Candlestick Pattern
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Table of contents:
What Is a Candlestick Pattern?
How to Read a Candlestick Pattern
Six Bullish Candlestick Patterns
Six Bearish Candlestick Patterns
Four Continuation Candlestick Patterns
Benefits of Using Candlestick Patterns
Bottom Line
FAQs
Trading cannot exist without candlestick patterns. This is one of the most important components of a successful transaction. The entire chart is essentially made up of candles, and candlestick patterns can be found everywhere. But often for beginners, candlestick analysis and candlestick models may seem complicated, but in fact they are not. In this article we will explain how to analyze a chart using candles, what signals candles can give and how candles are formed in general.
What Is a Candlestick Pattern?
Candles (also called Japanese candles) are one of the interval forms of representing a price chart. It is called interval, since one object displays everything that happens on the chart during a specified time interval corresponding to the selected timeframe. As a result, each chart period is depicted as a white or black rectangle with additional elements.
Key takeaways:
- Candlestick patterns allow you to determine a trend reversal at an early stage or the entry point into a trade.
- The main parameters of a candle are the body of the candle, the shadow and the color of the candle.
- Candlestick patterns can be bullish, bearish, or continuation patterns.
- You cannot enter into a trade based only on candlestick patterns; candlestick patterns are an addition to a trading strategy.
Candle Body
Candle body is the distance between the opening and closing prices. If the closing price is higher than the opening price, that is, the market has risen, then the body will be white. If the closing price is lower than the opening price, that is, the market has declined, the body will be black. The higher the growing candle, the more buyers there are in the market, the stronger the demand. This indicates market growth. The lower the falling candle, the more sellers there are. This indicates a decline in the market.
Candle Wick/Shadow
Shadow (wick) is the maximum and minimum price for a given period. More often than not, the longer the shadow, the stronger the market sentiment. In some situations, a shadow can signal a change in trend. For example, if a candle was growing strongly, but began to fall towards the close and developed a large upper shadow and a narrow body, then, most likely, buying dominated during trading, and by the end of the session investors changed their point of view. Candles without shadows are called “Marubozu”. A black Marubozu candle indicates that the opening price of the candle corresponded to its maximum, and the closing price corresponded to its minimum, that is, a bearish trend prevailed. White “marubozu” indicates the opposite situation, when a growing, “bullish” trend prevailed.
Candle Color
Trading platforms usually offer two color pairs - green and red or white and black. There is no difference between these pairs; both pairs show either a rise in price or a fall. It is not difficult to guess that a red and black candlestick indicate a fall in price, and a green or white candlestick indicates an increase. A red candle indicates that the price has dropped for the selected timeframe unit. Let's say you are trading on a 5 minute time frame. At 11:00 the price of the asset was $1000, at 11:05 the price dropped to $995. Please note, this does not mean that the price gradually slid down, perhaps it made upward movements, fluctuated, but in the end, after 5 minutes, the price reached $995. Same with green candles.
How to Read a Candlestick Pattern
A daily candlestick represents a market’s opening, high, low, and closing (OHLC) prices. The rectangular real body, or just body, is colored with a dark color (red or black) for a drop in price and a light color (green or white) for a price increase. The lines above and below the body are referred to as wicks or tails, and they represent the day’s maximum high and low. Taken together, the parts of the candlestick can frequently signal changes in a market’s direction or highlight significant potential moves that frequently must be confirmed by the next day’s candle. Thus, candlestick patterns can help you in your trading strategy, so can J2T with our solutions https://j2t.com/solutions/mt5global/.
Six Bullish Candlestick Patterns
Hammer
One candle whose body is two or more times smaller than the lower shadow. The upper shadow is practically absent. The color of the candle body does not matter. After the formation of such a combination, you can expect the price to move upward.
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Inverse hammer
A similarly bullish pattern is the inverted hammer. The only difference being that the upper wick is long, while the lower wick is short.
It indicates a buying pressure, followed by a selling pressure that was not strong enough to drive the market price down. The inverse hammer suggests that buyers will soon have control of the market.
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Bullish engulfing
Two candles stand next to each other and have different directions (and colors). The body of the green candle completely covers the body of the red one, that is, it absorbs it. This combination indicates that the trend will form in a bullish direction.
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Piercing line
The piercing line is also a two-stick pattern, made up of a long red candle, followed by a long green candle.
There is usually a significant gap down between the first candlestick’s closing price, and the green candlestick’s opening. It indicates a strong buying pressure, as the price is pushed up to or above the mid-price of the previous day.
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Morning star
Two candles stand side by side: the first is falling, the second is a “doji” (the candle opened and closed at the same price), and its opening price is lower than the closing price of the first candle. Then follows the third, growing candle. The color of the doji does not matter. After such a combination is formed, you can expect the price to move upward.
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Three white soldiers
The three white soldiers pattern occurs over three days. It consists of consecutive long green (or white) candles with small wicks, which open and close progressively higher than the previous day.
It is a very strong bullish signal that occurs after a downtrend, and shows a steady advance of buying pressure.
