Best Popular Candlestick Patterns: Candlestick charts are a technical tool that packs data for multiple time frames into single price bars. This makes them more useful than traditional open-high, low-close bars or simple lines that connect the dots of closing prices. Candlesticks build patterns that predict price direction once completed. Proper color coding adds depth to this colorful technical tool, which dates back to 18th-century Japanese rice traders.
Steve Nison brought candlestick patterns to the Western world in his popular 1991 book, “Japanese Candlestick Charting Techniques.” Many traders can now identify dozens of these formations, which have colorful names like bearish dark cloud cover, evening star, and three black crows. In addition, single bar patterns including the Doji and hammer have been incorporated into dozens of long- and short-side trading strategies.
Not all candlestick patterns work equally well. Their huge popularity has lowered reliability because they’ve been analyzed by hedge funds and their algorithms. These well-funded players rely on lightning-speed execution to trade against retail investors and traditional fund managers who execute technical analysis strategies found in popular texts.
What Is A Candlestick?
A candlestick is a type of price chart used in technical analysis that displays the high, low, open, and closing prices of a security for a specific period. It originated from Japanese rice merchants and traders to track market prices and daily momentum for hundreds of years before becoming popularized in the United States. The wide part of the candlestick is called the “real body” and tells investors whether the closing price was higher or lower than the opening price (black/red if the stock closed lower, white/green if the stock closed higher).
Candlestick charts are thought to have been developed in the 18th century by Munehisa Homma, a Japanese rice trader. They were introduced to the Western world by Steve Nison in his book Japanese Candlestick Charting Techniques, first published in 1991. They are often used today in the stock analysis along with other analytical tools such as Fibonacci analysis.
The candlestick’s shadows show the day’s high and low and how they compare to the open and close. A candlestick’s shape varies based on the relationship between the day’s high, low, opening, and closing prices.
Candlesticks reflect the impact of investor sentiment on security prices and are used by technical analysts to determine when to enter and exit trades. Candlestick charting is based on a technique developed in Japan in the 1700s for tracking the price of rice. Candlesticks are a suitable technique for trading any liquid financial asset such as stocks, foreign exchange, and futures.
Best Popular Candlestick Patterns
Meanwhile, we are going to lecture you on the Best popular Candlestick patterns.
How to use candlestick patterns
There are countless candlestick patterns that traders can use to identify areas of interest on a chart. These can be used for day trading, swing trading, and even longer-term position trading. While some candlestick patterns may provide insights into the balance between buyers and sellers, others may indicate a reversal, continuation, or indecision.
It’s important to note that candlestick patterns aren’t necessarily a buy or sell signal by themselves. They are instead a way to look at market structure and a potential indication of an upcoming opportunity. As such, it is always useful to look at patterns in context. This can be the context of the technical pattern on the chart, but also the broader market environment and other factors.
In short, like any other market analysis tool, candlestick patterns are most useful when used in combination with other techniques. These may include the Wyckoff Method, the Elliott Wave Theory, and the Dow Theory. It can also include technical analysis (TA) indicators, such as Trend Lines, Moving Averages, the Relative Strength Index (RSI), Stochastic RSI, Bollinger Bands, Ichimoku Clouds, Parabolic SAR, or the MACD.
Bullish reversal patterns
Here is 4 the list of the Bullish reversal patterns:
1. Hammer
A candlestick with a long lower wick at the bottom of a downtrend, where the lower wick is at least twice the size of the body.
A hammer shows that even though the selling pressure was high, the bulls drove the price back up close to the open. A hammer can be either red or green, but green hammers may indicate a stronger bull reaction.
2. Inverted hammer
Also called the inverse hammer, it’s just like a hammer, but with a long wick above the body rather than below. Similar to a hammer, the upper wick should be at least twice the size of the body.
An inverted hammer occurs at the bottom of a downtrend and may indicate a potential reversal upward. The upper wick shows that price stopped its continued downward movement, even though the sellers eventually managed to drive it down near the open. As such, the inverted hammer may suggest that buyers soon might gain control of the market.
3. Three white soldiers
The three white soldiers’ pattern consists of three consecutive green candlesticks that all open within the previous candle’s body, and close at a level exceeding the previous candle’s high.
