The Most Powerful Reversal Patterns In Forex You Must Know (2024)

Price or trading patterns help forex traders gain some insight into what the current market sentiment is and the direction it is most likely to go.

Such patterns are interesting since, unlike markets (such as stock or oil) where bulls and bears determine the strength of one asset, forex patterns give an insight into which currency is more likely to get weaker while the other gets stronger once the price breaks out of the pattern formed.

Generally, you will find two price patterns that form and can be traded together or independently from each other depending on the trading strategy you use or the time frame that you are trading on:

1. Candlestick Patterns: look for specific candlestick combinations which indicate what the market is going to do next.
2. Chart Patterns: instead of looking for specific candlestick combinations, traders will look for a large group of candlesticks that form certain patterns, such as Double Top/Bottom, Bull/Bear Flags and so on.

By reading the price pattern, traders can obtain better insight into what is happening in the market, adding an extra layer of confirmation to their analysis.

Price patterns can come in 3 broad types: Continuation Patterns, Reversal Patterns, and Uncertain Patterns.

The focus point of the article is forex reversal patterns.

Reversal patterns are specific price formations resulting from price movements in the financial market that indicate the price has stopped moving in its current direction and has reversed to go towards the opposite direction — hence the name reversal patterns.

Put simply, a forex reversal pattern tells you when the price is likely going to reverse and go in the opposite direction.

Logically, you can assume that since reversal patterns involve the price moving in the opposite direction, bullish reversal patterns and bearish reversal patterns do exist.

It makes sense why many traders of varying levels and abilities are very keen to ask about reversals and want to test them out. When used correctly, forex reversal patterns can help traders improve their trading performance. For this reason, many decide to make them part of their trading plan.

That’s the keyword, though, when used correctly.

New forex traders or anyone discovering reversal patterns for the first time think they are the magic formula they can use to predict market reversal. What they don’t understand is that the struggle isn’t about understanding what reversal patterns in forex are and how to read them. It’s how to use them profitably.

Profitable traders find lots of value in reversal patterns because of what they are designed to detect: a change in the market direction.

Traders can use forex reversal patterns to predict potential market reversal points to enter the market as a reversal trade. Such strategies offer the highest reward-to-risk ratio when used at the right time due to using a tight stop loss.

Also, no trader would want to stay in the market and be surprised when it turns against them. A sign that the market is going to U-turn is something every trader wants to know to manage their trade. This is precisely where reversal patterns come in handy.

They let the trader know when the market sentiment is going to change. That could be the signal the trader needs to decide whether to continue with the trade or close it altogether and bank the profits made.

Another use case is when a trade is going in a loss, and the trader must decide whether to close the trade or leave it to hit stop loss. If the reversal pattern occurs at some point when the trade is in a loss, then the trader could decide not to close it with the expectation that the trade will go back in profit into the original intended direction.

Every type of trader can benefit from this, no matter what sort of trader they are.

For instance, a fundamental trader can use forex reversal patterns to illustrate the market narrative at a given point in time in relation to economic news, while technical traders can use such patterns to confirm their trading idea or analysis or to enter the market.

That explanation should help you understand a few trading situations where reversal patterns would be attractive for the trader, but now the obvious question is:

Unless you are a machine or have an exceptional memory, it will be quite tasking for you to remember all existing reversal patterns in forex. And even if, by some miracle, you do remember them all, you will quickly learn that experienced traders do not use every pattern.

This is the same reason why many traders don’t make a profit using reversal patterns. There are rules as to when to use and when to not use reversal patterns in alignment with other market conditions.

In the next section, we will explore “What are the most powerful Reversal Patterns”. When to use them and how to use them. We will also touch on why traders fail to use them in more depth.

So, keep reading…

First things first, one thing we’d like to clarify. Saying a pattern is “most powerful” is not accurate because it teaches some bad habits. You begin to put extra weight on certain patterns that you shouldn’t, which is what causes some traders to fail with trading reversal patterns (more on this later).

To avoid falling into this trap, you should pick the patterns that work best for your trading strategy and think of these as the most reliable patterns in the charts you are trading when they come in alignment with certain market conditions.

The problem is that there are tons of reversal patterns available, and learning where to start with them can be challenging. Luckily, we’ve done the heavy lifting for you. We’ve studied hundreds of charts and read through countless resources, which, combined with our 20+ combined years of experience, resulted in the following list of the most reliable high-probability reversal patterns in forex.

Important note: All the reversal patterns below can be used as intraday patterns or any other trading style because the price is fractal.

