape (like a triangle) or may appear as one–four candlesticks appearing in a set sequence.
Two Types Of Reversal Patterns
Reversal patterns come in all sorts of crazy shapes, structures, and variations – crab pattern, anyone? However, ALL patterns fall under one of two categories depending on how and why they form in the market.
And Candlestick Patterns.
Candlestick patterns are the most frequent type– you’ve probably seen these before.
They appear when one – four candlestick form in a specific sequence, creating a small pattern, and are best used either as entry signals combined with other technical techniques or early warning signals price could be about to reverse.
The other type, chart patterns, are much rarer than their candlestick counterparts and usually generate significantly larger reversals.
These patterns appear when multiple candlesticks form a simple shape or structure. Examples include the head and shoulders pattern, triangle pattern, and double bottoms and tops.
Strongest Candlestick Reversal Patterns
An enormous number of candlestick patterns form in forex.
With so many patterns, how’d you know which to watch for and trade?
Well, fear not…
Because now I’m going to detail the only two candlestick reversal patterns worth watching for.
These patterns make fantastic reversal signals on their own but become even more powerful when combined with other technical points, like supply and demand zones, support and resistance levels, and big round numbers.
Here’s pattern #1…
Bullish/Bearish Engulfing Patterns
What better way to start than with engulfing patterns.
Perhaps the most important pattern (chart or candlestick) in forex, engulfs initiate some of the biggest reversals around, making them extremely useful entry signals into reversal trades.
Engulfing patterns form when two candlesticks appear one after the other, with the second candle always being opposite and wrapping around the first. That’s why it’s called ‘engulfing’ – because the 2nd candle engulfs the first.
Engulfing patterns come in two variations:
Bullish engulfing patterns, and
Bearish Engulfing patterns.
The bullish engulf always signals a reversal to the upside – watch for these during down-moves.
The pattern forms when a large bullish candle forms after a small bearish candle and always closes higher.
No close higher, no bullish engulf.
It’s as simple as that.
Onto bearish engulfs now…
A bearish reversal pattern, the bearish engulf signals a reversal to the downside.
Like the bullish engulf, it forms with two candlesticks.
However, the first candle is always bullish, with the second being bearish.
For a valid pattern, the bear candle MUST close lower than the bull candle.
Trading Bullish And Bearish Engulfing Patterns
Engulfing patterns provide quick entries into big reversals. You use them on their own or in combo with other technical points of significance (recommended)
To trade the patterns, follow these 3 steps…
Step 1: Wait for the engulf to form.
This may sound obvious, but it’s crazy how many people get it wrong.
Before you trade any engulf, make sure the pattern is really an engulf. I can’t stress how important this is. Check if the second candle engulfs the previous candle. Does the candle wrap around and close below (or above for bull engulfs) the previous candlestick?
If it does, that’s a valid engulf.
If it doesn’t, move on…
The pattern must be something else.
Here’s what a correct engulf looks like…
Step 2: Wait for the engulf to close.
One of the biggest mistakes people make with engulfing patterns – and candlestick patterns in general – is entering when the pattern is still forming.
Before you trade an engulf, WAIT for the pattern to close.
DO NOT enter when the engulf is forming; wait for the next candle to open.
Traders forget how quickly price can change in forex. An engulf may look dead set to form one minute but morph into something totally different the next. If you enter and the pattern changes, most of the time, you’ll lose money.
The only way to know for sure if a pattern has formed is by waiting for it to close – i.e, by waiting for the next candle to open.
You can see this below…
Step 3: Enter a trade and place a stop loss
And finally, it’s time to enter a trade and place a stop loss.
Entering engulf trades is easy enough – wait for the pattern to close, then enter using a long/short market order. It is possible to use limit orders too, but I recommend sticking with market orders – gets you in much faster.
Price usually takes off after engulfs form, so you want to get in ASAP.
For the stop loss, place it above or below the high/low of the pattern.
For bearish engulfs, place it above the high.
For bullish engulfs, place it below the low.
Taking profits comes down to personal preference. I usually take profits whenever a new swing high/low forms, but the choice is up to you – use whatever you fancy.
Key Points To Remember:
1: Engulfing patterns are only valid if the second candle engulfs the first.
That means the 2nd candle MUST close lower than the first (for bearish engulfs) or close higher than the first (for bullish engulfs).
If price doesn’t close lower/higher, the pattern is NOT an engulf.
