Candlestick patterns are one of the most useful trading tools holding a valuable place in every financial market. Their use has drastically increased with the rise of the cryptocurrency market. As people are developing a keen interest in online trading, they look forward to utilize the tools for maximizing their profits and making their life easier. They consider these tools to take benefits from the growing financial markets. In such a condition, candlestick patterns serve as a primary tool to help the growing traders.
This article discusses all the necessary details you need to know about candlesticks and 12 effective candlestick patterns for traders’ assistance.
What Are Candlesticks?
Candlesticks are the advanced technical display of price movement. They display an asset’s price movement information for a certain time frame. They pack the data into a price bar, each representing the high, low, opening, and closing prices for the period. The financial chart contains a graphical presentation of data in multiple bars, speaking for the asset’s market value in the past. Candlesticks formulate a pattern that forecasts the price direction. They are more robust, visually appealing, and practical than traditional charts and bar graphs. They are also easier and simpler to understand.
As candlesticks are graphical presentations, it is necessary to understand their anatomy to get their message. Each aspect of the candlestick, such as body size, filling style, and color, adds details to this tool’s presented information. Traders need to learn all the necessary details to get the hidden information and predict the prices to make the most from financial markets. Candlesticks are tools for technical analysis, and they are used in liquidating any financial asset.
How Is a Candlestick Formed?
To form a candlestick, we must have information about opening, closing, high and low prices of the asset duration. A candlestick is the presentation of this data in a certain graphical form. The candlesticks have a similar structure with minor variations. Each variation delivers a signal for different information. Traders subjectively interpret these variations to understand the information, or again, they can use some advanced tools for interpreting the candlestick pattern.
Each bar or the candlestick is divided into upper shadow, lower shadow, and the real body. There are two types of candlesticks, bearish or bullish candles. The bearish candles are red and black, while bullish candles are green or white. The color simplifies the identification of the candlestick type. The body picturizes the range between the opening and closing prices. The size and color of the body signal multiple pieces of information.
The size of the candlestick body tells the difference between the opening and closing price of the asset. It also tells about the buying and selling pressures from the financial markets. The most important characteristics of the candlestick body size are discussed below:
- The Long Candlestick Body
It shows quickly rising prices, higher buying interest, and strong price movement. If the size of the candlestick increases further, it denotes an acceleration in the price trend and trend intensity.
- The Short candlestick Body
A short or the shrinking candlestick body shows a declining trend, a declining price movement, and highlights strong market forces.
- The Stable Body
If the size of the body remains the same for the time, it shows consistency and confirms a stable trend.
The length of the upper and lower shadow is helpful in determining the volatility and shows the complete picture of price fluctuations.
- The long shadows
The long shadows denote uncertainty of the prices and a competitive market. It shows that buyers and sellers compete for the asset, but none has won the race. A quickly increasing shadow after the long trend phase shows a further intensifying trend between buyers and sellers, which was stable.
- The Short Shadows
Opposite the long shadows, the short shadows represent a stable market position with zero or little instability. A healthy trend usually represents a small shadow on either side of the body, denotes quickly moving trend in one direction as one side of the market players wins over the other.
Besides the size of the body and the length of the shadows, the ratio between body and shadow also contains information to convey a message about market behavior and price movements. Understanding and correlating the body to shadow ratio is compulsory to get real insight from the candlesticks.
- The Body is Longer than the Shadows
Longer body of a candlestick represents a stronger trend. As the trend is stronger, the prices move faster towards the direction of the trend. When we look at the candlestick in upward trend, it closes towards the main body’s high end and has a very small or no candlestick shadow.
- The Shadows are Longer than the Body
Longer shadows than the body show opposite trend of the with longer body and short shadows. Such a candlestick appears when the trend slows down and moves in the opposite direction.
- Relatively Long Shadows and Small Body
This type of candlestick represents turning points and sideways phases. Such candlesticks appear when there is a balance between buyers and sellers but it is uncertain about the upcoming price movement in the financial market.