This one is an absolute classic when it comes to forex patterns. The head & shoulders pattern appears during uptrends, whereas its inverted (or inverse) form appears during downtrends. This will be easier to understand if we go through the standard head & shoulders pattern first.

The head & shoulders pattern is formed when you see a peak (the first shoulder), then a higher peak (the head), and then a lower peak (the second shoulder).

The common way of trading the head & shoulder pattern is by drawing a neckline from the bottom of the first shoulder and connecting it to the bottom of the second shoulder. If it slopes down, then it becomes a higher probability pattern. Regarding timeframes, higher ones (4 hours and daily) have a higher probability of working than 1 hour or lower timeframes.

To find your target, measure the high point of the head to the neckline. This tells you how far the price will move after it breaks the neckline. Then, project that price below the second shoulder’s neckline.

The problem with this method is that it allows for too much distance between the entry and the stop loss. Having a too-large stop loss means you would have to reduce your position size drastically and have a larger profit target distance to have an adequate risk-reward ratio.

For this reason, we would enter a trade using this pattern in a different way. So instead of entering at the break of the neckline, we would:

1. Wait for the price to form the head and shoulders and then break below the 2nd shoulder “Break in Market Structure“.
2. Wait for the price to retrace back to a previous area of consolidation within the 2nd Shoulder. We call this consolidation area an “Order Block“.
3. Enter the trade at the Order Block and add the Stop Loss to be above a previous high (2 highs to the left).

Trading the head & shoulders reversal pattern this way would maximise your risk-to-reward ratio by having a tighter stop loss compared to the same profit target and a larger position size to allow for making more profit.

The inverse head & shoulders appears in uptrends and is an upside-down version of the standard head & shoulders reversal pattern. The principles are the same, except it is flipped upside-down.

Another popular reversal pattern used in forex is the triple bottom or triple top pattern. Reading it is simple: It is an almost 3 equal swing high (roughly equal in practice), followed by a break below a support level, or an almost 3 equal swing low, followed by a break above a resistance level.

The idea is that this reversal pattern is a form of consolidation in price before it reverses in the opposite direction. It suggests the uptrend or downtrend is losing momentum and then it consolidates and can’t break through the next level.

However, for the triple bottom or triple top to be considered a high-probability reversal pattern, you need to keep in mind a few things:

1. The 3rd swing must run the stops of the 2nd swing (and sometimes of both the 1st and 2nd swing).
2. If there is no stop run by the 3rd swing and the 3 swings are equal, then you would need to wait for more confirmation from the price because it wouldn’t be a high probability reversal pattern yet.
3. Usually, when there are equal highs, we call it the ‘engineered liquidity.’ This is because the banks are leaving this area to come back to it and run the stops in the search for liquidity. So don’t fall into that trap and get stopped out. Instead, make sure that the run-on stop occurs first and then enter the trade.

In the stock market, an Exhaustion Gap occurs when there is a massive shift in sentiment from bullish to bearish or vice versa, creating a visible gap in price action.

Those gaps signal a change in direction because there is something that has changed fundamentally, and big players have tipped their hand and exited their positions at the 2nd gap. So it would be only logical to trade this pattern after seeing the 2nd gap at a retest.

How can you trade this reversal pattern in forex? As you may already know, forex is a lot more liquid market than stocks and gaps like this happen very rarely.

In forex, you will not get an Exhaustion Gap like this because it is more liquid than the equity market. Rather, you will see a big momentum candle body, followed by a period of consolidation which then ends with another big momentum candle in the opposite direction, which then changes direction.

While Exhaustion Gaps look different in forex and stocks, they both share 3 features:

• They form after a large trend.
• Higher than average trading volume happens on the day.
• The gaps occur immediately when the market opens after the weekend.

The reasoning behind the island reversal pattern is that after the trading asset has been in a major trend in one direction, it goes into consolidation for a period that could take days or weeks.

Then, usually, banks and large institutions hold their money or exit their positions during the large consolidation in preparation for a major trend change before the public knows about it.

Also, all major meetings or economic news that could have a big impact on the market tend to happen because of meetings held between major countries on the weekend.

So when the market opens on Sunday or Monday, the market looks for pricing in that major fundamental change and ends up causing a big gap followed by a large momentum candle.

Our job is not to predict when the gaps will happen but to look for an entry after they occur at the retest of that 2nd gap, as shown in the picture below.

In terms of stop loss, you would need to place the stop loss above the resistance of the 2nd gap. In terms of the profit target, you should be targeting previous lows or highs depending on the trend direction change.

