The LCG Blog

Light and informative stories from LCG and the world of online trading.

CFD trading is high risk and may not be suitable for everyone.
Japanese Candlesticks to spot market reversals

Candlestick reversal patterns are one of the most commonly used technical trading signals in forex trading. While they do not represent a magic bullet to forex trading millions, over time candlestick reversal indications have been found to be an often reliable indicator of trend change.

Candlestick charting, originating in Japan over 300 years ago, only became popular in the Western world in the last half century. However, in that time span, candlestick charting has largely replaced bar charting as the technical trader’s tool of choice. The major advantage that candlestick charting offers is that the candlestick representing whatever given time frame (hourly, 4-hour, daily, etc.) provides a much clearer visual representation of the relation between the opening and closing prices of the time period – i.e., whether price ultimately closed higher or lower for the period. They simply make it easier for traders to see the essential trading action for each period. Candlestick charting also offers a further advantage by virtue of the fact that there are clearly defined candlestick patterns recognized as signals of potential market trend reversal.

The Pin Bar

One of the most widely recognized candlestick reversal patterns is the pin bar. The pin bar is also referred to as the hammer pattern when it occurs in a bearish trend, signaling a possible bullish market reversal, and as the shooting star pattern when it occurs in an uptrend, signaling a potential reversal to the downside.

The above image shows a hammer pin bar that indicates a potential market reversal from downtrend to uptrend. The key element of the pin bar is the elongated tail. The long tail is formed by bears aggressively pushing price significantly lower during the time period – but the fact that the closing price is back up near the opening price indicates that the attempt to push price lower was ultimately strongly rejected. The initial drop in price is followed by a stronger move to the upside that brings price back near, or even above, the opening price. The “message” of the hammer candlestick pattern is that downside momentum has been exhausted and that bulls have now strongly entered the market to attempt to push price higher.

When the hammer pin bar pattern is an accurate indication of trend reversal, price does not usually subsequently go any lower than the low of the pin bar candlestick. Therefore, traders who buy based on this reversal indication frequently place a stop-loss order just a pip or two below the low of the pin bar.

The shooting star pattern – which indicates a potential market reversal to the downside – is simply the hammer pattern turned upside down. There is a long tail on the topside of the candlestick body, which represents a failed attempt to push price higher, rather than on the bottom side of the body as is the case with the hammer pattern.

Engulfing Candlesticks

Engulfing candlesticks are another candlestick pattern that indicate a possible market reversal. A bullish engulfing candlestick, indicating a possible reversal to the upside, is one where the body of an up candlestick (one where the close is higher than the open) completely encompasses the body of the immediately previous down candlestick. Conversely, a bearish engulfing candlestick that may signal the end of an uptrend completely encompasses the immediately previous up candlestick.

The 30-minute chart of GBP/USD below shows a large bullish engulfing candlestick six candlesticks in from the left-hand side of the chart, that occurs on April 12th – after which the market did move strongly to the upside.


The Doji

A doji candlestick is formed when the opening and closing price of a candlestick are identical, so that the candlestick has essentially no body, only upside and downside tails that extend on either side of the opening/closing price. Here is what a doji candlestick looks like:

The common interpretation of the doji pattern is that it indicates indecision in the market. Price moves both higher and lower, but ultimately settles right back where it began. Indecision in a market often precedes a trend change, and that’s why the doji pattern is often considered an indicator of possible trend change, although not as strong an indicator as the pin bar or engulfing candlestick patterns.


Candlestick reversal patterns can be key technical indicators of a possible trend change, either from uptrend to downtrend, or vice-versa. When such reversal patterns occur, traders look to other technical indicators – such as moving averages, pivot points, and volume – for confirming indications of a market reversal.

Any information provided is for educational purposes only and does not take into account your personal circumstances (for example your available funds and risk appetite). CFD trading carries a high level of risk to your capital and can result in losses that exceed your initial deposit. They may not be suitable for everyone, so please ensure that you fully understand the risks involved. You should seek independent financial advice, if you feel it is necessary or appropriate.


The 3 biggest factors for choosing of broker
The 3 biggest factors for choosing of broker   Especially when you first start trading, but even as an experienced trader there are 3 boxes that any online broker should tick. There are many considerations for your choice of broker. These might include tradi… Read more


Client sentiment and the use of data in trading
Data is a bit of a dirty word at the moment. The Cambridge Analytica and Facebook scandal has put a spotlight on consumer data and forced every one of us look carefully at how our online data is shared. But what about the use of data when it comes to trading?… Read more


The Basics of Harmonic Patterns & Harmonic Trading
Harmonic Trading is a way to analyse financial markets by recognising specific price patterns and the alignment of Fibonacci ratios to determine potential reversal points. This methodology assumes that trading patterns or cycles, like in life, repeat themselv… Read more


How to Avoid Chasing the Market
Chasing the market – jumping in after a market has already made a substantial move in one direction or the other – is a common way traders come unstuck. It is one of those “classic trading mistakes” that professional (winning) traders religiously avoid. A Com… Read more


Moving a Stop-loss to Protect Profits in Winning Trades
Once a trader has executed a trade, and it becomes profitable, his primary goal is to keep as much as the profit as possible. The last thing a trader wants is to see profits drop, vanish or turn into a loss. To prevent this from happening, the trader can move… Read more


Pros & Cons of CFDs
What are CFDs? CFDs – short for ‘Contract For Difference’ are a popular form of derivatives trading. The word ‘derivatives’ can have some spooky connotations – weren’t they what caused the financial crisis in 2008? Yes and No. Complicated structured products… Read more


Three Ways to Set Profit Targets
Learning how to wisely manage and exit trades is critical to trading success. Unfortunately, it is a skill often neglected or overlooked. This article will give you three solid strategies for setting profit targets. How many times are traders confronted with… Read more


Japanese Candlesticks to spot market reversals
Candlestick reversal patterns are one of the most commonly used technical trading signals in forex trading. While they do not represent a magic bullet to forex trading millions, over time candlestick reversal indications have been found to be an often reliable… Read more