The position of the body with the shadows demonstrates two scenarios. Firstly, if the body is at one end, and the shadow sticks out on the other end, the candlestick shows the trend is moving towards one direction. The scenario is called a hammer, rejection, or pin bar. If the body is placed at the center of two equal lengths of upper and lower shadow, it represents uncertainty in the trend but a balance in the market value. In the indecision scenario, the price returns to its start point.
Besides size, the color of the body is very important. The color-coded system represents a direction in trend. If the body is shaded red or black, it tells that the closing was lower than the opening. An empty (white) and a green body tells that opening was lower than the closing. Colors make it easy for traders to observe the trends.
How To Read A Candlestick?
If a trader understands the formation and anatomy of the candlestick, reading a candlestick becomes easier. Each candlestick presents information about the high, low, opening, and closing of the asset in a given time, so traders must learn how to get this information from the bars in the financial chart.
Let’s learn to read a candlestick.
The low represents the level where the market has dropped during a trading session and displays the lowest point of the asset.
The high represents the level where market has raised during a trading session and also displays the highest point of the asset in the market.
Close represents the position where a trading session closed. In the bearish candle, the close point is below the body, whereas in the bullish candle, it is at the top.
Open represents the position where a trading session opened. In the bearish candle, the close point is below the body, whereas in the bullish candle, it is at the top. The candlestick signals are for any period, be it a day, hours, or even more minute-long cycles of the trading day. There are some established patterns of the candlestick financial chart.
What are Patterns Of A Candlestick?
Like the candlestick structure, the side-by-side placement of candlesticks in a chart builds a pattern. The pattern focuses on the size of the body, upper and lower shadows, longer body and no shadows. The patterns are simple or complex, bullish or bearish, and signify trend reversals, continuations, indecision or a pause in the price direction.
Candlestick patterns play a significant role in a trader’s life. Traders interpret the candlestick patterns to use the information in them to predict the market’s value of an asset. It helps them to shape their trading activities based on price movements and previous patterns.
Understanding the patterns is synonymous with understanding the price movement in the financial markets. Once traders are aware of the price movements, they are sure about trading activities and manage risk.
Top Candlestick Patterns with Interpretation
There are 42 different candlestick patterns that convey different informations. Here is a list of their names
Big black candle
Big white candle
Long Lower Shadow
Long Upper Shadow
Bearish Harami Cross
Bullish Harami Cross
Engulfing Bearish Line
Dark Cloud Cover
Bearish 3-Method Formation
Bullish 3-Method Formation
Evening Doji Star
Morning Doji Star
Three White Soldier
Three Black Crows
Remembering each of them is beneficial for traders, but it is practically impossible to keep all of them at their fingertips. Although it is possible that with time and experience, traders become familiar with all of them but in the beginning understanding, reading the candlestick, and learning the famous ones is enough.
Here we enlist the top 12 candlestick patterns that everyone should know about.
- Bearish Candlesticks
Shooting Star Candlestick Patterns
Located at the top of an uptrend, the pattern signals a bearish reversal. It is a single candlestick pattern. The shooting star candlestick pattern resembles an inverted hammer shape. The body of the candlestick is located under a long upper shadow. The shadow size is twice that of the real body of teh candlestick.
The pattern is formed when the opening and closing prices are equivalent. It is a tpe of reversal signal indicating a falling price in the market trend.
Hanging Man Candlestick Patterns
The hanging man candlestick pattern resembles a hammer candlestick in shape. It has a small body near the high with an absent or little upper shadow and a long lower shadow. Usually, the lower shadow is twice is the size of the body. Hanging man candlestick pattern is a single candlestick pattern present at the end of the upward trend and represents a bearish reversal.
This candlestick denotes a scenario where there was selling off during the trading session, and buyers can push the prices up again. It indicates that the bulls are losing market control.
Evening Star Candlestick Patterns
The evening star candlestick pattern contains three candlesticks. The even star candlestick consists of a bullish candlestick, a Doji followed by a bearish candlestick. The bullish candle, the first candle in the triad, represents an uptrend followed by a Doji representing indecision in the market. The third candlestick, the bearish, is strong and wipes the gains of the first candlestick.