Ideally, these candlesticks shouldn’t have long lower wicks, indicating that continuous buying pressure is driving the price up. The size of the candles and the length of the wicks can be used to judge the chances of continuation or a possible retracement.
4. Bullish harami
A bullish harami is a long red candle followed by a smaller green candle that’s entirely contained within the body of the previous candle.
The bullish harami can unfold over two or more days, and it’s a pattern indicating that selling momentum is slowing down and might be coming to an end.
Bearish reversal patterns
Meanwhile, we are going to lecture you on the Bearish reversal patterns. Here is 5 the list of the Bearish reversal patterns:
1. Hanging man
The hanging man is the bearish equivalent of a hammer. It typically forms at the end of an uptrend with a small body and a long lower wick.
The lower wick indicates that there was a large sell-off, but bulls managed to take back control and drive the price up. Keeping that in mind, after a prolonged uptrend, the sell-off may act as a warning that the bulls might soon be losing control of the market.
2. Shooting star
The shooting star is made of a candlestick with a long upper wick, little or no lower wick, and a small body, ideally near the low. The shooting star is a similar shape to the inverted hammer but is formed at the end of an uptrend.
It indicates that the market reached a high, but then sellers took control and drove the price back down. Some traders prefer to wait for the next few candlesticks to unfold for confirmation of the pattern.
3. Three black crows
The three black crows are made of three consecutive red candlesticks that open within the previous candle’s body and close at a level below the previous candle’s low.
The bearish equivalent of three white soldiers. Ideally, these candlesticks shouldn’t have long higher wicks, indicating continuous selling pressure driving the price down. The size of the candles and the length of the wicks can be used to judge the chances of continuation.
4. Bearish harami
The bearish harami is a long green candle followed by a small red candle with a body that’s entirely contained within the body of the previous candle.
The bearish harami can unfold over two or more days, appears at the end of an uptrend and may indicate that buying pressure is decreasing.
5. Dark cloud cover
The dark cloud cover pattern consists of a red candle that opens above the close of the previous green candle but then closes below the midpoint of that candle.
It can often be accompanied by high volume, indicating that momentum might be shifting from the upside to the downside. Traders might wait for a third red candle for confirmation of the pattern.
Continuation patterns
- Rising three methods: This pattern occurs in an uptrend, where three consecutive red candles with small bodies are followed by the continuation of the uptrend. Ideally, the red candles shouldn’t breach the range of the preceding candlestick. The continuation is confirmed with a green candle with a large body. Indicating that bulls are back in control of the trend’s direction.
- Falling three methods: The inverse of rising three methods, indicating the continuation of a downtrend instead.
Doji
Doji forms when the open and the close are the same (or very close to each other). The price can move above and below the open but eventually closes at or near the open. As such, a Doji may indicate an indecision point between buying and selling forces. Still, the interpretation of a Doji is highly dependent on context.
Depending on where the line of the open/close falls, a Doji can be described as:
- Gravestone Doji – Bearish reversal candle with a long upper wick and the open/close near the low.
- Long-legged Doji – Indecisive candle with both a lower and upper wick, and the open/close near the midpoint.
- Dragonfly Doji – Either bullish or bearish candle (depending on context) with a long lower wick and the open/close near the high.
According to the original definition of the Doji, the open and close should be exactly the same. But, what if the open and close aren’t the same but are instead very close to each other? That’s called a spinning top. However, since cryptocurrency markets can be very volatile, exact Doji is rare. As such, the spinning top is often used interchangeably with the Doji.
Candlestick patterns based on price gaps
There are many candlestick patterns that use price gaps. A price gap is formed when a financial asset opens above or below its previous closing price, which creates a gap between the two candlesticks. Since cryptocurrency markets trade round the clock, patterns based on these types of price gaps are not present.
Even so, price gaps can still occur in illiquid markets. However, since they happen mainly because of low liquidity and high bid-ask spreads, they might not be useful as actionable patterns.
In Conclusion
Candlestick patterns are essential for any trader to at least be familiar with. Even if they don’t directly incorporate them into their trading strategy.
While they can be undoubtedly useful to analyze the markets. It’s important to remember that they aren’t based on any scientific principles or laws. They instead convey and visualize the buying and selling forces that ultimately drive the markets.
However, if there is anything you think we are missing. Don’t hesitate to inform us by dropping your advice in the comment section.
Either way, let me know by leaving a comment below!
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