The Japanese candlestick patterns have become crucial for stock and forex trading analysis to understand market movements and make better trading decisions. The candlestick pattern is one of the most used and easy-to-identify technical tools due to its bright colour and distinguished patterns.
In a volatile trading market, the prices and candlestick patterns constantly change. Therefore, it’s essential to learn about the patterns carefully to accurately identify the market situation because even a slight change can make a huge difference. This article will help you analyse and understand the differences between various forex candlestick patterns.
What are Candlestick Patterns?
Candlestick patterns indicate price highs and lows, in which red indicates a decline and green indicates an increase in asset prices. These patterns are easily identified on the charts as they appear like a candle with a wick either above or below the pattern. The candlestick patterns are differentiated into various types based on the pattern placement on the chart and the candle and wick position.
How to Read Candlestick Patterns?
Candlestick patterns are shaped like a candle, including the candle body and wick, also referred to as upper shadow or lower shadow.
- Body: The coloured block is the candle body; if the body is small, the opening and closing prices are closer.
- Upper Wick or Shadow: A long line that extends over the candlestick body, which indicates a sudden drop in the asset price.
- Lower Wick or Shadow: The long line extending below the candlestick body indicates a rise in the asset price.
If the upper shadow is long, the asset price is about to decline. On the other hand, if the lower shadow is long, it indicates a potential increase in the asset price.
Based on these variations in the patterns, they are categorised into different types called bullish and bearish patterns. While identifying the patterns, look for the projection of the shadow. Does it have a long upper wick or shadow? It is a bearish pattern or inverted hammer pattern. If the pattern is reversed, it is a reversed inverted hammer or shooting star pattern.
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Don’t Trade Before Learning These 35 Powerful Candlestick Patterns:
Bullish Candlesticks Pattern
|Bearish Candlesticks Patterns
|Continuation Candlestick Patterns
Falling Three Methods
Shooting Star Pattern
|Morning Star Pattern
|Evening Star Pattern
Bullish Piercing Pattern
Dark Cloud Cover
Rising Three Methods
Three White Soldiers
Three Black Crows
Three Inside Up Pattern
Three Inside Down
Upside Tasuki Gap
Downside Tasuki Gap
Three Outside Down
Three Outside Up
Download Source: 35 Powerful Candlestick Patterns PDF Download
Types of Candlestick Patterns
Many candlestick patterns on the Internet can be confusing and hard to track. When you look for advanced cheat sheet candlestick patterns, there are more than 50 patterns with slight variations and fancy names that are hard to remember.
To simplify your job, we will provide you with the most common Forex candlestick pattern that usually appears on the charts. This way, you can understand and memorise the common patterns and analyse the patterns without confusion.
Bullish Candlestick Patterns
A Bullish candlestick pattern is a broad classification of the candlestick pattern in which the candle body is on the top, followed by a long wick or lower shadow. These patterns are further classified into many other patterns, and some common ones are morning star, bullish engulfing, bullish harami, doji pattern etc.
Some of the expected bullish candlestick patterns are as follows:
Bullish Engulfing Pattern
This pattern is formed when a downtrend shifts towards an uptrend in which the second pattern completely engulfs the previous pattern. As you can see in the image below, the candle body of the second pattern is larger than the first one, which means that the difference between the opening and closing asset or market price has increased.
Morning Star Candlestick Pattern
This three-candle pattern effectively indicates the asset or market price transition from bearish to bullish. It includes a large bearish candlestick pattern, followed by a bearish pattern with a small candle body, then a bullish candlestick pattern with a long candle body.
Doji Candlestick Patterns
The Doji pattern represents a state of dilemma in the market as the small candlestick body indicates a small gap between the opening and closing prices. This means neither buyers can increase the asset price nor the sellers can reduce it.
The doji patterns are further divided into two types, which are
- Gravestone Doji: Represented by a small candle body, a long upper wick, and a non-existent lower wick, it forms a bearish reversal pattern.
- Dragonfly Doji: Represented by a long lower wick and a short upper wick that forms a T-shaped pattern.
This pattern is formed when there is a trend reversal in the market. It is represented by a long, bearish candle followed by a short, bullish candlestick pattern, which completely contrasts the bullish engulfing pattern.
Three White Soldiers
As the name suggests, three white soldiers are candlestick trading patterns with consecutive bullish patterns. When this pattern appears on the chart, the buyers have entered the market in large numbers. These patterns are represented by green bullish candlestick patterns with long bodies and short wicks.
Bearish Candlestick Patterns
The bearish candlestick pattern, also known as the inverted hammer candlestick pattern, represents a downtrend in the market. They are also called bullish candlestick reversal patterns or shooting star candlestick patterns. Some of the most common bearish candlestick trading patterns are as follows:
A hanging man is one of the bearish reversal candlestick patterns that appears after a market uptrend, and the pattern is identifiable because of a long lower wick and a short candle body.
Bearish engulfing is when a short bullish pattern is followed by a long bearish pattern that completely engulfs it. This shows a trend reversal and a shift of market or asset prices from high to low.
This is a three-candlestick trading pattern in which a bullish pattern is immediately followed by a bullish reversal, represented by a long upper wick or shadow. Then the third pattern is a complete bearish pattern, which indicates that the market has switched to a downtrend.
