Master the Top 5 Bearish Candlesticks and Trading Strategies

One of the quickest ways to learn crypto trading is to recognize and understand candlestick patterns. These candlestick patterns show whether the trend is keeping its course or changing direction.

TL;DR

  • Bearish candlestick patterns may reveal the relative strength of buyers and sellers, while others can predict a reversal.
  • These candles are indicators that provide information about the market sentiment
  • It's important to keep in mind that the presence of a certain candlestick pattern does not always indicate a buy or sell signal.
  • Bearish candlestick patterns should be examined in their proper contexts.

One of the quickest ways to learn crypto trading is to recognize and understand candlestick patterns. These candlestick patterns show whether the trend is keeping its course or changing direction.

Traders may employ a wide variety of candlestick patterns to zero in on promising price action, used for day trading, swing trading, or even long-term trades. The relative strength of buyers and sellers may often be discerned from some candlestick patterns, while other patterns may signal a reversal, continuance, or indecision.

In this article, we’re going to look at some of the most popular bearish candlestick patterns that indicate a market reversal after a price hike.

The Hanging Man

The hanging man is a bearish pattern that forms near the peak of an upward trend. Even if the market ends at a high price, a protracted, downward-extending shadow indicates that more bears are entering the market. Bears can only gain ground if the bulls, who have been driving prices upward, begin to loosen up. Although bulls can achieve a closing price around the time frame’s high, there is significant selling pressure for portions of the session, creating a long wick.

If the hanging man candles have short wick and shadow, they can be considered spinning tops. In the case of the hanging man, the spinning top's upper shadow is negligible or nonexistent, but the bottom shadow is rather lengthy.

The hanging man pattern is most likely to result in a price drop if it features an above-average volume with extended lower shadows, followed by a selling day.  If you notice a pattern like this, you can consider shorting the asset around the end of the down day after the hanging man.

The Shooting Star

The shooting star is characterized by a large top shadow, a short or nonexistent lower shadow, and a small body at the low of the day. A shooting star candlestick pattern is only valid if it occurs alongside an upward trend in price. To qualify as a shooting star, the gap between the day's high and low must be greater than twice the length of the star itself. Ideally, there wouldn't be any obscuring shadows beneath the actual body.

A shooting star opens and then rapidly climbs in price during the day as a result of the recent increase. Buying activity is consistent with the previous days, sellers then join in during the timeframe, which brings the price down to around where it was at the beginning, wiping out the gains. This indicates that buyers have lost power as the timeframe comes to a close which puts the sellers in charge.

The shooting star pattern is verified by the subsequent candle, where the subsequent candle’s high must remain lower than the shooting star's high and closing lower than the shooting star's close.

The subsequent candle after a shooting star should ideally gap lower or open around the previous close before moving down on significant volume. When the price drops in the next timeframe, it's a strong indication that the downward trend may continue. Where traders can decide to close their positions or open a short position in the market.

Bearish Harami

When the two bars of the candlestick chart form a long green candle followed by a shorter red candle, it's a warning that prices might start going downtrend. In this pattern, both the opening and closing prices of the second candle are included inside the body of the first candle. A bearish harami usually forms near the end of an upswing.

The asset can be shorted if it breaks below the bearish harami's second candle. For traders who can't keep an eye on the market, a stop-limit order placed beneath the bearish harami candle's low is a good option; otherwise, a market order placed at the moment of the break is another viable strategy. A stop-limit order might be set at the high of the harami candle or the high of the long green candle, depending on the trader's risk tolerance.

To increase the odds of making a profitable trade, investors can employ technical indicators like the relative strength index (RSI) and the stochastic oscillator in conjunction with a bearish harami pattern. A short trade may be launched when the pattern appears and the indicator flashes an overbought signal. Since bearish haramis are best traded during an overall decline, it might be useful to increase the indicator's sensitivity such that an overbought reading is shown during a retracement in the downtrend. If the indicator goes back into the oversold area, that's a good opportunity to take profit.

Three Black Crows

This bearish candlestick pattern, "Three Black Crows," can signal the conclusion of an uptrend.  The three black crows is appears as three successive long-bodied red candlesticks with opening prices inside the next candle's real body and closings below the previous candle's low make up the black crow pattern. As confirmation of a reversal, traders frequently employ this signal in combination with other technical indicators or chart patterns.

The candlesticks should have a substantial length while casting minimal or no shadow. Extending shadows might be a sign of a temporary pause in the upswing while buyers and sellers rebalance. The accuracy of the three black crows pattern can be increased with rising trading volume. The volume can be low throughout the rise, building up to the pattern, which indicates that the upswing is initiated by a minority of bulls and then reversed by a majority of bears.

If a big drop follows the formation of three black crows, traders should be careful of oversold circumstances that might lead to consolidation before a continuation of the decline.

Technical indicators, such as the relative strength index (RSI), where a value below 30.0 indicates oversold circumstances, and the stochastic oscillator indicator, which reflects the velocity of movement, are the best ways to determine whether an asset is oversold.

Dark Cloud Cover

When a massive black candle forms a "dark cloud" over a previously rising candle, it is called the "Dark Cloud Cover pattern. Similar to a bearish engulfing pattern, sellers gain control of the timeframe after buyers have driven the market considerably up at the open. The change in buying to selling activity suggests a potential price reversal is near.

The Dark Cloud Cover pattern has green and red candlesticks with long bodies and short or non-existent shadows as the distinguishing feature. The combination of these characteristics suggests that the drop in price was a decisive one. In this case, traders want to wait for a bearish candle to appear after the pattern for more confirmation. If the price doesn't drop after a Dark Cloud Cover, it might be a sign that the price will gap up instead.

Long positions can be closed near the closing of the bearish candle. Alternatively, if the price continues to drop, traders may decide to exit in the next time frame if the pattern is confirmed

A stop loss might be set above the high of the bearish candle if entering short at the conclusion of the bearish candle or the next session. A Dark Cloud Cover pattern has no predetermined profit goal. To gauge when to close a short position, traders use a variety of different indicators or candlestick patterns.

Using Candlesticks as trading indicators

In order to validate their findings from technical analysis, traders will frequently look to the fundamentals of the market. A trader may look at the fundamentals of a coin to determine the likelihood that it will exceed profit expectations. If a breakout occurs just before a key report is released, a technical analysis of the candlestick chart can aid a trader's decision.

However, it’s important to keep in mind that the presence of a certain candlestick pattern does not always indicate a buy or sell signal. Instead, they provide a window into the structure of the market and might point to a future opportunity. Therefore, it is important to examine patterns in their proper contexts. This may be the larger market environment, or it may be the background of the technical pattern on the chart.

Disclaimer: The information and publications in this article are not intended to be and do not constitute financial advice, investment advice, trading advice, or any other advice or recommendation offered or endorsed by Coins.

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