Module 3 – Core Reversal Setups
Reversals aren’t luck — they’re the visible moment when power shifts from buyers to sellers or vice versa. In this module, you’ll master the high-probability setups that mark those transitions. We’ll cut out 90% of the noise and focus on what actually flips the market.
What You’ll Learn
- The major candlestick reversal patterns that signal a true power shift
- How to identify valid reversals vs. fake signals
- Why location and structure are more important than the pattern itself
1. The Foundation: What Makes a True Reversal
A reversal is not a single candle turning green after a drop. It’s a shift in control — confirmed by context, rejection, and follow-through.
- It usually happens at major support/resistance or supply/demand zones
- It shows exhaustion on one side (long wicks, fading volume)
- It creates a candle that breaks structure or invalidates prior momentum
Always ask: “Who was in control, and who’s taking over?”
If you can answer that, you’ll never mistake noise for a reversal again.
2. The Big 7 Reversal Patterns
2.1 Bullish & Bearish Engulfing – The Power Flip
Structure: Two candles. The second completely engulfs the first.
Meaning: One side wipes out the other’s effort in a single move.
- Bullish Engulfing: Appears after a downtrend. Bears close weak, then bulls erase their gains. Buyer strength is even more credible if volume supports it.
- Bearish Engulfing: Appears after an uptrend. Bulls push higher, but bears crush the candle and close below the prior open — a strong sign of control change.
Psychology: Market overextends → weak hands get trapped → reversal starts as they exit in panic.
2.2 Hammer & Shooting Star – Rejection Extremes
Structure: Small body, long wick rejecting a key price zone.
Meaning: The market tested a level, got rejected hard, and flipped intraday sentiment.
- Hammer: Long lower wick, closes near the top → buyers absorbed selling pressure
- Shooting Star: Long upper wick, closes near the bottom → sellers rejected higher prices
Psychology: One side got too confident, the other ambushed them. A micro “fight” that exposes exhaustion.
2.3 Morning Star & Evening Star – The Sentiment Flip
Structure: Three candles. A weak/indecisive middle candle surrounded by conviction candles.
- Morning Star: Bear candle → small indecisive candle → strong bull candle. Signals bottoming and renewed buying pressure.
- Evening Star: Bull candle → small indecisive candle → strong bear candle. Signals the end of an uptrend.
Psychology: Momentum fades, the crowd hesitates, and the opposite side takes control decisively.
2.4 Harami (Inside Bar) – Calm Before the Storm
Structure: A small candle contained within the prior candle’s range.
Meaning: Compression. Energy builds before the release.
- Often appears near market tops/bottoms, just before breakout or reversal
- Trade only when price breaks out of the mother bar decisively
Psychology: Big players accumulate quietly. Retail misses the silence before the move.
2.5 Tweezer Tops & Bottoms – Dual Rejection
Structure: Two consecutive candles sharing the same high or low.
Meaning: Double confirmation that the level held.
- Tweezer Top: Equal highs; sellers defended the level twice
- Tweezer Bottom: Equal lows; buyers defended the zone twice
Psychology: Two battles, same result. The market respects that zone as a barrier.
3. Valid vs. Invalid Reversals
3.1 Valid Setup
- Pattern forms at a major level (support/resistance)
- It rejects liquidity (long wick or false breakout)
- Aligned with higher-timeframe context (Daily level, 4H entry)
- Follow-through candle confirms the shift
3.2 Invalid Setup
- Pattern forms mid-range with no context
- Occurs during low volume or mid-week chop
- No structure break; price stays inside the prior swing
Remember: a beautiful candle in the wrong location is useless.
A half-formed candle at a perfect level can be gold.
4. Reading the Trap: Where Retail Loses
The best reversals happen where most traders are wrong:
- After a breakout that immediately fails (false breakout → engulfing reversal)
- At emotional extremes where everyone is “sure” the trend continues
- Where stop-loss clusters sit (long wicks piercing obvious levels)
Smart money hunts liquidity. Reversals are built on trapped traders closing losing positions. Spot the shift and you have the entry edge.
5. Execution Strategy
Combine the candle signal with structure confirmation:
- Identify a key level on the Daily or 4H chart
- Wait for a rejection pattern (Engulfing, Hammer, etc.)
- Confirm with a close beyond the prior candle midpoint
- Enter on the retest if possible
- Stop-loss: beyond the wick
- Target: next structure level (minimum 1:3 R:R)
6. Practice Drills
Exercise 1 – Pattern Spotting
On a Daily chart, find 10 Engulfing or Hammer setups at major levels. Note how often they lead to reversals vs continuations.
Exercise 2 – Context Awareness
Mark support and resistance on a 4H chart. Observe which patterns repeat at those levels. Ignore everything else — focus only on valid zones.
Exercise 3 – Replay Mode Training
Use TradingView’s Replay Tool. Pause before a suspected reversal zone. Predict what will form and where price will go. Press play and check your accuracy.
7. Professional Insight
The most profitable reversals are uncomfortable to enter. They happen when the crowd is emotionally one-sided — right before the flip.
“By the time you feel confident, the professionals have already entered.”
Read emotion, context, and structure — not colors. The candle tells you what happened; your edge is knowing why it happened.