The three-drive touch, 1-2-3 pattern, three touches, whatever you like to call it — the Three Indians Reversal Pattern is a classic reversal pattern that is best used for trading reversals after a period of retracements of a trend. This means that when a retracement is about to reverse, it allows you to enter the trade and get in sync with a major trend direction.

However, this can’t be applied to any timeframe. A major trend is ‘major’ only when it’s relative to the timeframe you are trading in. For the sake of this example, I will use a recent example of a EUR/USD 4-hour timeframe in a bearish trend.

The reasoning behind this reversal pattern is that when a major trend is consolidating or retracing, the price seeks liquidity by pulling back from its trend in order to accumulate more orders before it continues its overall trend.

The reason why there are three drives or swings is that each time the price forms a swing high when retracing in a bearish trend (or a swing low when retracing in a bullish trend), institutions are adding more sell positions above each previous high by matching their sell orders with the retail stop loss placed above those previous highs (when bearish, each sell position has a buy stop loss and when bullish, each buy position has a sell stop loss).

So typically, this happens twice, and the 3rd time is usually the time when the signals become valid to trade.

The common way of trading this trend is waiting for the price to go back below the 2nd swing high price level in a bearish trend (for a bullish trend, you would wait for the price to go back above the 2nd swing low) when entering the trade. This trading method is called conservative, as you only enter the trade once the price has gone back below the price level of the 2nd swing.

If you are interested in learning how to accurately predict who to enter this reversal trade at the 3rd swing high while the 3rd swing is forming, then make sure to join our BLT Smart Money Concepts course.

When talking about candlestick reversal patterns, we will only consider the ones with 2 or more candlestick formations because they give a better view of the market narrative. Single candlesticks mean nothing on their own because the price will not reverse or change direction just because one single reversal candlestick shows up.

So, let’s go ahead and explore the most reliable candlestick reversal patterns below:

Characteristics of Morning Star Bullish Reversal Candlestick Pattern:

1. The 1st candlestick is bearish and has a relatively large body;
2. The 2nd candlestick in the middle has a small body;
3. The 3rd candlestick is bullish and has a relatively larger body than the 2nd candlestick.

Characteristics of Evening Star Bearish Reversal Candlestick Pattern:

1. The 1st candlestick is bullish and has a relatively large body;
2. The 2nd candlestick in the middle has a small body;
3. The 3rd candlestick is bearish and has a relatively larger body than the 2nd candlestick.

In terms of trade entry, you would enter only when

1. The Evening Star/Morning Start has formed at a key level.
2. Only after the 3rd candlestick has closed.

Regarding stop loss, it should be just above the highest high of previous candlesticks within the latest price swing and not just above the reversal pattern candlestick formation – and vice versa for the Morning Star bullish reversal pattern.

In terms of take profit, as always, look for a swing low (or more than one swing) in the opposite direction as targets.

Characteristics of Tweezers Top Candlestick Reversal Pattern:

1. Shows up at about the end of a bullish trend.
2. The 1st candlestick is bullish and has a relatively large body.
3. The 2nd candlestick is bearish and has a relatively large body too.

Characteristics of Tweezers Bottom Candlestick Reversal Pattern:

1. Shows up at about the end of a bearish trend.
2. The 1st candlestick is bearish and has a relatively large body.
3. The 2nd candlestick is bullish and has a relatively large body too.

This is a pattern formed by 2 or more candlesticks, as the name suggests, one candlestick’s body (the last one) engulfs the 1st or the few candles before it.

If you look up online the engulfing candlestick reversal pattern, you will find that it is made up of only 2 candlesticks. In reality, that’s not always true because it’s not really about the number of candles but more about the story behind the candle formation – aka, the famous market narrative.

If you look up online the engulfing candlestick reversal pattern, you will find that it is made up of only 2 candlesticks. In reality, that’s not always true because it’s not really about the number of candles but more about the story behind the candle formation – aka, the famous market narrative.

Meanwhile, in the #2 bullish engulfing pattern, you would see the usual common way of looking at the engulfing pattern, missing the better entry at the key level.

Characteristics of Engulfing Candlestick Bullish Reversal Pattern:

1. It could be made up of 2 or more candles.
2. The 1st one of a few candles must be bearish and treated as one bearish candle if there is more than one.
3. The last candle of a few before it must be bullish and treated as one if there is more than one.

