26 May, 2025
3 minutes
Candlestick charts are likely the most widely used technical analysis tool within the cryptocurrency market. They assist traders in comprehending price action and forecasting future price direction based on past data. One of the most valuable pieces of information that is communicated through candlestick charts is reversal candlestick patterns, which can be an indication of direction changes underway in the prices. Whether trading Bitcoin, Ethereum, or altcoins, being able to recognize these patterns can be a huge advantage.
In this article, we'll cover the most powerful reversal candlestick patterns, both bullish and bearish patterns. We'll also provide you with an easy-to-use candlestick reversal patterns cheat sheet to apply to your trading.
Reversal candlestick patterns are unique forms of candlesticks on a chart that are recognized to indicate a possible reversal of trend. They indicate that the prevailing trend, either uptrend or downtrend, will reverse direction. They are crucial to crypto traders as they assist them in setting entry and exit points at better timing.
The two main types are:
Bullish Reversal Candlestick Patterns - Indicate a change from falling to rising trend.
Bearish Reversal Candlestick Patterns - Indicate a change from rising to falling trend.
They are made of one candle or more than one candle and will be even more beneficial to use with a group of technical indicators, e.g., the resistance and support levels, RSI, or the moving averages.
Here's a quick guide for common trend reversal candlestick patterns.
| Pattern | Type | Candles Needed | Key Signal |
|---|---|---|---|
| Hammer | Bullish Reversal Candlestick Patterns | 1 | Long lower wick, small body, after downtrend |
| Morning Star | Bullish Reversal Candlestick Patterns | 3 | Red, small candle, green |
| Bullish Engulfing | Bullish Reversal Candlestick Patterns | 2 | Green candle engulfs red |
| Piercing Line | Bullish Reversal Candlestick Patterns | 2 | Green closes above red midpoint |
| Shooting Star | Bearish Reversal Candlestick Patterns | 1 | Long upper wick, small body, after uptrend |
| Evening Star | Bearish Reversal Candlestick Patterns | 3 | Green, small candle, red |
| Bearish Engulfing | Bearish Reversal Candlestick Patterns | 2 | Red candle engulfs green |
| Dark Cloud Cover | Bearish Reversal Candlestick Patterns | 2 | Red closes below green midpoint |
The crypto market is highly volatile and susceptible to rapid price change. This is why reversal patterns are of great use because:
They allow traders to capitalize on rapid trend reversals.
They offer low-risk entry points when properly validated.
They allow better risk management through offering stop-loss levels near pattern validation points.
Now let us talk about the most reliable bullish reversal patterns in candlestick trading.
Small-bodied candlestick pattern with a long lower wick.
After a downtrend.
It indicates that sellers attempted to drive the price down, but buyers prevailed.
Three-candle pattern.
A big red candle is followed by a small-bodied candle (red or green), and then a big green candle.
Indicates that sellers' momentum was reversed into buyers' momentum.
Two candlestick reversal patterns.
The first red candle, and second green candle completely covers the first one.
Clear indication that buyers are taking over.
Same as bullish engulfing.
The green candle opens below the previous red candle but closes above the midpoint of the red candle.
Following are the most widely used bearish reversal candlestick patterns.
Single candlestick with small body and long upper wick.
Happens after a rising trend.
Carries the warning that buyers were pushing prices higher but lost control at the end of the session.
Three-candle pattern.
There is a large green candle followed by a small-bodied candle, and then a large red candle.
A sign that buyers' buying power is weakening.
Two-candle pattern.
It starts with a green candle and is followed by a red one that engulfs the first candle.
One of the strongest bearish momentum indicators.
The red candle opens higher than the green but closes lower than the middle point of the green candle.
Locate the Trend: Reversal patterns will function only if there is a trend. Identify if the market is experiencing an uptrend or downtrend.
Find Support and Resistance: These are the points assisting in the sustainability of a reversal pattern.
Confirm with Indicators: Employ indicators like RSI (Relative Strength Index) or MACD to confirm if the market is overbought or oversold.
Wait for the Pattern to Complete: Never buy or sell during the middle of a pattern. Wait for a confirmed signal.
Manage Risk: Place stop-loss orders below the low of a bullish pattern or above the high of a bearish pattern.
Candlestick reversal patterns, though initially designed for conventional financial markets like stocks and forex, have become titanic in significance in the crypto universe since the early days of Bitcoin trading. Their genesis in crypto is mostly because technical analysis tools were utilized by those traders who moved from conventional markets with a plan to implement a known method of handling crypto's quirky price action.
Strong reversal candlestick patterns had its origins in the 18th century in Japan with rice traders like Munehisa Homma. It was later introduced to the mainstream of the world when it was taken to Western markets in the 1990s by analysts like Steve Nison. These patterns formed the basis of price action forecasting since they were graphic and could represent market psychology.
With Bitcoin beginning trading on exchanges during around 2010, technical analysis pioneers began using candlestick patterns to predict price movement in this novel, extremely speculative asset. Since crypto lacked fundamental metrics like earnings announcements or GDP for valuation, technical metrics like reversal patterns became the hallmark of analysis.
Bitcoin's high volatility puts patterns like Doji or Hammer in particular focus.
They used these patterns to forecast rapid reversals of trends in emerging Bitcoin markets, which were illiquid.