The evening star candlestick pattern is equivalent to the bullish morning star. It denotes a reversal of an upward trend in the financial chart.
Three Black Crows Candlestick Pattern
This pattern is a top reversal signal with multiple candlesticks formed after an uptrend. The pattern has three candlesticks made of three long bearish bodies without upper and lower shadows and opens within the body of the preceding candlestick in the pattern. The three candlesticks have consecutive low lower closes at the low or near the low.
It denotes a situation where the trading session opens at a similar prices as that of previous day but due to the selling pressure prices goes lower and lower each day. Sellers are more than buyers in three days regularly.
Bearish Engulfing Pattern
Bearish engulfing pattern is a common and powerful multiple candlestick patterns. It is formed after an uptrend and indicates a bearish reversal.
The pattern is denoted by two candlesticks where the second candlestick engulfs the first candlestick. The first candlestick represents the continuation of the uptrend. In contrast, the second candlestick in the bearish engulfing pattern is a longer candlestick that shows there will be a pause to the uptrend. It is considered a major reversal signal.
- Bullish Candlesticks
Engulfing Bullish Candlestick Pattern
The engulfing bullish candlestick pattern is a two candlestick pattern. The first small black candlestick is followed by a large white candlestick such that the first whole candlestick (body plus the upper and lower shadow) can accomodate within the body of the second candlestick. When it appears at the end of a trend, it is considered a major reversal signal.
Piercing Candlestick Pattern
Piercing candlestick pattern is a two-candlestick pattern with a long red candlestick followed by a long green candlestick in the financial chart. It is a reversal signal that appears after a downward trend.
The first of the two candlesticks indicate continuity of the downward trend, whereas the second candlestick shows that bulls are back in the scene. In the given scenario, the second candlestick fills up the gap of 50% of the real body of the first candlestick.
The hammer candlestick pattern
The hammer is a single candlestick pattern. It resembles the shape of a hammer consisting of a small body with a long lower shadow and no or little upper shadow. It is a bullish pattern candlestick in a downward trend and is usually located at the bottom of the trend.
The hammer candlestick pattern shows that there was strong selling pressure throughout the day, but buyer pressure reversed the prices in the financial market.
Inverse Hammer Candlestick Pattern
As the name indicates, it is an inverse of the hammer candlestick pattern with the body under the long upper shadow. The lower shadow is absent or minimal in such a candlestick pattern.
Morning Star Candlestick Pattern
The morning star candlestick pattern is multiple candlestick patterns located after the downward trend. It indicates a bullish reversal. The pattern consists of three candlesticks where the first candlestick indicates a downward trend. The second candlestick is a Doji that represents indecision in the market. The position of the Doji must be completely out of the body of the first and third candlestick. The third candlestick shows that bulls are back in the market, and the situation will reverse.
Spinning Top Candlestick Pattern
A neutral candlestick pattern gains importance when it is between other candlestick patterns. It is a single candlestick pattern with a small body, and the size of upper and lower shadow can vary, but they are of equal length.
The spinning top candlestick pattern denotes a scenario where the bulls set the price higher, and bears try to pull it low, thus resulting in no meaningful change in the market trend. The spinning top is followed by an upward or a downward trend.
Doji Candlestick Pattern
Doji candlestick pattern, just like spinning top candlestick pattern, denotes indecision in the market. It resembles a plus sign or a cross with a small body and long upper and lower shadows. It is a single candlestick pattern.
A Doji candlestick pattern is formed in a scenario where bulls and bears fight to control the prices, but none of them wins over the other. It represents an equilibrium in the market’s demand and supply of an asset. Hence, the candlestick denotes a neutral position.
Candlestick pattern is an effective and advanced tool used in the financial markets. Many simple and complex patterns indicate upward, downward, and reversal trends. Understanding these trends helps traders to predict the price movement.