Candlestick Patterns
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As illustrated above, candlesticks are created by up and down movements in the price. These price movements sometimes form patterns a trader uses for analysis or trading purposes. There are many candlestick patterns.
Patterns are separated into bullish and bearish. Bullish patterns indicate that the price is likely to rise, while bearish patterns indicate that the price is likely to fall. No pattern works all the time, as candlestick patterns represent tendencies in price movement, not guarantees.
Below are some popular ones.
Doji
Doji’s are single candlestick patterns that indicate weakness and a potential trend reversal depending on where the doji appears on the price chart.
It has no real body or very little real body
the opening and closing prices for the period were at the exact same level or very close together.
Doji indicates that there is indecision and uncertainty in the market with neither buyers nor sellers were willing to move the price to significant levels.
A doji with a long upper shadow and no lower shadow. It has greater significance in an uptrend as it indicates that the buyers were able to push the price up during the session, but were unable to hold the market at the higher levels, conceding ground to the sellers. It usually indicates that the uptrend is running out of steam.
Doji with small upper and lower shadow. Indicates indecision. Initial weakening sign of a dominant trend.
It has a long upper shadow and no lower shadow it has greater significance in a downtrend as it has bullish implications. It is thus an early indication that a downtrend is running out of steam.
A doji with long upper and lower shadows. The long shadows indicate that the market rallied and sold off significantly during the session neither position was held as the market closed where it opened. Indicates great uncertainty
Bearish trend reversal pattern that appears in an uptrend
Signals potential weakness in uptrend
It is a two candlesticks pattern
The first candle must be bullish with large real body
The 2nd candle should be bearish that opens above the high of the first candle but closes well into the real body of the first candle
More reliable if the 2nd candle closes below the middle of the 1st candle
More reliable if both candles have no shadows
It is a bullish trend reversal pattern that appears towards the end of a downtrend.
It is a two candles pattern.
The first candle must be bearish with a large real body and second candle must be bullish.
The second candle must close above the middle of the first candle
It is a reversal pattern consisting of two opposite trend candlesticks were the second candle engulfs the open and close of the prior candle.
A bearish engulfing pattern is most indicative of the onset of a bearish price move when it appears in the midst of an uptrend and vice-versa for bullish engulfing.
The length of the first candle’s real body is significant as a smaller real body implies greater indecision and uncertainty. Volumes on the second candle should be higher than the first one.
A bearish trend reversal pattern that warns of a potential reversal of an uptrend.
It is a 3 candlesticks pattern, opposite of morning star.
The first candlestick must be bullish and must have relatively large real body.
The second candlestick is the star, with short real body that doesn’t touch the real body of first one and can be within the upper shadow of the first one.
3rd candle confirms weakness in the trend which should be a bearish candle that closes well into the body of the first candlestick.
The reliability increases when 3rd candle opens below the body of the star candle.
Also, reliability increases when 3rd candle does not have long lower shadow.
Volume can also be considered, volume of the third candle being higher.
A bullish trend reversal pattern that warns of a potential reversal of a downtrend.
It is a 3 candlesticks pattern, opposite of evening star.
The first candlestick must be bearish and must have relatively large real body.
The second candlestick is the star, with short real body that doesn’t touch the real body of first one and can be within the lower shadow of the first one.
3rd candle confirms weakness in the trend which should be a bullish candle that closes well into the body of the first candle.
The reliability increases when 3rd candle opens above the body of the star candle which is rare.
Also, reliability increases when 3rd candle does not have long upper shadow. Volume can also be considered, volume of the third candle being higher.
It is a bearish one candle pattern that appears in uptrend and warns of potential trend reversal.
Since the long lower shadow is a bullish signal, this candle should be followed by candle closing at least below the real body of the hanging man candle.
Furthermore, for the reversal signal to be confirmed, the consequent bearish bar should reach the “neckline” established by the open of the bullish bar on the other side of the hanging man.
the long lower shadow of the hanging man should be twice the length of the real body.
The body’s color is not important. Little or no upper shadow. It is often a first sign of weakening of the bull trend.
Hammer is same as the hanging man candle pattern. Appears after a down trend signaling weakening of the downtrend.
It is a bearish reversal pattern that consists of 3 bearish candles that are consecutive.
It is a moderate trend reversal pattern. Each of the candles should be relatively long bearish candles with each candle closing at or near the low price for the period.
The successive candles should make a steady decline in price and should not have long lower shadows. Preferably should open within the real body of the preceding candle but not necessary.
It consists of 3 bullish candles.
It is moderate reversal pattern.
Each of the candles should be relatively long bullish candles with each candle closing at or near the low price for the period.
The successive candles should make a steady rise in price and should not have long upper shadows. Preferably should open within the real body of the preceding candle but not necessary.
The spinning top candlestick pattern has a short body centered between wicks of equal length.
The pattern indicates indecision in the market, resulting in no meaningful change in price: the bulls sent the price higher, while the bears pushed it low again. Spinning tops are often interpreted as a period of consolidation, or rest, following a significant uptrend or downtrend.
On its own the spinning top is a relatively benign signal, but they can be interpreted as a sign of things to come as it signifies that the current market pressure is losing control.
Trend continuation candlestick patterns
Three-method formation patterns are used to predict the continuation of a current trend, be it bearish or bullish.
The bearish pattern is called the ‘falling three methods. It is formed of a long red body, followed by three small green bodies, and another red body – the green candles are all contained within the range of the bearish bodies.
It shows traders that the bulls do not have enough strength to reverse the trend.
The opposite is true for the bullish pattern, called the ‘rising three methods’ candlestick pattern.
It comprises of three short reds sandwiched within the range of two long greens.
The pattern shows traders that, despite some selling pressure, buyers are retaining control of the market.