Characteristics of Engulfing Candlestick Bearish Reversal Pattern:

1. It could be made up of 2 or more candles.
2. The 1st one of a few candles must be bullish and treated as one bullish candle if there is more than one.
3. The last candle of a few before it must be bearish and treated as one if there is more than one.

Trading reversal patterns can be profitable for traders, yet most fail when trading them. Why? The difference lies in the approach:

• Profitable Traders decide which reversal patterns are the most reliable for them in confluence with other complementary analyses; they do not make entire trading decisions based on them alone.
• Unprofitable Traders decide certain reversal patterns are the most powerful without having backtested them enough and understanding well how to use them in conjunction with their strategy; they make their decisions based on such patterns regardless of their trading plan rules, ignoring lots of other important signals, confluences and factors in the market. This causes traders to misread prices and sentiment and lose the broader view of the market.

In essence, unprofitable trailers treat reversal patterns as if they were bulletproof or had some hidden message that overpowers the rest of the market.

This is bad trading psychology practice. It forces you to think about patterns in terms of them being powerful or weak instead of thinking about them in terms of high and low probabilities.

Reversal patterns have their limits. That said, let’s outline some of the confluences and factors that cause traders to fail when they are eager to add reversal patterns to their trading plan.

The market narrative refers to understanding the broader view of the market, what the price is doing right now, whether it will reverse at specific price levels or not and why.

Understanding the market narrative prior to looking at trading patterns is crucial. To approach this right, ask yourself the following questions:

1. What is the higher timeframe direction? – Is it bullish or bearish?
2. What the market is doing now?
   – Is it trending or consolidating?
3. Where is the price is trying to go to?
   – Is it just consolidating?; Or
   – Did it just break out recently from its consolidation?; or
   – Is it only seeking liquidity by creating a fake-out and then reversing?
4. What liquidity zone is it trying to reach?
   – Is the price trying to just run stops above a recent swing high (or below a recent swing low) and then reverse at key support or resistance level?; Or
   – Has the price just reversed for a short pullback only to continue with the original direction?
5. What about inter-market analysis, for example, EUR vs USD. Do they confirm each other’s or not?
   – For example, if you decide that EURUSD is about to reverse to go short and a reversal pattern shows up, is there supporting evidence that the USD will also get stronger or at least consolidate to allow for EUR to reverse and get weaker? (PS: when looking at pairs, for example, EURUSD, EUR gets weaker if EUR is neutral vs USD strong or if EUR is weak and USD is neutral).
6. Is there any market news that supports the idea of the price reversing after the reversal pattern has formed?
   – Or is the price just pulling back after the reversal pattern formation only to continue trading in the original direction at or after the news release?

Planning your trade well with different potential scenarios and understanding the market narrative should give you an advantage, helping you establish where the market is most likely to go and trade in that direction.

There has never been a reversal pattern trader who predicted a market reversal by just looking at the reversal pattern alone. And that leads us to the next point…

Unsuccessful reversal pattern traders often try to catch a market turn first so they can say they caught 100% of a move.

Whenever a trader trading reversal patterns suffers a huge loss, it is because the pattern they were trying to catch was a reversal only in their imagination. Many traders assume that a pattern is a reversal without looking for extra clues or confirmations. More often than not, it turns out that the market is not going to reverse any time soon.

The truth is that no one ever could catch 100% of the market reversal. Remember to always look for confirmation, even if that means sacrificing a few pips.

What’s our tip here? Look for the highest probability trade entry with the lowest potential risk and not the highest pips number trade.

And sure, it’s always nice to catch more pips. However, your focus should be on risk management and high-probability trade first. The rest will follow.

Sounds logical, right? So why do some reversal pattern traders ignore the market narrative, even when it is clear as day that it’s not going to reverse?

The reasons are simple:

1. Fear of Missing Out (FOMO) thinking that if the reversal patterns have formed, they are going to miss out on the move or;
2. Not looking at the market in an objective way and instead looking at reversal patterns subjectively, trying to force a trade idea into the market instead of trying to understand what the market is telling you. Such traders believe that the reversal pattern of their choice is the only one they need, trying to fit it onto the market and not letting the market tell them what reversal pattern is forming.

Another mistake reversal pattern traders make is ignoring other trade entry elements. This is especially common when the pattern they consider powerful appears, causing them to enter the trade despite having other confluences for entering the trade, for example, a touch on a key level and trend line.

This is a perfect example of traders over-relying on reversal patterns, believing they are too powerful to be nullified by other market-related factors. They convince themselves that the position will turn in their favour no matter what. More often than not, leaving them on the wrong side of the trade.

