Traders commonly use candlestick patterns to predict future price movement and direction. There are several different candlestick patterns that can appear on a chart. This article goes over the 15 most common that every trader should know.
What is a Candlestick?
The Japanese candlestick chart was created back in the 18th century by a Japanese rice trader named Munehisa Homma. Steve Nison introduced the chart to the western world in his book, Japanese Candlestick Charting Techniques (affiliate link).
Candlestick charts are now one of the most popular chart types for technical analysis. They make it quick and easy for traders to interpret price action
Three elements of a candlestick
- The wicks or shadows indicate the intra-day low or high.
- The body represents the open and close range.
- The body color illustrates if the price direction is going up or down. Red (or black) indicates a price decrease and green (or white) indicates a price increase.
Over the years traders have noticed certain patterns that indicate support levels, resistance levels, trend reversals and more.
A candlestick pattern can be a bullish, bearish or neutral indicator. Using these patterns along with other indicators can help a trader make better decisions.
A bearish engulfing pattern can indicate an end of an uptrend. The first candle is green (or white) and has a small body, the following candle is long and red (or black). The larger and lower the engulfing red candle is the more bearish the pattern.
A bullish engulfing pattern is the opposite of a bearish engulfing pattern. It can signal an end of a downtrend. The first candle is small and red (or black), while the following candle is large and green (or white).
The bearish tweezer pattern also called a “tweezer top” indicates a bearish reversal at the top of an uptrend. A bearish tweezer top forms during a clear uptrend and the upper wicks will show an obvious price rejection.
The bullish tweezer pattern also called a “tweezer bottom” indicates a bullish reversal at the bottom of a downtrend. A bullish tweezer top forms during a clear downtrend and the lower wicks will show
A doji will form when a security’s open and close are essentially the same. The length of the upper and lower wicks can vary. Typically a doji will end up looking like a cross. By itself, a doji represents a neutral pattern. The preceding price action can confirm either a bearish or bullish bias.
The shooting star pattern is a bearish candlestick with a long upper wick and little to now lower wick. The candlestick appears in an uptrend and warns of a potential bearish trend reversal. It’s bearish because the price tried to rise but closed towards the open.
The evening star is a bearish three candlestick pattern that indicates a top trend reversal. The middle candlestick is the star. The pattern starts with one large green candlestick, then a short doji like
The morning star pattern is the opposite of an evening star pattern. It is a bullish bottom reversal indicator. Instead of the first candlestick being green (or white) like the evening star pattern, it’s
The hammer pattern forms a candlestick that looks like a hammer. Its body is short which represents the head of the hammer and the long lower wick represents the handle. A hammer can be both bearish or bullish depending on where it appears on a chart.
A bearish hammer is known as a “hanging man.” A hanging man at a top of an uptrend warns of a potential trend reversal.
A bullish hammer is found at the bottom of a downtrend and signals a potential bullish trend reversal.
The inverted hammer pattern mostly forms at the bottom of a downtrend. The candlestick will have a long upper wick and little to no bottom wick. The pattern indicates a potential bullish trend reversal.
The spinning top pattern has a short body that is centered between two long upper and lower wicks. It is a sign of market indecision because there wasn’t any meaningful price change. A spinning top can signal more sideways movement.
Three Black Crows
Three black crows is a bearish candlestick pattern that indicates the reversal of an uptrend. It consists of three consecutive candlesticks with large red (or black) bodies. The pattern is considered reliable when confirmed by other technical indicators like volume and RSI.
Three White Soldiers
This pattern is the opposite of the three black crows pattern. The 3 consecutive candlesticks have large green (or white) bodies. Three white soldiers
Three Inside Down
The three inside down pattern is sometimes referred to as the confirmed bearish harami. The first candle is long and green (or white) that closes near its high. The second candle is small and red (or black) and it closes inside the body of the first candle. The third candle surpasses the lows of the first candles. This pattern indicates a bearish reversal after an uptrend.
Three Inside Up
The three inside up pattern is also known as the confirmed bullish harami. The first candle is long and red (or black) that closes near its low. The second candle is small and red (or white) and it closes inside the body of the first candle. The third candle surpasses the highs of the first candles. This pattern indicates a bullish reversal after an uptrend.
Identifying these candlestick patterns correctly can help a trader significantly. They should be used in conjunction with other technical and even fundamental indicators.
Don’t risk entering or exiting a trade until you get confirmation of the pattern. Reversal candlestick patterns that appear at support or resistance levels can be more important than those found within the security’s current range.