2: Engulfs work best combined with other technical points.
Like all patterns, engulfs give stronger reversal signals when forming at important technical points. I like to use them with supply and demand zones, but they perform great at support and resistance levels and other TA points, too.
Bullish/Bearish Pin Bars
Ah, the pin bar…
Few patterns can match this little tyke!
The pin bar is easily one of the most important candlestick patterns in forex, and you’ve probably seen them form many times without realizing.
Here’s how it looks…
Known for its easy-to-spot appearance, a pin bar forms when price moves one way but then quickly moves the other. The resulting candlestick shows a long upper or lower wick with a tiny body and indicates price will continue moving the other way.
Like all patterns, pin bars come in two variations:
Bullish pin bars,
Bearish pin bars.
Bullish pin bars signal a reversal to the upside and form during down-moves.
Bearish pin bars indicate a reversal to the downside; these appear during up-moves.
While pin bars come in two variations, 4 types of pin bars actually exist. These all look the same but indicate different reversals depending on where they form. The two seen above are called the shooting star (left) and hammer pin bar (right).
These are the ONLY two pin bar variants to concentrate on.
DO NOT trade the inverted hammer or upside-down star – the other types.
These two patterns give extremely inconsistent reversal signals. If you take them, more often than not, you’ll lose money or make a wrong trading decision – like taking profits too early or closing a profitable trade.
Concentrate on the hammer and shooting star; they provide the best reversals signals.
Now, how to trade pin bars…
How To Trade Pin Bars
Pin bars are one of the easiest reversal patterns to spot and trade, which makes them perfect for beginners wanting simple signal to enter trades with.
Let’s go through a quick example…
Step 1: Wait for a pin to form.
Of course, before you can trade a pin bar, one must form on the charts.
Pin bars form when price moves one way then makes a sudden move in the other. This movement causes a candlestick with a long upper or lower wick to form with a small body. To find a pin bar then, look at the wick…
If a candle has a long wick (or tail, as some call it), and a small body.
Chances are, it’s a bullish or bearish pin bar.
In our example, a bearish pin bar forms – see the wick?
The wick forms above the body and sticks out from the surrounding price action. That tells us a bearish pin bar exists, and price may now soon reverse.
Onto step 2 now…
Step 2: Wait for the pin to close.
Once a pin bar forms, the next step is to wait for price to confirm the pattern.
As good as they are, pin bars DO NOT automatically indicate price will reverse. Wait for more confirmation and then enter. This confirmation comes when the pin bar closes and the next candlestick opens.
If you enter before the pin closes, it could change into a different candle.
If that happens, you’ll probably lose money, so wait before entering.
Even with confirmation, pin bars can and will still fail.
To put the odds in your favor, watch for pins at important technical points, like supply and demand zones or support and resistance levels. They increase the probability price will reverse after the pin bar forms.
Step 3: Enter a trade & place stop loss
If the above steps check out, you can enter a trade and place a stop loss.
Entry into a pin bar trade comes ONLY when the pattern has closed via the next candle opening, as I mentioned in step 2.
So, in our example…
We only enter once the pin closes and the bull candle opens.
The stop on a pin bar trade always goes either above or below the wick.
For bearish pins, it goes ABOVE the wick.
For bullish pins, it goes BELOW the wick.
As far as taking profits and moving the stop is concerned… it’s really up to you.
For me, I move my stop to breakeven once price makes a new low or high. By that time, price has usually moved far enough to confirm the reversal, meaning it unlikely to move back to the entry – the pin bar itself.
Key Points To Remember:
Before we move on, here’s a few important points to remember when using pin bars in your trading…
#1. The best pins always feature a long wick.
If you want to trade the best pin bars, check for a long wick. These pins usually result in large reversals, since the long wick reveals significant buying or selling came in when the pin bar was forming.
#2. Try to understand why a pin bar formed.
A big mistake traders make with pin bars is they assume all pins form for the same reason. That’s not actually the case. Pin bars form because of the big players taking profits, closing trades, or entering trades.
What type of pin forms plays a major role in whether price reverses.
If a pin forms due to profit-taking, that’s not going to create a big reversal.
The big players will want price to continue in the same direction after taking profits.
The best pins form due to the big players entering trades – or closing trades on occasion. To find these pins, you must understand the behavior of other traders and what action led to the pin forming.
Sadly, we haven’t got time to explain this today.
