If you are a trader, you probably know that every candle you see on the chart is a part of history. It tells what happened with the price and how bulls and bears fought over a certain period.
But did you know that candlestick patterns can also provide a wide range of opportunities for your trading? Some traders use them to seek a reversal or a trend continuation. Others set stop losses and take profits near their shadows to control risks.
In this post, I will show you some of the most common and powerful candlestick patterns that can help you make better trading decisions. Let's get started!
What is a candlestick?
A candlestick is a way of displaying information about an asset's price movement. It has three basic features:
- The body, which represents the open-to-close range
- The wick, or shadow, that indicates the intra-day high and low
- The color, which reveals the direction of market movement – a green (or white) body indicates a price increase, while a red (or black) body shows a price decrease
Over time, individual candlesticks form patterns that traders can use to recognize major support and resistance levels. There are three types of candlestick patterns: bullish, bearish, and continuation.
Bullish candlestick patterns
Bullish patterns may form after a market downtrend, and signal a reversal of price movement. They are an indicator for traders to consider opening a long position to profit from any upward trajectory.
Here are some examples of bullish candlestick patterns:
A bullish engulfing pattern is formed when a green candle completely engulfs the previous red candle. It indicates that buyers have overwhelmed sellers and pushed the price higher.
A hammer pattern is formed when a red or green candle has a small body and a long lower wick. It indicates that although there were selling pressures during the day, ultimately buyers drove the price back up.
An inverted hammer pattern is similar to the hammer pattern, except that it has a long upper wick instead of a lower wick. It indicates that buyers tried to push the price higher but met resistance from sellers.
A morning star pattern is formed by three candles: A red one followed by a small-bodied one (red or green) below it, then followed by another green one above it. It indicates that sellers have lost momentum and buyers have taken over.
A piercing pattern is formed when two candles: A red one followed by another green one above it but not fully engulfing it. It indicates that buyers have gained some strength but not enough to reverse the trend completely.
There are many more bullish candlestick patterns such as three white soldiers, bullish harami, three inside up, etc., but I won't go into details here as this post would be too long otherwise.
Bearish candlestick patterns
Bearish patterns may form after an uptrend in market prices indicating a reversal in a direction downwards.
They are an indicator for traders to consider opening short positions or exiting their long positions.
Here are some examples of bearish candlestick patterns:
A bearish engulfing pattern is formed when two candles: A green one followed by another red one below it completely engulf it.
It indicates that sellers have overwhelmed buyers and pushed the price lower.
A hanging man pattern is formed when two candles: A green one followed by another red or green one with a small body and long lower wick.
It indicates that buyers have lost control and sellers may take over soon.
A shooting star is a single candle pattern that forms at the end of an uptrend. It has a small body near the low end of its range and a long upper wick that extends above it. It shows that buyers pushed the price up during the day, but sellers came in and drove it back down, rejecting higher levels.
An evening star is a three-candle pattern that forms at the end of an uptrend. It consists of a large bullish candle followed by a small indecisive candle (such as a doji or spinning top) and then by
a large bearish candle. It shows that buyers have lost momentum and sellers have stepped in to reverse
Candlestick patterns are like the secret language of the market. They tell you what other traders are thinking and feeling about a certain asset. By learning how to read and understand these patterns, you can get a better idea of where the price is likely to go next and when to enter or exit a trade. Candlestick patterns can also help you spot potential reversals, breakouts, and trends before they happen. That way, you can take advantage of profitable opportunities and avoid losing money. Learning candlestick patterns is not hard, but it takes some practice and patience. Once you master this skill, you will have an edge over other traders who rely on indicators or news alone.