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📈 Mastering Candlestick Patterns: Reversals, Targets, and Risk Management
In our previous discussion, we explored the anatomy of candlesticks, the importance of trend context, and the confirmation process for candlestick reversal patterns. Now, let’s delve deeper into setting targets, risk management, and bearish reversals while also touching on health and discipline in trading—a crucial but often overlooked aspect of a trader’s success.
🎯 Setting Targets for Reversal Trades
When trading reversal patterns, setting realistic targets is crucial to managing risk and optimizing profits.
📌 Defining the First Target
The first target is calculated based on the distance from the top to the bottom of the pattern (i.e., the length of the candlestick).
This measured move is projected upwards (for bullish trades) or downwards (for bearish trades) to set a 1:1 risk-reward ratio.
Traders book 50% of their profits at the first target and then manage the remaining position based on trend-following indicators.
📍 Example: If a hammer candlestick has a body of ₹20, the first target would be ₹20 above the breakout point for a long trade.
🔄 Why Trend Following is Preferable Over Reversal Trading?
Most professional traders follow trends rather than betting on reversals because reversals are rare. It’s similar to how successful athletes like Virat Kohli perform consistently—when they are in good form, they keep performing well, and when they struggle, they often continue struggling for some time.
Trends are more reliable than reversals.
Reversal success rates are lower (55-60%) compared to trend continuation strategies.
Booking partial profits and trailing the remaining position with a supertrend indicator ensures higher success rates.
📍 Example: If a stock moves ₹50 in favor, a trader may book ₹25 worth of profit (50%) and then use a supertrend indicator to trail the rest.
📉 The Bearish Reversal: Identifying Shorting Opportunities
While bullish reversals occur after a downtrend, bearish reversals emerge after an uptrend. The methodology remains similar, but instead of buying after confirmation, traders look to short-sell the asset when a bearish signal appears.
🔴 Marking Key Levels for Short Trades
High Line & Low Line: Just like in bullish reversals, traders mark the high and low of the pattern to identify breakout/breakdown levels.
Stop-Loss: In a short trade, the stop-loss is placed above the high line to protect against reversals.
Entry Rule: If the price breaches the low line within the next four candles, a trader enters a short position.
📍 Example: In TVS Motors, a dark cloud cover pattern emerged after an uptrend. However, because confirmation did not occur within four candles, the trade was invalid.
🌠 The Shooting Star: A Powerful Bearish Reversal Signal
One of the most reliable bearish reversal patterns is the Shooting Star, which appears at the peak of an uptrend and signals potential selling pressure.
⭐ How to Trade the Shooting Star?
Identify the Shooting Star:
Appears after an uptrend.
Has a small body near the low and a long upper shadow.
Indicates that buyers pushed prices higher but failed to sustain the momentum.
Confirmation Criteria:
The next candle must breach the low of the Shooting Star within four candles.
If breached, short the asset immediately (without waiting for the candle close).
Risk Management:
First target: Distance between the high and low of the Shooting Star (1:1 ratio).
Second target: Trail with a supertrend indicator for further downside moves.
📍 Example: In F&O trading, a trader might short two lots after a Shooting Star confirmation, book 50% at the first target, and trail the rest.
🏆 The Psychology of Trading: Discipline, Health, and Performance
Trading is not just about technical patterns—it’s about mental discipline, physical health, and emotional stability. Successful traders treat trading like a sport—requiring both mental sharpness and physical endurance.
🧠 Mental and Physical Health for Trading Success
A healthy body leads to a sharper mind, which directly impacts a trader’s ability to focus, analyze, and make rational decisions.
✅ Exercise daily (30 minutes minimum) – Walk, jog, or do light workouts. ✅ Practice mindfulness or meditation (15 minutes daily) – Helps control emotions while trading. ✅ Follow a balanced diet – High protein, low sugar, and adequate hydration. ✅ Regular health checkups – Trading is a long-term profession; good health ensures longevity.
📍 Personal Story: The speaker shared his personal fitness journey, where he lost 24 kg over 11 months by following a structured fitness plan. This improvement in physical health significantly enhanced his mental clarity and trading performance.
🎯 Walking & Diabetes Management
For those struggling with diabetes or high blood pressure, a simple 30-60 minute daily walk can dramatically improve health.
🚶♂️ Benefits of Walking for Traders:
Burns 180-240 calories in 30 minutes, leading to gradual weight loss.
Helps control diabetes by reducing excess glucose.
Lowers stress and improves focus—essential for traders who spend hours in front of screens.
📌 Pro Tip: If you’re overweight or have joint issues, start slow (10-15 minutes per day) and gradually build up endurance.
🛠️ The Hammer Pattern: A Classic Bullish Reversal
Now, let’s return to candlestick patterns and discuss one of the most important bullish reversals—the Hammer.
🔨 What is a Hammer Candlestick?
Appears after a downtrend.
Has a small body at the top and a long lower shadow.
Indicates that sellers pushed prices down, but buyers regained control and pushed the price higher by the close.
Can be green (stronger signal) or red (weaker signal).
📈 Trading Strategy for the Hammer Pattern
Identify the Hammer after a downtrend.
Wait for confirmation – The price must break the Hammer’s high within the next four candles.
Enter a long trade as soon as the breakout occurs.
Place stop-loss below the Hammer’s low.
First target = size of the Hammer’s body (1:1 ratio).
If trend continues, trail the trade using a supertrend indicator.
📍 Example: In Zydus stock, back-to-back Hammer candles appeared after a downtrend, leading to a strong bullish reversal. Traders who entered after the confirmation candle saw significant upside movement.
🎯 Key Takeaways
✅ Reversal trades should only be taken after a clear trend—sideways markets reduce effectiveness. ✅ Always confirm the pattern within the next four candles before entering a trade. ✅ Book partial profits at the first target and trail the remaining position for extended gains. ✅ Health and mental discipline are crucial—treat trading like a professional sport. ✅ Exercise, proper diet, and mindfulness improve decision-making skills—leading to better trading performance.
🔜 Coming up next: More candlestick patterns, advanced trading strategies, and live trade examples! 🚀
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