Popular Candlesticks Patterns
Traders rely on candlestick patterns in order to be able to determine the future outcome of their investment by predicting the future price of assets they are following up with. Price movements and market trends are showcased in candlestick charts, also forming patterns that traders can recognise and use to their advantage in order to maximise ROI and make profitable investment decisions.
There are several types of bullish patterns that can be used by traders to determine when is the right time to make a position. Bullish patterns are commonly formed during downtrends, while there is a rule that bullish patterns are always followed by uptrend prices. After having repeated price changes and trends in the market, these trends turn into patterns, forming either bearish or bullish trends. Below are some of the most popular bullish reversal trends that represent some of the most reliable patterns when combined with other technical indicators, such as oscillators, for example.
Bullish engulfing is a bullish reversal pattern and one of the more popularly used candlestick patterns. This pattern is recognisable by two candlesticks, one of which represents a bearish trend and the other a bullish trend, usually coloured in red and green or black and white. The real body of the bullish candlestick usually consists of the real body of the bearish candlestick, which means that the green candlestick usually has more length. This pattern usually shows that the bullish price will turn bearish the next day, while bullish trends are set to prevail the very next day, surpassing the high price of the previous uptrend.
The hammer is another bullish reversal pattern and is easily recognisable by the specific resemblance to the shape of a hammer that candlesticks have. When the open, close and high price are close and relatively the same, a hammer pattern is created, with a long shadow line that is usually twice as long as the real body of the candlesticks. In cases where the close and high price are similar, bullish trends are stronger. Bulls are still prevailing in the case when the high and open price are the same; a bullish trend is still dominant and it's also considered bullish, although the level of bullishness is decreased.
As the name may indicate, the inverse hammer is the opposite of hammer patterns, also representing a bullish reversal pattern. The pattern occurs when open, low and close are relatively the same. The difference between hammer and inverse hammer is seen in the long upper shadow. In the case where low and open price are the same, the inverted hammer is considered as a strong bullish sign. However, when the close and low price make a matching value, a bearish pattern called Hanging Man is formed, although this pattern is still considered a bullish sign.
The piercing line is a bullish reversal trend and is recognisable by one bearish and one bullish candle. This pattern is formed when the bullish candle price closes on the second trading day above the middle price of the bearish candle on the first trading day. The level of demand as opposed to supply is increased in this case.
The morning star is another bullish reversal pattern, consisting of three candlesticks representing three trading days. The first-day candlestick is always bearish (red), showing strong bearish trends and even sinking to new lows. The second day may bring a weak bearish or weak bullish candlestick, while the trend may also indicate neutral momentum. On the third day, the bullish candlestick is seen, with bulls prevailing with upwards trending. The bullish trend on the third day usually covers the losses made on the first day.
Three white soldiers
The three white soldiers is a bullish reversal trend, representing three trading days with three bullish long candlestick bodies (hence the name of the pattern). This pattern is used to indicate a reversal in trends from downtrend prices. The opposite of this trend would be three black crows, used to indicate when there are chances for a trend reversal from uptrending. Three white soldiers is considered to be a reliable indicator of reversal towards bullish trends when confirmed with other indicators, while it may easily change to doji.
As the name indicates, harami is a bullish reversal trend, meaning "pregnant” when translated from Japanese. The pattern consists of two candlesticks representing two trading days. There are bullish and bearish harami patterns. When there is a large bearish candlestick on the first trading day followed by a smaller bullish or bearish body on the second day, harami is considered bullish, indicating that the price on the second day won’t move below the price recorded on the first bearish day. For harami to be bullish, the price needs to be gapped up on the second day.
After having a repeated market trend showcasing the reversal to downtrends, bearish patterns are formed, helping traders predict when the prices of assets are about to decline and take a downward turn.
Bearish engulfing is a bearish reversal trend appearing at the top of an uptrend. Bearish engulfing consists of two candlestick bodies, representing two days. On the first day there is a smaller bullish candlestick body followed by a longer bearish one on the second day. The trend occurs upon having the market gapping up, starting with mild bullish trends; however, the bullish trends are to be intercepted with bearish trends that are due to push the price down below the initial gains on the first day. When this pattern is spotted, it is more likely that the bears are taking over trends in the market for the next following days.
Hanging man is a bearish reversal pattern, resembling the bullish reversal hammer as the small candlestick bodies have long lower shadows as well. When the open and high price are relatively the same, this pattern is formed, indicating bearish trends to follow. Even if it happens that a bullish hanging man is formed when the close and high price are the same, this sign is considered bearish.