Has it ever happened to you that you entered a trade using a reversal pattern only for the trade to continue in the direction of your original trade idea? If not, it will likely happen sooner or later.

What does it mean? That you are entering too soon.

To avoid jumping the gun, keep an eye on key bank levels. Notice that they are the strongest when the run on liquidity has occurred. Once it happens, it is giving traders an indication that big institutions are getting involved around this level giving us an extra confirmation that this level is holding and we can consider entering the trade soon.

So, instead of falling into this trap, wait for that run on liquidity to happen around the key bank level you have found the reversal pattern forming, and then enter when risk is lower.

If your idea about the reversal is correct, the price should drop from here and not come back into your stop loss anymore.

Traders who tend to fail in trading reversal patterns do so because they believe that it’s the pattern that causes the market to reverse. That’s not true, of course.

The reality is the opposite:

• Reversal patterns are only a phenomenon. It’s the Central Bank that causes the market to reverse.
• Reversal patterns are just patterns that form as a result of the price action movement over time.

This is why learning how to read the market sentiment is so important. If you understand what the market is doing, you can better predict what it’s likely to do next. This way, you can make an educated forecast instead of treating your reversal pattern as a crystal ball that shows you when to enter the trade.

Now that you know the most reliable reversal patterns in forex, their benefits, and mistakes to avoid, let’s talk more about the gentle art of trading reversal patterns.

First, let’s answer the vital question…

Reversal patterns can be traded in both trending and ranging markets. It’s only a matter of when to use them in each market environment and relative to the timeframe you are trading it off.

In ranging markets, reversals are best used when:

1. Range Reversal at the Bottom (Bullsh) or Top of the Range (Bearish):
   When the price is approaching the bottom (or top) of the range the reversal pattern forms at around a key level.
2. Pullback Reversal in the Middle of the Range:
   When the price has already reversed, enter the trade near the bottom (or top) of the range when the price retraces to a key level to get into the trade.

In trending markets, they are best used when:

1. Trend Reversal at Key Bank Levels:
   When the price is approaching the key level, the reversal pattern will likely form at or around the underlying key level.
2. Pullback Reversal at Key Bank Levels:
   When the price has already reversed, enter the trade when the price retraces to a key level.

One thing we want to highlight. Something that could catch out lots of reversal pattern traders is that what they may think is a reversal is actually a retracement (the market temporarily reverses and then resumes its direction).

So, how can you differentiate between them?

• Reversals happen at key levels and higher timeframes (4 hours and higher); they also usually have strong momentum (large candles with large bodies) and follow a strong fundamental news change.
• Retracements, on the other hand, happen after a directional move in one direction. The price is usually moving slowly with smaller candles (smaller bodies and more wicks). They are short-lived and don’t have a fundamental reason for their move.

Implementing reversal patterns can be beneficial, here is a summary to help you have the confidence to spot real market reversals and make sure you are not falling into the trap others do.

1. Do not rely only on reversal patterns alone. They are only one of a few tools you should use.
2. Use reversal patterns in line with the market narrative.
3. Use reversal patterns at key bank levels to get the highest probability of reversals you can find.
4. If your plan includes technical analysis tools such as the Fibonacci, or Pivot Points, you can use these tools to help add validity to your pattern.
5. Choose a combination of tools, resources, and reversal patterns to build your edge as a trader. For example, if you use MA Cross Over, then only use the reversal pattern once the signal has occurred. If you use Pivot Points, then use reversal patterns only around Key Pivot Points. Another example is trading them around Key Fibonacci Retracement Levels.

The most important thing, though, is to remember to ALWAYS have a story or reasons why the price should reverse. We call this story the market narrative, and understanding it is key to learning how to trade with the institutions and not against them.

Having said that, it is possible for a trader to build elite trading strategies around patterns that, when used in context with the market, should provide excellent results.

Trading reversal patterns provide traders with another way to read the market and spot where the bullish and bearish sentiment is currently and where it could turn. However, for reversal patterns to work their magic, they must be used in context with other trading tools outlined in a trader’s plan and with the market narrative in mind.

That said, to find some interesting reversal trades with the highest probability reversal patterns, it is still strongly suggested that you test various reversals in different markets and timeframes, backtesting them along with your trading strategy. That’s because your experience could be different depending on how you view the market and what you use in your analysis.

Once mastered, reversal patterns can become an effective addition to your forex trading strategy. And if you want to test them in action but don’t have the funds to start, be sure to sign up for our City Traders Imperium funding program.