However, you can learn all this and more in my book…
Pin Bars Revealed
Strongest Reversal Chart Patterns
And now, let’s switch over to chart patterns.
Chart patterns are far rarer than candlestick patterns. That may sound like a negative, but it’s actually a good thing! Their rarity and longer construction time means they usually generate large, market-changing reversals, making them amazing signals to watch for.
If you see one of the following patterns appear, get ready…
A trend change or major reversal could be beginning.
Here’s pattern #1…
Double Bottom & Double Top (Best)
Perhaps the most obvious choice, the double bottom and double top are two of the most powerful reversal patterns in forex – and they appear often to boot!
These patterns form when price produces two bottoms or two tops. The bottoms/tops usually appear at support or resistance and form at relatively similar prices, indicating a double rejection of the S or R level.
Double bottom and double top patterns are created from the big players enter two positions at separate but similar prices.
In forex, the big players can rarely enter their trades at a single price.
To enter, THOUSANDS of opposing buyers or sellers must be available.
That’s rarely the case, so the big players must compensate. How?
By splitting their trades into smaller chunks and placing them at different times but at similar prices. That replicates them having one trade entered at a single price, which is what they’d want if enough buyers or sellers were free.
On a chart, that sometimes appears as a double bottom/double top.
The pattern shows the big players entering their small trades.
Each bottom/top is a trade, entered at different prices.
Trading The Double Top/Double Bottom Patterns
For the most part, double tops and double bottom patterns are pretty easy to trade – especially compared to other chart patterns.
Wait for the pattern to form,
See if price breaks the neckline,
Then enter a trade.
That said, it is important to keep a few key points in mind to trade the patterns correctly.
Let’s run through a quick example…
(we’ll use a double top in this case)
Here’s a double top that’s formed on the 1-hour chart of Eur/Usd.
To trade this pattern, we follow the steps below.
FIRST: wait for the pattern to form.
A double bottom completes once the second top has fully formed, i.e price moves lower and leaves a top in its wake. This top can be higher/lower than the first top, but only slightly.
If the second top forms well off the first, that’s not a real double top.
NEXT: See if price breaks the neckline.
On its own, a double top doesn’t indicate a reversal.
You must wait for confirmation.
And that comes when price breaks the neckline of the pattern.
The neckline is the support level (or trendline) created by the swing low leading to the second top.
When price breaks this point, the pattern is confirmed.
The market now has a high probability (but not certain) of continuing to fall.
FINALLY: Wait for entry signal to appear.
To enter a double top trade, wait for a PA signal when price re-tests the neckline break. Some people tell you to enter immediately after the neckline breaks, but it’s safer to wait for price action instead.
After you enter a trade, place your stop ABOVE the highest top.
Price probably won’t return here, but better to be safe than sorry.
Once price has fallen well below the neckline, you can move the stop to the pattern high to reduce risk and lock in profits.
To trade the double bottom, follow these same steps.
Just replace “top” with “bottom” and you’re go to go.
Everything else is the same – entry, taking profits, etc.
Key Points To Remember:
#1. The 2nd top/bottom DOES NOT need to be exact.
While the 2nd tops or bottoms in a double pattern must be relatively inline, they don’t need to be exact; they can form slightly above or below. It’s only when the 2nd top/bottom forms well away from the initial top/bottom that the pattern becomes invalid.
There aren’t any hard rules that dictate this, so use your eyes and experience.
#2. The higher the timeframe, the bigger the reversal.
This isn’t specific to the double top/bottom, but it’s still super important to know. The higher the timeframe a chart pattern appears on, the bigger the reversal will usually be. And usually, the more accurate they’ll be too.
Three Drives Higher/Lower
This isn’t a ‘chart pattern’ per se, but it can help you time the market and make more informed trading decisions.
The three drives lower/high pattern forms when price makes three drives (swings) in the same direction, culminating in a reversal, retracement, or consolidation. The drives occur because of how herd psychology works in forex.
Here’s an example…
Price is falling, so most traders are shorting right now.
We see price shoot higher, creating a new upswing.
What are most traders doing now, do you think?
Are they still short or entering long?
Probably 50/50, right?
Many are still shorting due to the previous downtrend, but the new upswing has caused many to enter long because price now looks bullish.
Price then shoots higher again…
What do most traders do now?
Do they stay short?
No, most now enter long – price looks way more bullish.