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Six Bearish Candlestick Patterns
Hanging man
This candle appears at the end of a bullish trend. The candle is red, the body is several times smaller than the wick, the wick is directed downwards. Such candle means that buyers did not have enough strength to “pull” the candle up (so that it turned green), sellers (short sellers) began to dominate.
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Shooting star
This candle is an inverted hanging man, the candle wick is on top, the body is still several times smaller than the wick. Buyers pulled the price up, but at some point the forces of sellers began to dominate and pushed the price down and a wick was formed. This candle can also be found at the beginning of a bearish trend.
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Bearish engulfing
The first candle is green, the second is red. The red candle is larger than the green one (both below and above); it seems to cover the green candle. It also speaks about the prevailing forces of sellers.
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Evening star
This pattern in candlestick charts consists of three candles, the first is green, the second is short green (possibly with wicks), and the third is red. The second candle reflects the struggle for dominance between buyers and sellers, and the third red candle indicates the victory of sellers.
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Three black crows
The pattern consists of three red candles without wicks. They show the beginning of a confident downward movement, and the absence of wicks shows that buyers did not have enough strength to even slightly temporarily raise the price up.
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Dark cloud cover
The pattern consists of three candles, the first is bullish, the second is bearish and is larger in size than the first, the third is short bullish. This pattern shows the confident intention of sellers to pull the price down.
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Four Continuation Candlestick Patterns
Candles that do not reflect the dominance of buyers or sellers are called continuation patterns. These can help traders to identify a period of rest in the market, when there is market indecision or neutral price movement.
Doji
The Doji pattern appears when the opening and closing prices coincide. Such a candle will reflect the struggle between buyers and sellers, which ultimately does not lead to profit for either party. Although the Doji candle itself does not reflect the superiority of either side, it can often be found in other patterns, such as the bullish morning star and the bearish evening star.
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Spinning top
The spinning top pattern is somewhat similar to a Doji, the candle has shadows at the top and bottom and a small body. Typically this pattern indicates a battle between a bullish and bearish trend, and the candle after the spinning top can set the trend. If there is a green candle, then the trend is bullish, if it is red, then the trend is bearish. This will show which side won after fighting each other.
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Falling three methods
This pattern can be confusing to an inexperienced trader; it signals a continuation of the current trend, whether bullish or bearish.
The model consists of a long red candle, three small green ones, and the model also closes with a long red candle. Green candles are within the red candles. This suggests that the bulls at some point wanted to reverse the market, but their strength was not enough and the bears again seized control.
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Rising three methods
The opposite model, everything is the same as with the “three falling methods”, only the trend is bullish, between two long green candles there are three red ones, without going beyond the boundaries of the green ones. This pattern in candlestick charts reflects a short-term dominance of the bears, but the bulls soon take control of the market again.
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Benefits of Using Candlestick Patterns
Candlestick patterns are a visual representation of price movements in financial markets, offering a rich tapestry of information for traders. Using them provides several key benefits:
- Enhanced Market Understanding: Candlestick patterns illuminate the interplay of supply and demand forces within a specific timeframe. They depict market sentiment, momentum, and potential reversals, providing valuable insights into price action.
- Early Identification of Trends: Recognizing familiar patterns allows traders to anticipate potential trends before they fully manifest. This head start can be crucial for entering positions at favorable entry points or exiting before significant price drops.
- Confirmation of Trading Decisions: Candlestick pattern can validate existing trading strategies and signals. For example, a bullish pattern emerging after a downtrend can confirm a potential breakout and increase confidence in a buy order.
- Risk Management: Certain candlestick patterns can indicate potential reversals or price consolidations. Recognizing these patterns allows traders to adjust their positions or even exit trades to minimize losses.
- Increased Trading Efficiency: By understanding candlestick patterns, traders can quickly assess market conditions and identify potential opportunities without relying solely on complex technical indicators.
- Visual Appeal and Intuitive Understanding: Candlestick pattern is visually appealing and easy to understand, making it easier for traders to grasp market dynamics and interpret price action.
- Versatility Across Markets: Candlestick patterns can be applied across various financial markets, including stocks, forex, commodities, and cryptocurrencies, offering a universal language for understanding price movement.
Bottom Line
While candlestick patterns are a powerful tool, it's essential to remember that they are not foolproof. They should be used in conjunction with other technical and fundamental analyses to make informed trading decisions.
FAQs
Which Candlestick Pattern Is Most Reliable?
All candlestick patterns are reliable when used in conjunction with fundamental and technical analysis.
Is A Candlestick Chart Different From A Bar Chart?
Candlestick chart and bar charts both show price movement, but candlestick charts provide a more detailed visual representation, making them better for identifying patterns and market sentiment. Bar charts are simpler and more concise.
Does Candlestick Pattern Analysis Really Work?
Candlestick chart analysis is an integral part of trading, undoubtedly it should be used, but we also shouldn’t forget about fundamental and technical analysis.
Can Candlestick Patterns Be Used to Predict Market Turning Points?
To determine a trend reversal, you need to rely not only on candlestick patterns, but also on other aspects such as average price movement, liquidity, imbalance, and other technical analysis attributes.
