There are many different types of reversal candles so in this section we are going to show examples of all sorts of reversal candles. Most of these reversal candles involve a certain process to develop and the candle just illustrates how that process took place.
The process of a downtrend reversal candle:
1st. The candle goes under the prior candle low.
2nd. The candle goes back above the candles low.
3rd. The candle closes above the prior candles low.
A hammer bottom candle can lead to a reversal of a downtrend to a start of an uptrend. Traders often will hunt for these in a stock that is in a downtrend or pullback. Once the stock makes one of these candles traders will buy in and use the hammer bottom low as their stop loss. A hammer candle will have a long bottom wick, normally much longer than the body of the candle.
A piercing pattern is done with heavy volume, like any reversal candle. Basically the stock gaps under the previous days low but then gets bought up and closes above prior days low giving us a nice green candle that pierced through most of the prior candle.
The process of uptrend reversal candle:
1st. The candle goes above the previous high.
2nd. The candle goes back below the prior candle high.
3rd. The candle closes under prior candles high.
A shooting star candle that can result in a reversal from an uptrend to a downtrend. It will have very high volume also. A trader who wants to trade a shooting star will get short and use the shooting star’s high as their stop loss. A shooting star will have a very long wick on the top, normally much longer than the body of the candle.
Dark cloud cover is a pretty unique name and sounds very scary and thats because it really can signal that a stock that was once in an uptrend could quickly reverse course. A candle like this involves high volume and that is the important difference between this candle and an exhaustion gap. Many people confuse the two candles very often, the important distinction to make between the two is the volume on the day because an exhaustion gap will have very light or relatively average volume where as a stock that shows dark cloud cover will have high volume indicating that many people are dumping shares at the highs.
Remember this is just a watchlist and do not guarantee to be profitable trades. Use your own judgment when making the trade.
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