Patterns for price crashes or pumps would often result in substantial market corrections or bull rushes.
When marketplaces evolved, especially in 2017 during the ICO bubble, strong reversal candlestick patterns were evident in hundreds of altcoins, not only Bitcoin. The patterns were utilized by traders to:
Mark tops and bottoms along the parabolic up-move of Bitcoin and Ethereum.
Mark entry and exit along the highly speculative phase.
Mark exhaustion of trends, especially when mood in the market shifted rapidly.
Bearish Engulfing signal was a precursor to the 2018 bear market.
Morning Star patterns also kept repeating on short-term recovery phases.
When DeFi and NFTs were on the rise, there were more market participants than ever before in the cryptocurrency market, so there was more market liquidity and volume. Reversal candlestick patterns continued to work in the following:
The 2021 bull trend, where Shooting Star patterns signaled local tops.
The 2022 bear trend, where Hammer patterns validated relief rallies.
Besides, with institutional money entering the space, the effectiveness of old-fashioned chart patterns - including candlestick reversals - was amplified since these investors imported tried-and-true technical analysis methods to crypto.
Despite crypto's rapid development, market activity still follows well-documented psychological patterns:
Buying and selling are driven by fear and greed.
Patterns repeat due to crowd psychology and herd behavior.
Candlestick charts remain one of the most universal languages among traders across the world.
As the crypto market keeps expanding and evolving, reversal candlestick patterns in crypto are a reliable benchmark that has both vintage origins and modern market forces behind them. Their adaptability in new contexts like multi-chain universes, tokenized assets, and decentralized exchanges ensures their ongoing efficacy as predictors of crypto price action.
Candlestick reversal patterns have survived for thousands of years in the ancient traditional markets and even longer in our new ever-changing cryptocurrency markets. They are reliable due to human nature, which repeats itself whenever the market behaves. The patterns are an expression of the universal struggle between customers (bulls) and speculators (bears). When one of the two gains momentum after laboring hard for a considerable amount of time, there is a likely trend change.
In cryptocurrency, despite higher volatility, these patterns are valuable as they:
Take the market mood in real time.
Pinpoint important turning points where momentum turns around.
Can be applied with a volume analysis or another indicator (like RSI, MACD) for further confirmation.
Though there is no one pattern that leads to success, most traders utilize reversal candle patterns because they deliver unambiguous entry and exit points and can aid in risk control if used rightly. Through usage, repeated occurrences of these reversal patterns candlestick build trader conviction and decision-making.
The use of candlestick reversal patterns within cryptocurrencies began from the beginning of Bitcoin trading. When other market participants from mainstream finance entered the market, universal tools like candlestick charts couldn't help but find their place in crypto analysis. Traders started using patterns like Hammer, Engulfing, and Doji in 2012 to predict price moves in Bitcoin, Ethereum, and altcoins.
Crypto markets differ from forex or stocks in that:
24/7 trading: anything can happen at any time, generating additional opportunities.
More volatility: the high-speed price action generates more volatile and repetitive patterns.
Poor supervision: greater possibilities of false breakouts or manipulation.
But despite all the differences, reversal candlestick patterns still work. Pinpoint moments of crypto history - like the 2017 bull run or the 2021 high - have proven that these patterns are turning points. Traders through time taught themselves how to use these old-school tools to fit crypto's eccentricities and coupled them with blockchain-themed indicators like on-chain data.
Candlestick reversal patterns are still a powerful ally to crypto traders rushing swiftly and in a hurry through markets. Picking up on Bitcoin or trying out altcoins, knowing how to spot bearish and bullish reversal patterns is the edge-maker in a very large edge. Reversal patterns are less technical signals than they are symptomatic of actual shifts in trader psychology, and catching a glimpse of when a trend is about to reverse is worth its gold weight.
However, profitable trading with candlestick patterns entails:
Patience to wait for confirmation.
Practice to recognize good setups.
Discipline to use them in combination with other tools like volume or moving averages.
No pattern can guarantee certainty, but with a good strategy, reversal candlestick patterns can help the trader anticipate the market turns, manage risk, and optimize entry/exit points. As the crypto market grows and matures, these tested and proven patterns will continue to be in the trader's toolkit to sort price charts' chaos into profitable decisions.
Some of the more well-known common ones include Hammer and Shooting Star, Bearish Engulfing and Bullish Engulfing, and then more advanced Evening and Morning Stars. They both signal a bull or bearish reversal, respectively, depending on the current trend.
No pattern is perfect, but reversal patterns can be extremely effective when combined with other signals. They are more trustworthy when accompanied by indications of increasing volume or support/resistance levels.
Yes, it is easy to use candlestick patterns after learning fundamental chart reading skills. They provide visual indicators that assist novice traders to gauge market sentiment and price action.
Reversal patterns appear on all time scales, ranging from 1-minute charts up to daily or weekly charts. Reversal patterns on the longer time scales (e.g., daily or weekly) have a higher likelihood of being right since there is greater market consensus.
To prevent false signals, always wait for confirmation (e.g., the next candle to close in the desired direction), look at volume trends, and utilize other indicators such as RSI or MACD to provide additional confirmation.
Both are not superior. Both are effective in their own manner. Reversal patterns assist in the identification of trend reversal, whereas continuation patterns support the prevailing trend. Both are employed by seasoned traders based on their strategy and market conditions.
