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Candlestick patterns are used to predict the future direction of price movements. Discover the 16 most common candlestick patterns and how you can use them to identify trading opportunities.
Market Market trends Technical analysis #trading
Andres Ochoa | Financial editor, Colombia.
What are Japanese candles?
Japanese candlestick patterns are a visual representation of market price movements. They are one of the most well-known components of technical analysis, as they allow investors to quickly obtain price-related information from just a few price bars.
This article focuses on a daily chart, where each candle represents an intraday trade. Each candle has three basic characteristics:
The body, which represents the range from open to close.
The wick or shadow, which represents the rises and falls of the intraday.
The color, which indicates the direction of market movement. A green (or white) body means that the price is increasing, while a red (or black) body shows a decrease in price.
Over time, individual candles form patterns that investors can use to recognize major support and resistance levels. There are many candle patterns that indicate that there is an opportunity in a market. Some of them offer a perspective on the balance between selling and buying pressure, while others identify continuation patterns or indecisions in the market.
Before you start trading, it is essential that you familiarize yourself with the basic principles of candlestick patterns and how they can help you make decisions.
Six ascending candle patterns
Ascending patterns can occur after a downtrend in the market and indicate a reversal of price movements. They are an indicator for investors to consider the idea of opening a long position so that they benefit from any bullish trajectory.
Hammer
This pattern consists of a small body with a long lower wick and is located at the end of a downtrend.
A hammer shows that, although there was selling pressure during the day, eventually a lot of buying pressure caused the price to retreat. The body color can vary, but green hammers indicate a stronger bull market than red hammers.
Inverted hammer
A similar ascending pattern is the inverted hammer. The only difference is that the upper wick is long, while the lower one is short.
This indicates that there is a lot of buying pressure followed by selling pressure that has not been strong enough to lower market prices. The inverted hammer suggests that buyers will soon be in control of the market.
Bullish envelope
The engulfing candle pattern is made up of two candles. It is a small red body that is completely wrapped in a large green candle.
Even though the second day opens lower than the first, the bull market causes prices to rise and investors end up making profits.
Penetrating
This also consists of a pattern with two candles, made up of a long red candle, followed by a long green candle.
Normally there is a significant bearish gap between the first closing price of the candle and the green opening of the candle. This indicates that there is great buying pressure as the price rises to the average price level or above the previous day.
Morning Star
The morning star pattern is considered a sign of hope in a downtrend in the market. It is a pattern of three candles: one with a small body that is located between a large red one and a large green one. Traditionally, the “star” will not overtake the large bodies, as market gaps will occur at both the open and close.
This is a sign that the selling pressure from the first day is beginning to ease and a bull market is forecast.
Three white soldiers
The three white soldiers pattern occurs over three days. It is made up of a series of consecutive large green (or white) candles with small wicks (shadows), which progressively close and open higher than the previous day.
This is a fairly important bullish signal after a downtrend and shows a constant advance in buying pressure.
Six Descending Candle Patterns
Descending candlestick patterns typically form after an uptrend and signal a resistance point. Strong pessimism about the market price usually causes investors to close their positions and open a short position to take advantage of the price drop.
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hanging man
The hanging man is the bearish version of the hammer: it has the same shape, but is formed at the end of an uptrend.
This indicates that there has been a significant level of sales during the day, but buyers have been able to drive the price up. A significant level of selling is usually considered a sign that the bullish trend is disappearing in the market.
Shooting Star
The shooting star has the same shape as the inverted hammer, but is formed in an uptrend: it has a small body and a large upper wick.
Normally, the market will experience a small bullish gap at the opening, as well as a bullish rally towards an intraday before closing at a price just above the opening price, like a shooting star falling towards the ground.
Bearish envelope
A bearish engulfing pattern occurs at the end of an uptrend. The first candle has a small green body that wraps around a subsequent large red candle.
It involves the peak or slowdown of price movement and is a signal of an imminent market decline. The lower the second candle falls, the more likely the trend is to be important.
evening star
The Evening Star is a pattern made up of three candles that is the equivalent of the bullish Morning Star. It is made up of a small candle sandwiched between a large green candle and a large red candle.
It indicates that there is a reversal of the bullish trend and is especially important when the third candle eliminates the profits generated by the first.
three black crows
The three black crows pattern is made up of three large red candles with short or non-existent wicks. Each session opens with a similar price to the previous day, but selling pressure causes the price to fall further and further with each close.
Investors interpret these patterns as the beginning of a downtrend, as the number of sellers exceeds the number of buyers for three days in a row.
dark cloud cover
The dark cloud pattern indicates that there is a bearish reversal, that is, a dark cloud over the previous day's optimism. It is made up of two candles: a red one that opens with a price higher than the green body of the previous day and closes below its midpoint.
This is a sign that the bearish trend has taken over the session, so prices experience a significant drop. If the candle wicks are short, this suggests that the downtrend was decisive.
Four continuation candle patterns
If a candlestick pattern does not indicate a change in market direction, it is known as a continuation pattern. This can help investors identify a period of rest in the market, when there is indecision in the market or a neutral price movement.
Doji
When a market opens and closes at virtually the same price, the candle resembles a cross or plus symbol. Investors should look for a short or non-existent body with strands that vary in length.
The doji pattern represents a fight between buyers and sellers that ends with neither side making a net profit. On its own, a doji is a neutral signal, but it can be found in reversal patterns such as the bullish morning star and the bearish evening star.
horns
These patterns have a short body that sits in the center of strands of the same size. The pattern indicates that there is indecision in the market, which means that there is no major change in price: the bulls have sold at the high price, while the bears have decreased it again. Spins are typically interpreted as a period of consolidation or rest, which may be followed by an uptrend or downtrend.
On its own, the spinning top is a relatively neutral signal, but it can be interpreted as a sign that things may start to happen, as it implies that the current market pressure is losing control.
Triple bearish formation
This pattern is used to predict the continuation of the current trend, whether bullish or bearish.
The bearish pattern is known as the “bearish triple formation.” It is made up of a long red body, followed by three small green bodies and another red body. The green candles appear in the range of the bearish bodies. This shows investors that the bulls do not have enough strength to reverse the trend.
Bullish triple formation
This is the opposite pattern to the previous one, since it is bullish, and is known as the "bullish triple formation." It consists of three short red candles sandwiched between two long green ones. The pattern shows investors that even though there is selling pressure, buyers are still in control of the market.
Practice to learn to read Japanese candles
The best method to learn to read Japanese candlesticks is to practice trading according to the signals you have. If you don't feel ready to trade real markets, you can develop your skills risk-free with the Binance demo account.
When using any candlestick pattern, it is essential to remember that although they are useful for quickly predicting trends, they should be used in conjunction with other forms of technical analysis to confirm the trend.
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