The shooting star is a bearish reversal sign, resembling the inverse hammer pattern as the upper shadow is longer than the candlestick bodies. In cases when open, low and close price are relatively the same, the shooting star pattern will be formed. When the close price and low price are the same, a bearish candlestick is formed within the shooting star pattern, indicating that the bearish trends completely ejected the bulls, often pushing the price at the closing below the open price. In cases where the open price and low price are the same, the shooting star may be considered less bearish, but still indicates a reversal to bears.
The evening star is a bearish reversal pattern consisting of three different candlestick bodies for three trading days. A long bullish candle will mark the first day, followed by a small bearish candlestick body, while a long bearish candlestick appears on the third day. The first day would be evidently marked with bullish trends, showcasing that bulls are prevailing; however, the second day may start with clear bulls only to have the bears stop the uptrend and make a reversal to downtrend. The reversal to bearish trends becomes evident on the third day. The bearish trends usually manage to push the price down to new lows.
Three black crows
The opposite pattern of the three white soldiers, the three black crows represent a bearish signal consisting of three bearish long candlestick bodies that end up at the lowest price point or near the lowest price, indicating a reversal from uptrend. The length of the body and the shadow can be used to determine how likely the trend is to retract.
Dark cloud cover
Dark cloud cover looks very similar to the bearish engulfing pattern by the way the pattern appears physically in the candlestick chart. This is a bearish reversal trend and it consists of two long candlestick bodies. The bullish body appears on the first day, followed by the bearish candlestick body. The pattern appears when the demand is unable to meet the supply where the supply is higher than demand. Bullish trend is unable to take the price higher, intercepted by bearish trends, while the bearish candlestick is closing at the middle price recorded on the first day.
The bearish harami usually signals upcoming uncertainty in the market; it consists of two candlesticks representing two days. The first-day candlestick is longer and bullish, followed by a smaller bearish candlestick body on the second day. The bulls are unable to push the price higher already on the second day despite gains on the first day.
Indecision candlestick patterns
Indecision candlestick patterns indicate steadiness in both negative and positive trends in the market. There are two types of indecision patterns: doji and spinning top.
Doji is an indecisive or transitional pattern indicating equality in bearish and bullish trends. Doji can be used to indicate a reversal in the market price, appearing at the top and the bottom of bearish and bullish trends, while it can also be a continuation pattern. In cases when the open price and close price are the same, the doji pattern is formed. The doji pattern is recognisable by the absence of candlestick bodies and the presence of upper and lower shadow lines of the same length.
The dragonfly doji is interpreted as a bullish sign of reversal, usually occurring at the bottom of downtrends. Dragonfly doji is formed when the close, high and open price are the same, which is a rare case in trading. Dragonfly doji patterns are recognisable by long lower shadow lines. This pattern shows that the bear trends were able to find the needed support so the price could go above the open price at the end of the day.
The gravestone doji usually occurs at the top of uptrends and it represents a bearish reversal pattern. When close, open and low price are the same, the gravestone doji is formed, recognisable by the long upper shadow. This pattern shows that the bulls were able to dominate the price, but the resistance brought a downward trend, pushing the price back down.
The spinning top pattern is recognisable by its short vertical body resembling a line with long upper and lower shadow lines of the same length. The body is so small that the difference between bears and bulls is barely seen. The pattern is actually showing the indecisiveness on the matter of buying or selling assets. The pattern appears when the close price ends up near the open price, having buyers pushing the price up and sellers pushing it down at the same time.
Aside from bullish, bearish, and indecisive patterns, there are other noted candlestick patterns that can be used as signals and indicators for trading. Some of these trends are inside bars and long wick.
Inside bars (continuation trend)
This continuation trend is formed when the high price is lower than the previous day's high, also having a higher low than the previous day's low. The pattern consists of two candlestick bodies, representing a price action pattern that showcases consolidation in the market momentum. The first-day candlestick is usually referred to as the “mother bar”, having a longer body than the second candlestick, called the “inside bar”. The inside bar pattern can be used as buy and sell signal.
Long wick (reversal trend)
The long wick is a reversal trend indicating a potential trend in the market momentum. This pattern is formed when asset prices are being tested and end up being rejected. The wick is then represented as the rejected area, consisting of a single candlestick. In the case of the long wick trend, the length of the wick is taken into consideration, while the wick needs to be longer than the previous 14 candles (14 days). This trend can be validated with support and resistance.
Candlestick patterns can be used for forming technical analysis and forecasting future outcomes of market trends and price movements; however, these indicators and signals in the form of patterns should be always confirmed with other technical indicators, such as resistance and support levels, in order to determine the entry point and to form trading decisions set to bring returns on investments.