Before, price still seemed bearish – due to the prior down-move.
With the new upswing, the market appears far more bullish. The prior down-move isn’t even visible anymore. So most traders would now enter long.
After a consolidation, we see another move higher…
Again, what are most traders doing now?
Going long!! The market is shooting higher!
By the time we see the third swing, price has risen so far that most traders would be entering long to capture what they think is a continuation. This when price will either reverse, retrace, or begin consolidating.
By now, the market’s become too obvious…
Everyone can see price is breaking higher; it’s clear as day!
The big players must create a counter move to confuse everyone again, so they can re-position and/or enter the other way.
In our case, we see a deep retracement.
This confuses the longs, forcing many to close.
That allows the big players to buy at better prices,
Initiating the next up move we see.
The three drives higher/lower isn’t technically a chart pattern, so you can’t trade it as you would the other patterns on this list. It is, however, useful for gauging when price might reverse, retrace or consolidate.
Consider the following scenario…
After rising for a while, you notice the three drives higher pattern. The first drive initiated the reversal, with the second pushing the market higher.
From the pattern, you know another drive higher is now likely.
You also know price will reverse, retrace, or consolidate once the drive terminates.
Now, if look at the image again…
You can see a supply zone sits not too far away from the current price action.
This zone marks a point where price has a high probability of reversing.
If we see another drive higher, it’s likely price will reverse at this zone.
We should watch for an entry signal and see if we can get in.
And, what happens…
A huge bearish engulf forms inside the zone, and we see a large reversal.
See how useful understanding the three drives can be now?
While they don’t provide exact entry signals like typical chart patterns, they do give you a sense of positioning in the current move. By combining that with other TA points, you can accurately gauge when and where price may reverse, as we did in the example.
Try this yourself… you’ll soon see how useful (and powerful) understanding the three drives higher/lower patterns can be.
Key Points To Remember:
1#. The middle drive usually lasts the longest.
In the three drives pattern, drive #2 will usually last the longest and cause the biggest price change. That’s the point when most traders realize a large new swing is underway and jump in to capture the move.
#2. Price will consolidate, retrace, or pause after each drive.
The three drives pattern always culminates in a large reversal, retracement, or consolidation. However, each drive itself will always result in a consolidation, retracement, or reversal. Use the this to time when to take profits and/or add to positions.
Multiple Highs/Lows Forming At Similar Prices
More of a structure than a pattern, seeing multiple swing highs or lows to form at similar prices is a powerful signal a gigantic reversal could be building. And it’s down to how the big players must enter their trades.
Remember, the big players can NEVER enter a giant trade in one go.
They never have enough opposing traders buying or selling.
Instead, they must split the trade into smaller chunks.
By splitting the trade, the banks lessen the number of opposing buyers or sellers required.
Rather than need tens of thousands to take the opposite side, now they only need a few thousand. That makes it much easier for them to enter the giant trade.
Enter one small trade,
Let price move a little,
Bring it back a short time later.
Then enter another small trade!
Rinse and repeat!
On a chart, that process looks like this…
Multiple swing lows (or highs) appearing at similar prices!
The lows (highs in our case) form whenever the banks enter a small trade. That’s what each high represents; a small buy trade placed by the banks.
Now, notice how the lows all form at similar prices?
That’s not a coincidence – it’s part of the plan.
By entering each trade at a similar price, the banks replicate one trade placed at a single price – their ideal option if enough orders were free. Each trade generates roughly the same profit and requires similar management; they must take profits at the same time, for example.
That’s the benefit of entering multiple small trades…
It makes big trades way more manageable.
That’s why the big players split their trades!
This is all good to know, sure, but how can it help our trading?
How can we use this information to our advantage?
Well, think about it…
If multiple highs/lows forming at similar prices indicates the banks are splitting their trades, that suggests a large reversal could be near.
Why else would they split a giant trade into smaller, more manageable positions?
We can use this to help predict big reversals…
If we see price bottom out around a major technical point and multiple swing lows form at similar prices, we know a large reversal might be building. Giving us a chance to get in early or close any open short trades we had open.
Pretty nifty, huh?
Reversal patterns come in a wide variety of shapes, sizes, and structures.
The 5 (or 6 counting’s the bonus pattern) seen today, however, are the best of the best – the ones you must watch for when trading. From now, keep your eyes peeled for these patterns.
You’ll be getting huge reversals in no time.
That, I can assure you.