Candlesticks are the most basic part of trading and their main purpose is to tell us what exactly the price is doing. But, there's more to candlesticks, as there are some candlestick patterns that are formed and traders can use this to take trades.
Single candlestick patterns
As the name suggests, single candlestick patterns are comprised of just one standalone candlestick.
The size of the body, length of the wicks as well as the location on the price chart where the candlestick is formed let the trader know the nature of the price movement on the basis of which he can take the trade.
1. Bullish Marubozu
This candlestick is one with a long body and little to no wicks. The bullish marubozu opens at its lowest and closes at its highest.
It indicates that the buyers dominated the price and hence it kept increasing in that time frame.
If a bullish marubozu is formed during an uptrend, it indicates a continuation in the trend of the currency pair.
If it is formed during a downtrend then it indicates that a reversal can take place.
2. Bearish Marubozu
This is also a candlestick with a long body and little to no wicks. As the name indicates that it is a bearish one hence it opens at its highest and closes at its lowest.
It indicates complete control by sellers in that time frame.
Bearish marubozu if formed during a downtrend indicates continuation and if formed during an uptrend, it indicates that a reversal in the price can take place.
3. Spinning Tops
This candlestick consists of a small narrow body and long wicks on both sides.
It indicates neutrality where neither the buyers nor sellers had complete control hence a situation of indecision.
The color of the body of the spinning top isn’t of much significance as the price did not close much further from where it opened.
If a spinning top is formed during an uptrend it indicates a possibility of a reversal as buyers are getting exhausted, and if it is formed during a downtrend then it indicates a possible reversal as not many sellers are present at that point of time in the market to drive the price even further down.
A Doji is just like a spinning top that shows a situation of indecision in the market. The only difference between the two is that a Doji has no real body.
A Doji candlestick closes at the price level at which it opened hence a flat body.
The length of the wicks of the Doji can vary, some will have long wicks on both sides, while some will have wicks on only one side.
Just like the spinning top, a Doji formed during an uptrend indicates a possible reversal and if formed in a downtrend also indicates a possible reversal.
5. Hammer and Hanging Man
These two candlesticks have the same appearance. Both have small and narrow bodies with long lower wicks and little to no wicks on the upside.
The real body of both the hammer and the hanging man is at the upper end.
The hammer is a bullish candlestick pattern i.e. it closed above its open price.
A hammer when formed during a downtrend indicates a potential reversal that the price can experience.
It is a bullish indication as it depicts that initially sellers had complete control but it was interrupted by the buyers that drove the price up.
The hanging man is a bearish candlestick pattern, it closes below the open price.
A hanging man when formed during an uptrend indicates a reversal.
It indicates that initially the sellers had complete control and took the price down but since it was an uptrend, buyers were present but were not too strong as it could only take the price up and did not close above open.
6. Inverted Hammer and Shooting Star
These two candlesticks appear the same, both have small narrow bodies with long upper wicks and little to no wicks on the lower side.
The real body of these candlesticks is present at the lower end.
The inverted hammer is a bullish candlestick pattern which when formed during a downtrend indicates shifting momentum.
It indicates that buyers had complete control but since it was already a downtrend and sellers were present to push the price down but not enough to push it below the open.
The shooting star is a bearish candlestick pattern and when it is formed during an uptrend it indicates a potential price reversal.
This candlestick indicates that though buyers had complete control, sellers came in and pushed the price down and it closed below the open price.
Double candlestick patterns
Two is better than one and as the name suggests the double candlestick pattern consists of two candlesticks.
In these patterns, it is important to see how the two candlesticks are formed in relation to one another and at what point on the price chart are they formed.
1. Bullish and Bearish Engulfing
The engulfing pattern is made up of two candlesticks in which the first candlestick is completely engulfed by the second candlestick.
This means that the body of the first candlestick should be inside the body of the second candlestick.
Some traders also require the second candlestick to engulf the entire first candlestick along with wicks.
Bullish engulfing is when the first candlestick is a bearish candlestick which is engulfed by a bullish second candlestick.
This when formed in a downtrend indicates a strong reversal in price and if formed during an uptrend indicates that buyers are getting even stronger.
Bearish engulfing is when the first candlestick is bullish which is engulfed by a bearish candlestick.
Bearish engulfing, when formed in an uptrend, indicates a strong price reversal and when formed in a downtrend indicates that more sellers are taking control.
In engulfing patterns it is important to check whether the price is already in a trend when it is formed, if formed during a sideways price movement, it isn’t of much significance.
The more the difference between the size of the two candlesticks the better it is as it indicates that strong market participants entered the market.
2. Inside Bars
The inside bar pattern is made up of two candlesticks in which the second candlestick is completely inside the first candlestick.
This is the reverse of the engulfing pattern in which the second candlestick engulfs the first candlestick, in the inside bar pattern the first candlestick engulfs the second candlestick.
In the inside bar pattern traders usually look for the body of the second candlestick to be completely inside the body of the first candlestick.
This pattern simply indicates that the momentum and volatility decreased in the second candlestick. Hence the pattern is not necessarily a bullish or bearish pattern.
