If you are a trader — or want to become one — you should know how important candlestick patterns really are. To help you on your trading journey, here is a summary of 16 of these patterns and what they show!
What are candlestick patterns?
One way of showing important info about the price movement of an asset is through a candlestick. They are a widely used module of technical analysis; they allow a quick interpretation of the price information from a small number of price bars.
In this article we will be narrowing our attention to a daily chart in which each day’s trading is shown in detail by each candlestick. The main features are composed of:
- the body, detailing the open-to-close range;
- the wick, showing the high and low of a day. It is also known as the shadow; and
- the colour, representing the market movement’s direction.
What happens is that the candlesticks make a pattern which the traders interpret into identifying resistance levels and major support. Candlestick patterns show different opportunities; while a number of them could be used to gain perspective on the buying and selling pressure balance, others could pick up market indecision or continuation patterns.
In any case, understanding candlestick patterns and their implications in major decisions is crucial before one starts trading.
Practice reading candlestick patterns
The most viable method, in terms of learning these patterns’ interpretation, is making it a practice to enter and exit the trades given by them. To improve your skills in a low-stakes atmosphere, you could open an IG demo account, or even a live account, if you have more confidence in your trading ability.
However, those who plan to start trading should also use other forms of technical analysis, along with the candlestick pattern to keep track of or identify the general trend.
Six Bullish Candlestick Patterns
Bullish patterns could be a reflection of the prior downtrend of a market and could indicate that the price movement is about to reverse. Traders could use them as an indication to open a long position so that any upward trajectory could profit them.
The hammer pattern is located at the lower end of a downward trend and is characterized by a shorter body and a long lower wick.
It indicates that despite selling pressures in the day, the buying pressure, being strong enough, raised the price again. While the color could differ, green, more than red, implies a more strong bull market.
The inverted hammer pattern is similar to the one detailed above with the only distinction being the lengthier upper wick and shorter lower wick.
This signifies the buying pressure which is ceded by relatively weak selling pressure, not able to lower the market price. The pattern also indicates the possibility that the market’s control will be transferred into the buyers’ court.
Two candlesticks form the bullish engulfing pattern with the first red candle contained inside the second green candle.
While the second day starts off with a lower price when compared to the first, the price is pushed up by the bullish market. This goes in the buyers’ favor.
The piercing line is also made of two candlesticks, the first one being a long red candle and the second being a long green one.
Normally, the closing price of the first candlestick is substantially different from the second one’s opening price. Since the price rises to the mid-price of the day before – or even supersedes it –the pattern indicates a buying pressure that is strong.
As the name implies, the morning star pattern signifies a break in the downtrend of a market. It consists of three candlesticks; two long red and green candles with one shorter candle in between. Conventionally, the star does not come within the boundaries of the long candles.
The pattern basically serves as an indication of a reduction of the first day’s selling pressure, with a bull market expected to arise.
Three White Soldiers
This pattern, consisting of long green or white candles – one after the other – represents changes over a trio of days. The candles follow a cycle of opening and closing relatively higher, compared to the last day.
The three white soldiers pattern characteristically takes place following a downtrend and is considered to be a significantly strong bullish signal indicating a stable and progressive rise in buying pressure.
Six Bearish Candlestick Patterns
Occurring after an upward trend, bearish candlestick patterns show a resistance point characterized by a marked decrease in faith in the market price and subsequent closing down of long positions by traders.
Instead, to capitalize on the decreasing price, the traders open a short position.
This could be considered very similar to a hammer, in bearish terms. The hanging man has a very similar make-up; however, it occurs at the ending point of an upward trend.
Going into details, the pattern signifies a high degree of sell-off throughout the day followed by an increase in price once again, thanks to the buyers. This high sell-off is itself viewed as a signal of loss of market control by the bulls.
Similar to the inverted hammer, the shooting star pattern happens during an upward trend. It is characterized by a long upper wick and a small lower body.
As per the pattern, in usual terms, the market starts off higher on opening – although not by a big margin – and goes on to increase during the day to a high point and then closing off on a price that is just north of that on the open.
The bearish engulfing pattern consists of a long red candle engulfing a small green body. It is situated at an upward trend’s tail.
This pattern represents a price movement’s peak or a slowdown, indicating an eventual decline in the market. Moreover, the level of shift in the trend is signified by how low the second candle is.
Characterized with a long green and red candle with a short candle in between them, this is the second three-candlestick pattern and can be thought of as the bullish morning star.
The evening star signals that an upward trend is about to reverse. The strength could also be visualized based on how the third candlestick overcomes the first candle’s gains.
Three Black Crows
Another three candlestick pattern, the three black crows, consists of a trio of side-by-side long red candles with relatively shorter or no wicks. While the price at the start is similar to the day before, it gets progressively lower at every close due to the selling pressures.
The pattern signifies a bearish downtrend’s beginning, based on sellers surpassing buyers over the course of three days of trading.
Dark Cloud Cover
As the name indicates in this case as well, a bearish reversal is implied in this pattern. It consists of a red candlestick opening higher than the green candlestick before it and closing south of the midpoint.
The dark cloud cover pattern indicates a bearish takeover, dropping the price. Furthermore, the shortness of the wick is indicative of the level of the decisiveness of the downtrend.
Four Continuation Candlestick Patterns
No change in market direction is to be expected in the showing up of the four continuation candlestick patterns. This is representative of a resting period in the market, implying either a price movement that is neutral or an indecisive market.
Doji is represented by a cross-like candlestick with differing wick length and a shorter (to non-existent) body; it presents when the open and close prices are almost the same.
The pattern shows that there is no net benefit for either the buyers or sellers and its lone occurrence could be seen as neutral. However, it could be associated with bullish evening and morning star patterns.
A short body in the smack middle of equally long wicks is the spinning top pattern, indicating market indecision and a resultant lack of meaningful price change. The spinning top, like doji, is considered to be a resting phase, albeit after a substantial downward or upward trend.
If the spinning top occurs on its own, it is generally considered to be a somewhat harmless sign. However, they signify a marked loss of control by the market pressure, which could lead to significant changes in the future.
Three Method Patterns
There are two types of three method patterns; one is the bearish — or falling — pattern and the other is the bullish one – or rising – pattern.
Falling Three Methods
Visually represented by three small green candles and a long red body, following a previous longer red body (the bearish bodies contain the green candles), the bearish pattern indicates the inability of the bulls to make the trend revert.
Rising Three Methods
The rising three methods, or the bullish pattern, represent the opposite implications for the market. It is characterized by two long green candles on either end of three consecutive shorter red candles. This shows that even with the presence of selling pressure, the market control is largely kept in the hands of the buyers.