Very few price action indicators are as reliable as candlestick patterns. Since candlesticks rely on nothing but price action, these patterns are instant, free from extraneous noise, and very profitable. We will look at 3 of the best candlestick reversal patters in this article.

1. Hammer

The hammer is formed when the price is moving down dramatically followed by a candle with a long wick on the bottom but a small body on the top. The last candle looks like a hammer (the wick being the handle, the body being the hammer head).

Hammers indicate that the market has fallen far enough. The wick is caused by sellers pushing the price down, but then buyers quickly coming in and pushing the price right back up. This quick reaction by the buyers indicates that price has reached a bargain level and there are plenty of buyers ready to buy.

2. Hanging Man

A hanging man is a hammer formed after an uptrend. The small body is the head of the man while the wick is his legs. When you see a hanging man, you know that the buyers have been pushing the market higher, but some sellers have come in and forced the price down (the wick is a result). Sure, the buyers pushed the price back up, but seeing the sellers in the market is a great indication that the price will soon fall.

When I see a hanging man, I like to wait for another indication that the market will fall. My personal experience is that hammers are more reliable that the hanging man, but that certainly doesn’t mean you ignore the latter.

3. Engulfing Patterns

Engulfing patterns can be seen in uptrends or downtrends. They are a result of the market moving strongly over a series of 2-3 candles, but then one candle reversing and completely engulfing the previous 2-3 candles.

Engulfing patters are a very strong first indication that the market attitude has completely changed.