Japanese rice farmers invented candlesticks in the 18th century to predict price fluctuations in the rice market using intraday highs and lows and depicting the direction of change. Today, candlestick patterns are an indispensable charting tool used to analyze market sentiment and visualize price action.
By utilizing candlestick charts, traders can make smarter short-term trading decisions, identifying trends, reversals, and potential exit points at an advantage.
Read on to learn the anatomy of a candlestick and find out how to spot the most common candlestick patterns.
Our candlestick patterns cheat sheet will introduce you to some of the most crucial stock patterns and advise you on how to respond to them when trading. All these different patterns can seem overwhelming at first, but with a little bit of study, you’ll find that you understand the market better and make more profitable trades.
Candlesticks show four specific price points for a given time period, often one day. These price points are the open, close, high, and low. Together, these price points give traders a snapshot of whether price movement is trending positive or negative, and how strong that momentum is.
Several candlestick chart patterns have emerged as clear indicators of a price reversal or continuation. Traders that memorize the candle pattern can spot them and get ahead of a trend for more favorable trading outcomes. These charts are versatile, with Forex and crypto candlestick charts being just as common as using them for options and swing trades.
The body represents the open-close price range during that time period. A larger body suggests a significant price movement during that period, indicating strong buying or selling pressure. Conversely, a smaller body suggests a relatively smaller price range between the opening and closing prices. This indicates less price movement and potentially lower market conviction during that period.
The color of a candlestick shows the direction of price movement during the specified time period. Green or white bodies represent a higher closing price than the opening price for a given period. Red or black bodies represent a lower closing price than the opening price. This makes it easy to know if the price increased or decreased that day in one glance.
The upper wick represents the highest price reached during the period, while the lower wick represents the lowest price. The length of the wicks provides valuable information about the price volatility and the market's ability to move beyond the opening and closing prices.
Candle patterns are spotted using all three components and groupings of multiple candlesticks. Combinations of different patterns can signal a price reversal or continuation, as well as to what degree.
Assuming a daily chart, each candlestick represents a day's price spread, directional change, and volatility. Learning how to read candlesticks requires the ability to understand what these factors mean in relation to each other. The use of an accurate trading journal software can also help with reading these types of charts.
Here are a few conclusions one can draw when reading candlesticks:
It's more practical to learn with real-world examples. We're going to start with the best candlestick patterns that every trader should be able to recognize and move on to the more complex ones. You'll notice most candlesticks are named after their shape or the Japanese equivalent. Candlesticks are usually split into bullish and bearish categories:
Bullish candlestick patterns usually occur at the end of a downtrend and indicate potential upward price movement. They indicate that buyers have gained control or are exerting more influence over sellers. Traders look for these signals as a sign to buy and profit off of this price increase. Note that experienced traders often wait to see other confirmation signals to be more confident in a position before entering.
The Piercing Line is a bullish reversal pattern indicating the end of a downward trend:
The Piercing Line suggests that selling pressure has weakened and buyers are stepping in.
The Bullish Hammer resembles an actual hammer and signifies the end of sellers driving prices down. This pattern is widely known, used in crypto candle charts and stock charts alike.
The Inverse Hammer or inverted hammer indicates the reversal of a downward trend. This reversal candle stick pattern has:
The Bullish Harami is a two-candle pattern that occurs during a downtrend.
The Morning Star candle suggests that selling pressure is weakening, and buyers are gaining control. This candlestick is bullish and indicates a potential upward trend reversal.
Bearish candlestick patterns indicate a price decrease; sellers are taking control and causing prices to decline. Many of these patterns have a bullish counterpart, often flipped to indicate the exact opposite.
The Bear Flag pattern predicts that a bearish downtrend will persist after a temporary price reversal known as a pullback. The flag pole, which is the sharp downward movement preceding the pullback, and the flag itself symbolize the retracement that takes place during the temporary reversal.
Bearish Evening Star
The Bearish Evening Star is the opposite of the bullish Morning Star. It consists of:
The Hanging Man Candlestick happens under two conditions.
How does this differ from the hammer? The hanging man is a bearish candle and forms within a short uptrend. The hammer candlestick pattern forms within a short downtrend.
Shooting Star Candlestick
The Shooting Star Candlestick is a bearish candlestick pattern that occurs when a trend is losing momentum. This pattern is a key indicator of potential trend reversals in candlestick stocks.
Abandoned Baby Candlestick
The Abandoned Baby Candlestick signals the end of a downtrend. Of the bearish candlestick patterns, it's rare and pretty trustworthy that a reversal is coming.
While common patterns and reversal candles are accurate enough to learn and use, they may give false signals and need to be confirmed using multiple other sources.
Advanced candlestick patterns provide more reliability, but are harder to pinpoint and confirm. Advanced traders who've known how to read candle charts using sophisticated technical analysis can identify these signals quickly.
1. Falling Three Methods
It consists of a long bearish candle followed by three smaller bullish candles that are contained within the range of the first candle, and it concludes with another long bearish candle that closes below the low of the initial bearish candle.
2. Rising Three Methods
This bullish continuation pattern indicates a prolonged uptrend in candlestick stocks:
The pattern is characterized by a long bullish candle followed by three smaller bearish candles that are contained within the range of the first candle, and it concludes with another long bullish candle that closes above the high of the initial bullish candle.
3. Mat Hold
The Mat Hold indicates the continuation of a preceding bullish or bearish move.
The first candle is a long bullish, followed by three small-bodies bearish candles contained within the range of the first bullish candle. The final candle is another long bullish candle that closes above the high of the first bullish candle, indicating the resumption of the uptrend.
4. Three-Line Strike
This trend-continuation candlestick pattern consists of four candles. The heights and positioning can support either a bullish or a bearish trend. It's one of the best candlestick patterns for continuation prediction.
1. Bullish and Bearish Engulfing
This powerful pattern is relatively easy to spot. It has a small bullish candlestick followed by a large bearish candle that engulfs the first one. This pattern indicates lower prices may be coming.
2. Three Inside Up/Down
Formed by three consecutive candles, this pattern indicates a loss of momentum in the current trend and suggests a potential shift in the opposite direction.
3. Three White Soldiers
This candle pattern is characterized by three back-to-back long bullish candles. Each candle opens within the body of the previous candle, preferably above its midpoint. The closing price of each candle should be near its highest point; reversal candles indicate potential bullish strength.
Yes, Forex and crypto traders can also use the candlestick methods to spot buy and sell signals. The same rules apply when using technical analysis.
Because crypto markets are open 24/7 and Forex markets have different clocks, traders may use different time frames and settings to find signals. Traders may set up a Forex candlestick chart or Bitcoin BTC) candlestick chart using the minute or hourly time frames because of the nature of the market.
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Candlestick patterns are vital tools for assessing market sentiment and price action. Understanding the components of a candlestick, body, color, and wick, helps traders interpret price movements and volatility to better pinpoint entry and exit points.
Learning common patterns like the Hammer, Morning/Evening Star, and the engulfing lines enables traders to identify potential reversals or continuations and make smarter trades.
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We help this guide helped you learn not only how to read candle charts but the candlesticks types that will help you become a more adept trader.