How do you recognize explosive reversal candles and benefit from them in your trades?

What Are Explosive Reversal Candles?

Explosive reversal candles are large-bodied Japanese candlesticks that appear with high volume. These candles typically come in the form of either a large engulfing candle or a big pin bar. The wide range and high volume reflect a sudden injection of significant liquidity into the market—often triggered by important economic news impacting a currency.

Characteristics of a Strong Explosive Candle

    1.    The candle must be large in size—not small.
    2.    High volume must accompany the candle, indicating heavy trading activity.
    3.    The candle should close near the top or bottom:
    •    A bullish candle should close near its high.
    •    A bearish candle should close near its low.

Best Areas for Explosive Candles to Appear

Explosive candles can appear anywhere on the chart, but they are not always significant. For a candle to have real impact, it must form at strong reversal zones. The most effective locations are supply and demand areas or major support and resistance levels. Fibonacci, pivot points, and similar technical levels are considered weaker, so it’s best not to rely on them heavily when identifying explosive candle setups.

How to Trade Explosive Candle Patterns
 

1. Explosive Engulfing Candle

When an explosive engulfing candle forms, it must have a large body, high volume, and a close in the same direction. The candle should fully engulf the previous candle—and the more candles it engulfs, the stronger the signal. The pattern must also appear at a significant reversal zone. Once these conditions are met, we begin searching for a trade entry. In the engulfing pattern, we typically wait for a retracement to the midpoint of the candle. Use the Fibonacci tool to draw from the high to the low of the candle, and place a pending order at the 50% level.

Bullish Explosive Engulfing Candle

A large bullish candle
Close near the high
High volume
Appears at demand or strong support zones
Entry: buy on retest of the candle’s midpoint (50% retracement)

Bearish Explosive Engulfing Candle

A large bearish candle
High volume
Close near the low
Appears at supply or strong resistance zones
Entry: sell on retest of the candle’s midpoint (50% retracement)

2. Explosive Pin Bar Candle

This pin bar has both a large body and a long wick. The larger the body and wick, the stronger the signal. The volume should be high—higher than previous bars. The candle must appear at key zones like supply, demand, support, or resistance. Entry is made immediately after the candle closes. No retest is required.

Bullish Explosive Pin Bar

Bullish pin bar matching the color of prior bullish candles
Close near the high
High volume
Appears at demand or strong support zones
Entry: buy immediately after candle closes

Bearish Explosive Pin Bar

Bearish pin bar matching the color of prior bearish candles
Close near the low
High volume
Appears at supply or strong resistance zones
Entry: sell immediately after candle closes

Setting Targets and Stop Loss

Target and stop-loss placement is simple.
For long trades:
Stop-loss goes a few points (typically 5) below the pattern’s low
Target 1: same size in points as the stop-loss
Target 2: double the size of the stop-loss

For short trades:
Stop-loss goes a few points (typically 5, plus spread) above the pattern’s high
Target 1: same size in points as the stop-loss
Target 2: double the size of the stop-loss

By applying these rules with discipline and waiting for confirmation at strong zones, explosive reversal candles can become a high-probability trading strategy.