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Reversal patterns indicate market turning points from "summary" of Japanese Candlestick Charting Techniques by Steve Nison
Reversal patterns can be powerful indicators of potential market turning points. These patterns often form after a prolonged trend in one direction, signaling that the trend may be losing momentum and could be on the verge of reversing. By recognizing these patterns early, traders can position themselves to take advantage of the upcoming shift in market direction. One of the most well-known reversal patterns is the classic Hammer pattern. This pattern forms when a security opens, trades lower during the day, but then rallies to close near its opening price. The long lower shadow of the candlestick resembles a hammer, hence the name. The Hammer pattern is typically seen as a bullish reversal signal, indicating that selling pressure may be exhausted and buyers could be stepping in to drive prices higher. Another common reversal pattern is the Shooting Star, which is essentially the opposite of the Hammer. The Shooting Star forms when a security opens, rallies during the day, but then sells off to close near its opening price. This pattern is viewed as a bearish reversal signal, suggesting that buying pressure may be waning and sellers could be taking control of the market. In addition to these individual candlestick patterns, traders can also look for larger, more complex formations that indicate potential reversals. For example, the Head and Shoulders pattern consists of three peaks - the left shoulder, the head, and the right shoulder - with a neckline connecting the lows of the two troughs. A break below the neckline is considered a bearish signal, while a break above it is seen as a bullish signal.- Understanding reversal patterns is essential for traders looking to anticipate market turning points and capitalize on potential changes in trend direction. By studying these patterns and incorporating them into their trading strategies, traders can gain a valuable edge in the market and improve their chances of success.
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