Introduction

The candlestick chart is one of the most widely used technical tools for analyzing price patterns. For centuries, traders and investors have used them to find patterns that can indicate the direction of prices. This article examines some of the most popular candlestick patterns through illustrated examples.

If you are ready to start reading candlestick charts, check out the Beginner's Guide to Candlestick Charts.

How to use the candlestick pattern

Traders can use a large number of candlestick patterns to identify areas of interest on the chart. They are appropriate for day trading, swing trading, and even long-term position trading. While some candlestick patterns can indicate balance between buyers and sellers, other candlestick patterns can indicate reversals, continuation, or indecision.

It is important to note that the candlestick pattern itself is not necessarily a buy or sell signal, but a way of observing the market structure and a potential indicator of upcoming opportunities. Therefore, it is always helpful to look at the pattern in context, what the context of the technical pattern on the chart might be, and the broader market environment and other factors.

Therefore, like any other market analysis tool, the candlestick pattern is most useful when combined with other methods such as the Wyckoff method, Elliott wave theory, and Dow theory. It can also be used as technical analysis (TA), such as Trend Lines, Moving averages, relative strength index (RSI), Stochastic RSI, Bollinger Bands, Ichimoku cloud, parabolic SAR, or MACD.

Patterns of bullish reversal

Hammer

A candlestick with a long bottom wick at the bottom of the downtrend, where the bottom wick is at least twice the size of the solid.

The hammer chart shows that despite the high selling pressure, the bulls once again pushed up prices near the opening. The hammer can be red or green, but a green hammer can indicate a stronger bullish reaction.

Inverted hammer

Also called an inverted hammer, it is similar to a hammer but has a long core above the body instead of below. Like a hammer, the wick on the top should be at least twice the size of the body.

The inverted hammer appears at the bottom of the downtrend, which may indicate a possible upside reversal. The upper wick indicates that the price has stopped its continued downward movement, although sellers eventually managed to pull it down near the opening. This may mean that buyers will soon control the market.

Three white soldiers

The Three White Soldiers pattern consists of three consecutive green candles that open in the body of the previous candle and close at a higher level than the high of the previous candle.

Ideally, these candles should not have longer and lower wicks, which indicates that continued buying pressure is pushing up prices. You can judge the chance of continuing or possible reversal by the size of the candle and the length of the wick.

Bullish harami

The bullish harami is characterized by a long red candle followed by a smaller green candle that is completely enclosed in the body of the previous candle.

A bullish Harami can last for two days or more. This pattern indicates that the sales momentum is slowing down and maybe coming to an end.

Bearish reversal patterns

Hanging man

The Hanged Man is equivalent to the bearish form of a hammer, usually formed at the end of an uptrend, with a smaller body and a longer core.

The lower wick indicates a large sell-off, but the bulls managed to regain control and raise the price. With this in mind, the sell-off after a long-term uptrend may be a warning that the bulls may soon lose control of the market.

Shooting star

The meteor consists of a candlestick with a long wick on it, almost no lower wick, and a small body, preferably near the bottom. The meteor resembles an inverted hammer in shape, but forms at the end of the uptrend.

This shows that the market has peaked, but then sellers controlled and lowered the price. Some traders prefer to wait for the next candle to open to confirm the pattern.

Three black crows

The three black crows are made up of three consecutive red candles that open in the body of the previous candle and close below its low.

The bearish is equivalent to three white soldiers. Ideally, these candles should not have longer and higher wicks, indicating that prices are continuing to fall due to continued selling pressure. You can judge the possibility of continuation by the size of the candle and the length of the wick.

Bearish harami

A bearish harami is a long green candle followed by a small red candle whose body is completely enclosed in the previous candle's body.

The bearish harami can last two or more days, appears at the end of an uptrend, and may indicate that buying pressure is dwindling.

Dark cloud cover

The dark cloud cover pattern consists of a red candle whose opening price is higher than the closing price of the previous green candle, and then the closing price is lower than the midpoint of the candle.

This is usually accompanied by a large amount of volume, which indicates that momentum may change from high to low. Traders can wait for the third red candle to confirm the pattern.

Continuation patterns

Rising three methods

This pattern appears in an uptrend when three consecutive small solid red candles are followed by the continuation of the uptrend. Ideally, the red candle should not break the range of the previous candle.

The continuation is confirmed by a large green candle, indicating that the bulls have regained control of the trend direction.

Falling three methods

The reversal of the three upward trend methods indicates the continuation of the downward trend.

Doji

When the opening price and the closing price are the same (or very close), a Doji will be formed. The price can fluctuate around the opening price but eventually close at or near the opening price. Therefore, the Doji can indicate the indecision between the buying and selling forces. However, the interpretation of the Doji is very sensitive.

According to the position of the on/off line, the Doji can be described as follows:

Gravestone Doji – A bearish reversal candle with a long top wick and an opening/closing price close to the low.

Long-legged Doji – Fuzzy candles with upper and lower wicks, with open/close near the middle.

Dragonfly Doji – A bullish or bearish candlestick (depending on the context), the bottom wick is very long, and the opening/closing is close to the high.

The original definition of Doji states that open and close should be the same, but what if open and close are different but very close? This is called a spinning top. The cryptocurrency market can be very volatile, and precise Dojis are rare, which is why the top is often used as a synonym for Dojis.

Candlestick patterns based on price gaps

Price gaps are used in many candlestick patterns. When the opening price of a financial asset is higher or lower than its previous closing price, there will be a price gap, which creates a gap between the two candles, thus creating this type of price gap. Even so, price gaps may also appear in illiquid markets. However, since they are mainly derived from low liquidity and high cash premiums, they may not be suitable as effective models.

Final Thoughts

Candlestick patterns are essential for every trader to at least understand them, even if they do not directly include them in their trading strategy.

Although they are very useful in market analysis, it is important to remember that they are not based on scientific principles or laws, but rather on conveying and visualizing the buying and selling forces that ultimately drive the market.