Traders can enter into long positions if the price breaks on the upside and can enter into short positions if the price breaks on the downside.
3. Dark Cloud Cover
This is a reversal candlestick pattern that consists of two candlesticks. In this, the first candlestick is usually a long bullish candlestick with a wide body and the second candlestick is a bearish one.
It is important that the second candlestick opens above the high of the first candlestick.
This pattern indicates that in the first candlestick buyers were in control and were also in control when the second candlestick opened but sellers pushed the price lower.
The dark cloud cover is a bearish candlestick pattern.
4. Piercing Line
The piercing line pattern is the opposite of the dark cloud cover pattern.
In this the first candlestick is a long body bearish candlestick and the second candlestick is a bullish candlestick that opened below the low of the first candlestick.
The piercing line indicates that sellers were in control of the first candlestick and were still in control as the second candlestick opened.
But the buyers gained control and pushed prices higher. Hence this is a bullish candlestick pattern.
Triple candlestick patterns
Triple candlestick patterns are the most reliable and effective candlestick patterns as it is made of more candlesticks.
More the candlesticks more the information that can be derived out of them.
1. Three Inside Up
The three inside up candlestick pattern is a bullish reversal pattern consisting of three candlesticks.
This pattern is usually formed at the bottom of a downtrend.
The first candlestick is a long body bearish candlestick that is formed in line with the prevailing bearish trend.
The second candlestick is a bullish one with a fairly medium body.
The size of the second candlestick is not of much significance but it essentially close around the midpoint of the first candlestick.
The third candlestick is also a bullish one that closes above the high of the first candlestick.
This pattern indicates that the bearish trend was getting weaker as buyers entered gradually and took charge to reverse the trend.
2. Three Inside Down
The three inside down candlestick pattern is just the reverse of the three inside up candlestick pattern.
This is a bearish reversal pattern and is formed at the top of an uptrend.
The first candlestick is a long body bullish candlestick that is formed in line with the prevailing bullish trend.
The second candlestick is a bearish one with a fairly medium body.
Size of the second candlestick is not of much significance but it essentially close around the midpoint of the first candlestick.
The third candlestick is also a bearish one that closes below the low of the first candlestick.
This pattern indicates that the buyers are being replaced by the sellers that are taking control and causing a reversal in the trend.
3. Evening Star
This is a triple candlestick pattern that indicates a bearish reversal that is formed mostly at the top of an uptrend.
The first candlestick is a strong bullish candlestick formed in line with the prevailing bullish trend.
The second candlestick is more of an indecision candlestick hence it could either be a spinning top or a Doji candlestick.
The third candlestick is a long body bearish candlestick.
This indicates a clear shift of bias and is a strong pattern.
4. Morning Star
The morning star is the opposite of the evening star that indicates a bullish reversal in price and is formed at the bottom.
The first candlestick is a strong bearish candlestick followed by an indecision candlestick.
The third candlestick is a long body bullish one indicating that buyers have taken over complete control and have managed to reverse the trend into a bullish one.
5. Three White Soldier
The three white soldier candlestick pattern is a bullish reversal pattern formed at the end of a downtrend or after a short period of consolidation.
The first candlestick is a bullish candlestick indicating the end of the bearish trend.
The second candlestick is also a bullish candlestick with little to no upper wicks and is bigger in size as compared to the first candlestick.
The third candlestick is a long body bullish candlestick with a size equal to or more than that of the second candlestick and little to no upper wicks.
It is important that each candlestick breaks high of the previous candlestick.
Just like any other reversal pattern this pattern also indicates that buyers are taking over control after a bearish trend or after a brief consolidation.
6. Three Black Crows
This is a bearish candlestick pattern usually formed after a bullish trend or after a consolidation.
It is the reverse of the three white soldier candlestick pattern.
All three candlestick patterns are bearish candlesticks, the first one indicating the end of bullish trend or end of consolidation, the second candlestick has little to no wicks and is bigger than the first candlestick, and the third candlestick is the same as the second candlestick or bigger.
Each candlestick in this pattern must break the low of the previous candlestick. This indicates that a bearish trend is being formed and the buyers are no more in control of the trend.
How you should trade these patterns
These were the most commonly used candlestick patterns used by traders and are also the most commonly found patterns on the price charts.
But, these are more than a dozen of patterns and should you be trading all of them together? How should you exactly be looking to use them in trading?
According to me, instead of cramming up names and characteristics of each candlestick pattern, you should understand the psychology and the rationale behind each pattern.
This will make it easier for you to spot the patterns in the live markets as and when they formed.
You can always look to use these patterns along with some additional tools in order to get a confluence and additional confirmations.
This will just increase the probability of the trade going in your favor.
No strategy or setup is a holy grail. The only holy grail is risk management which if applied properly will protect your capital.
You cannot control the markets but you surely can control the amount of risk you take on each trade.
Which patterns do you trade?
Do let me know which patterns out of these do you prefer and look to trade as and when they appear on the price charts.
Are there any other patterns that you trade? Let me know in the comments section.
Share this blog post with others and let them also become familiar with the various candlestick patterns that are available to us to trade.