Reward 500 Tiger-coinsHi, tigers! Let’s start this week’s lessons! Candlesticks Part 2: Two-Candlestick Reversal Patterns
"Dark Cloud Cover" & "Piercing Pattern": The Midpoint Test
These patterns rely on the "50% Rule." For a reversal to be valid, the second candle must pierce at least halfway into the body of the first candle.
A. Dark Cloud Cover (Bearish Reversal)
Appearance: Occurs at a high. A strong green candle is followed by a red candle that opens above the high of the previous day (a gap up) but closes below the midpoint (50%) of the green body.
Market Logic: The market opened with optimism (gap up), but sellers stepped in aggressively, erasing more than half of the previous day's gains. This "cloud" casts doubt on the uptrend.
B. Piercing Pattern (Bullish Reversal)
Appearance: Occurs at a low. A strong red candle is followed by a green candle that opens below the low (gap down) but rallies to close above the midpoint (50%) of the red body.
Market Logic: Bears tried to push lower at the open, but "smart money" stepped in to buy the discount, driving the price up and invalidating the previous day's selling pressure.
"Engulfing Pattern": Strong Unilateral Reversal
This is a more powerful version of the Piercing/Dark Cloud patterns because the second candle completely overwhelms the first.
Appearance: The body of the second candle completely "eats" or covers the body of the first candle. (Shadows don't necessarily need to be engulfed, but the body does).
A. Bearish Engulfing (Top Reversal)
The Pattern: Occurs during an uptrend.
First Candle: A small bullish (green/white) body.
Second Candle: A large bearish (red/black) body that completely "engulfs" (covers) the body of the first candle.
Interpretation: This signals a dramatic shift in sentiment. Sellers have completely overpowered the buyers from the previous day. The momentum has swung decisively to the downside, suggesting that the uptrend is over and a decline is likely.
B. Bullish Engulfing (Bottom Reversal)
The Pattern: Occurs during a downtrend.
First Candle: A small bearish (red/black) body.
Second Candle: A large bullish (green/white) body that completely "engulfs" the body of the first candle.
Interpretation: This signals a resurgence of demand. Buyers have completely overwhelmed the sellers from the previous day. The selling pressure has been absorbed, suggesting that the bottom is in and an upward trend is probable.
Market Logic: The balance of power shifted completely in a single session. The previous trend (represented by the small first candle) has been totally overpowered by the new direction.
"Harami Pattern": Signs of Momentum Exhaustion
"Harami" means "pregnant" in Japanese. The large first candle is the "mother," and the small second candle is the "baby." This pattern indicates that the previous trend has hit a wall.
A. Bullish Harami (Bottom Reversal)
The Pattern: Occurs during a downtrend.
First Candle: Long bearish (red/black) body.
Second Candle: Small bullish (green/white) body entirely contained within the first candle's range.
Interpretation: This signals that selling pressure has evaporated. The bears could not drive the price lower, and buyers are beginning to step in. It often precedes an upward movement.
B. Bearish Harami (Top Reversal)
The Pattern: Occurs during an uptrend.
First Candle: Long bullish (green/white) body.
Second Candle: Small bearish (red/black) body entirely contained within the first candle's range.
Interpretation: This signals that buying momentum has failed. The bulls could not drive the price higher, warning of a potential pullback or decline.
C. Harami Cross (Severe Warning)
The Pattern: The second candle is a Doji (a cross shape where Open equals Close) rather than a small body, sitting inside the previous large candle.
Interpretation: This is a more potent signal than a standard Harami. It indicates that the market has shifted from "high conviction" to "total indecision" in a single session. It often marks a major trend reversal point.
"Thrusting Line": Sudden Counterattack Signal
This pattern resembles the Engulfing or Piercing patterns but differs in the depth of the second candle's move. It reveals an aggressive attempt to reverse the trend.
A. Bullish Thrusting Line (Bottom Attempt)
The Pattern: Occurs in a downtrend.
First Candle: Bearish (red/black).
Second Candle: Bullish (green/white) that opens lower but rallies to penetrate into the prior candle's body.
Interpretation: This shows sudden buying momentum trying to overwhelm sellers.
Technical Note: If the green candle closes above the 50% midpoint of the red body, it is a strong reversal (Piercing Pattern). If it closes below the midpoint, it is a weaker signal (Thrusting Line), suggesting the bulls might not yet have enough power to fully reverse the trend.
B. Bearish Thrusting Line (Top Attempt)
The Pattern: Occurs in an uptrend.
First Candle: Bullish (green/white).
Second Candle: Bearish (red/black) that opens higher but plunges into the prior candle's body.
Interpretation: This signals a potential downward reversal.
Technical Note: The deeper the penetration, the stronger the signal. If the red candle closes below the 50% midpoint of the green body, it confirms a "Dark Cloud Cover," indicating major structural damage to the uptrend.
"Gap Patterns": Strategic Response to Price Volatility
A "Gap" (or Window) represents a price range where no trading took place. It indicates a significant imbalance between supply and demand.
A. Bullish Gap (Upward Gap)
The Pattern: The opening price is strictly higher than the previous day's High, creating a visible empty space between the candles.
Market Context:
Continuation: Typically appears during strong uptrends, signaling that buyer eagerness is accelerating.
Breakaway: Can appear at the very beginning of a reversal after a prolonged decline, signaling a violent shift in momentum.
B. Bearish Gap (Downward Gap)
The Pattern: The opening price is strictly lower than the previous day's Low, creating a visible empty space.
Market Context: Generally signals strong selling pressure and continuation of a downtrend.
Warning (The Shakeout): Holders should not panic immediately. If a bearish gap appears within an established uptrend, it may be a "Shakeout." This is often a manipulation or emotional overreaction designed to scare out weak hands before the primary uptrend resumes.
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Comments
Besides, the lesson shared highlights why two-candlestick patterns are about context and confirmation, not just candle shapes. The “50% midpoint rule” is especially useful — the depth of penetration clearly shows who controls the market.
I pay the most attention to Engulfing patterns and Harami Crosses. Engulfing candles signal a decisive shift in control, while a Harami Cross often warns that momentum is exhausted, prompting me to slow down and wait for confirmation.
I also like the discussion on Thrusting Lines and gaps, which reminds me that not every counter-move is a real reversal. If price can’t reclaim the midpoint, I treat it as an attempt, not a signal, and stay patient. Over time, this discipline has helped me avoid many false breakouts and unnecessary trades.
@Tiger_comments @TigerStars
1. The Bullish Engulfing Pattern occurs at the bottom of a downtrend & signals a powerful reversal to the upside.
A small red bearish candle is followed by a massive green bullish candle that completely covers the body of the previous day. It is a Buy signal.
NVIDIA in Oct 25. After a brief dip NVDA formed a Bullish Engulfing Candle. The green candle was so large that it looked like it ate the previous 3 days for breakfast. That was the signal for the rally that has pushed NVDA up over 3% on Jan 2.
The opposite is the Bearish Engulfing Pattern. This appears at the peak of an uptrend and warns that the party is over.
A small green bullish candle is followed by a much larger red bearish candle that completely engulfs the previous day's gains.
BABA on Nov 14, a giant red candle engulfed the previous day's green candle. It dropped 12% the following week.
@Tiger_comments @TigerStars
A bearish gap in a strong uptrend often signals a potential shakeout to scare out weak hands before the uptrend resumes, making option B the most likely indication rather than a guaranteed reversal.