The difference between reversal and continuation patterns

A reversal pattern appears at the end of a trend and warns that price may change direction. A continuation pattern appears while a trend is still running and tells you that price is likely to keep moving in the same direction.

Reversal patterns – Hammer and Engulfing

Hammer

After a downtrend, if you see a candle with a small body near the top and a long lower shadow, it is a Hammer. It shows sellers pushed price down, but buyers pushed it back near the opening level. When the Hammer appears at support, it signals a possible bullish reversal.

Bullish and Bearish Engulfing

A Bullish Engulfing is a large green candle that completely engulfs the previous red candle, usually after a decline. A Bearish Engulfing is the opposite: a large red candle engulfs the previous green candle after a rally. The key is to wait for these patterns at the end of a clear trend, not in a sideways market.

Continuation patterns – Marubozu and Inside Bar

A Marubozu has a large body and almost no shadows. A bullish Marubozu during an uptrend shows strong buying; a bearish Marubozu during a downtrend shows strong selling. It helps confirm the trend is still alive.

An Inside Bar consists of a mother candle and a smaller candle that forms completely inside its range. When price breaks out of the mother candle in the direction of the main trend, the trend often continues.

How to trade each type

For reversal patterns: only trade when the pattern forms at the end of a trend, near support or resistance. Wait for a confirming candle to close in the same direction.

For continuation patterns: confirm the trend on a higher timeframe first, then wait for a breakout in the trend direction.

Note: Always place a stop loss above or below the pattern to limit risk.

Avoid trading reversal or continuation patterns in a sideways market because price can whipsaw both ways.

Real examples

Suppose USD/JPY is falling from 150.00 to support at 148.00. A Hammer appears at 148.00, followed by a green confirmation candle. This is a bullish reversal signal, so you may consider buying with a stop loss below 148.00.

On the other hand, EUR/USD is rallying into resistance at 1.1200. If a Bearish Engulfing appears there, you may consider selling after price confirms lower, because the reversal pattern is inside a key area.

Common mistakes

Trading a Hammer immediately without waiting for confirmation.

Mistaking a continuation pattern for a reversal just because the candle has a long shadow.

Ignoring market context: a reversal candle only matters at the end of a trend and at a key price level.

Failing to check the higher timeframe before trading a continuation pattern.

Content is for reference only, not investment advice. Forex trading carries high risk.

Spotting Trend Reversal vs Continuation Candlestick Patterns