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 confirmed if volume supports it.
  • Bearish Engulfing: Appears after an uptrend. Bulls push higher, but bears crush the candle and close below prior open — strong sign of control change.

Psychology: Market overextends → weak hands get trapped → reversal starts as they exit positions 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 reversed intraday sentiment.

  • Hammer: Long lower wick, closes near top → buyers absorbed selling pressure.
  • Shooting Star: Long upper wick, closes near bottom → sellers rejected higher prices.

Psychology: One side got too confident, the other ambushed them. It’s a micro “fight” that reveals exhaustion.

2.3 Morning Star & Evening Star – The Sentiment Flip

Structure: Three candles — reversal pattern formed by a weak middle candle surrounded by conviction candles.

  • Morning Star: Bear candle → small indecisive candle → strong bull candle.
    Sign of bottoming and renewed buying pressure.
  • Evening Star: Bull candle → small indecisive candle → strong bear candle.
    Signals the end of an uptrend.

Psychology: The crowd loses momentum, hesitates, and then the opposite side seizes 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 building up before a move.

  • Appears near market tops or bottoms, often just before breakout or reversal.
  • Trade only when price breaks out of the mother bar decisively.

Psychology: Big players accumulating quietly. Retail doesn’t notice the silence before the move.

2.5 Tweezer Tops & Bottoms – Dual Rejection

Structure: Two consecutive candles sharing the same high or low.
Meaning: Both sides tested a level and failed. Double confirmation of rejection.

  • Tweezer Top: Equal highs; sellers defended that level twice.
  • Tweezer Bottom: Equal lows; buyers defended that zone twice.

Psychology: Two battles fought — 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).
  • It’s aligned with higher-timeframe context (e.g., Daily support on 4H entry).
  • There’s follow-through candle confirmation.

3.2 Invalid Setup

  • Pattern forms in the middle of a range — no context.
  • Occurs during low volume or mid-week chop.
  • No structure break — price still within previous 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 will continue.
  • Where stop-loss clusters sit (you’ll see long wicks piercing obvious levels).

Smart money hunts liquidity. Reversals are built on trapped traders closing losing positions.
Learn to spot that shift — that’s your entry edge.

5. Execution Strategy

Combine the candle signal with structure confirmation:

  1. Identify key level on Daily or 4H chart.
  2. Wait for a rejection pattern (Engulfing, Hammer, etc.).
  3. Confirm with close beyond prior candle midpoint.
  4. Enter on retest if possible.
  5. Stop-loss: beyond the wick.
  6. Target: next structure level (minimum 1:3 R:R).

6. Practice Drills

Exercise 1 – Pattern Spotting

  1. Open a Daily chart.
  2. Find 10 Engulfing or Hammer setups at major levels.
  3. Note how often they lead to reversals vs continuations.

Exercise 2 – Context Awareness

  1. Mark support and resistance on 4H chart.
  2. Observe which patterns repeat at those levels.
  3. Ignore everything else — focus only on valid zones.

Exercise 3 – Replay Mode Training

  1. Use TradingView’s Replay Tool.
  2. Pause before a suspected reversal zone.
  3. Predict which pattern will form and where price will go.
  4. Press play and see if your read was accurate.

7. Professional Insight

The most profitable reversals are usually 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.”

Learn to read emotion, context, and structure — not colors.
The candle only tells you what happened; your edge is knowing *why* it happened.

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