Shooting Star Candlestick Pattern
It is a single candlestick trading pattern, represented by a green bullish reversal pattern with a small candle body and a large upper wick. This indicates that the upward movement of the market is decreasing.
Stock Candlestick Patterns
The candlestick patterns are commonly used to analyse the stock market and prizes. In this article, we have listed some of the common and effective candlestick patterns used in stock trading as follows:
An abandoned baby pattern is formed in both bullish and bearish, represented by a tiny bullish or bearish pattern isolated from the continuous candlestick chart pattern. It indicates that the traders went against the candlestick chart trend.
Two candle reversal patterns in a consecutive manner are called a counterattack line, which denotes an uptrend in the market. The second pattern starts from the bottom of the first one.
Three White Soldiers and Three Black Crows
As mentioned above, three consecutive candlestick patterns represent three white soldiers and three black crows. These patterns are great for analysing stocks because they represent price consistency.
What are Crypto Candlestick Patterns?
Crypto candlestick patterns are the ones that are commonly used for analysing crypto trading markets.
This pattern indicates that the sellers tried to lower the price, but the buyers gained control over the assets. So, you can decide whether you want to sell or buy an asset based on this pattern.
Falling Three Method
These patterns are three consecutive smaller bullish patterns sandwiched between two bearish patterns, indicating a false alarm if this pattern appears. At the same time, crypto trading does not take the bullish patterns seriously, as they can convert into a bearish pattern at any time.
Day Trading Candlestick Patterns
Day trading refers to trading on shares that are done throughout the day. You can use certain candlestick patterns to analyse asset prices and market fluctuations.
It is a two-candlestick pattern sandwiched between price ranges or market trends. This pattern indicates a discontinuity in the market, which can help you monitor any potential changes in stock or asset prices.
Options Trading Candlestick Patterns
Options are another useful asset that traders prefer to trade with, and candlestick patterns can be used to understand options’ market or price movements.
Bearish and Bullish Harami
Bullish and bearish candlestick patterns are two candle patterns in which the second candle is engulfed by the first one resembling the figure of a pregnant woman, which is the meaning of harami in Japanese.
When you locate a bullish harami pattern, a potential market uptrend is coming. Therefore, buying call options is best when this pattern appears on the charts.
Dark Cloud Cover
In this pattern, a long green candlestick is followed by a red candlestick pattern, which indicates a shift of the market to a downtrend pattern after an upward trajectory.
Swing Trading Candlestick Patterns
You can use the following candlestick pattern to identify the potential of swing trading.
Tweezer Top and Bottom
A two-candle pattern with similar bottom wicks represents increased buyers in the swing trading market. You can enter a long position on the swing trading market when you identify this pattern.
The spinning top candlestick pattern is represented by a candlestick pattern with long upper and lower wicks and a small body in the middle. This shows the indecisiveness of the traders between buying and selling the asset.
Risk Management Tools for Candlestick Patterns
It doesn’t always have to be accurate; a false pattern is possible. Therefore, it is advisable to incorporate risk management tools and techniques to help you cut losses.
Stop loss is the most common risk management strategy that lets you stop trading on an asset after it reaches a certain price point that you determine.
This strategy is used by many experienced traders in which traders can set a limit of investment amount. As per this rule, traders should only risk 2% of their total capital as a risk management strategy to minimise losses.
Understanding and mastering these candlestick chart patterns will be important for stock and forex trading in 2024. Although they are not 100% effective, they give an almost accurate analysis of the market movements and potential price changes. Amongst many candlestick patterns, this article highlights the most common and basic patterns that will come in handy while trading.
FAQs- Frequently Asked Questions
How to read candlestick patterns?
It’s divided into body and wicks, in which the body represents the opening and closing prices. In contrast, the wicks show the highest and lowest prices in a particular time period.
What is the most reliable candlestick pattern?
Although candlestick patterns have risks and potential for false patterns, these patterns can be relied upon most of the time. An inverted hammer candlestick is one of the best candlestick patterns indicating market movement.
What is the engulfing candlestick pattern?
An engulfing candlestick pattern is when the first pattern, either bullish or bearish, is completely engulfed by the next pattern that is opposite in nature. You can use this pattern to indicate market movement from bullish to bearish.
Do candlestick patterns work?
Candlestick works in most instances, but it can sometimes be a false pattern. Therefore, risk management tools should be incorporated while trading.
Do candlestick patterns work for crypto?
Yes, it can be effective in analysing the crypto trading market. You can use the patterns to identify market trends and currency movements.
How many candlestick patterns are there?
There are over 50 candlestick patterns, but they can be broadly classified into bullish and bearish patterns.
What are candlestick patterns?
These are technical market analysis tools used to read the market or asset price highs and lows.
How accurate are candlestick patterns?
It can be about 55% accurate, which leaves the potential for doubts and second-guessing. Therefore, use other technical analysis tools and candlestick patterns for the most accurate results.
How do you identify, find, analyse, and calculate candlestick patterns?
Identify the candlestick patterns on the price charts and use the candlestick patterns cheat sheet to evaluate the patterns and calculate what they indicate. For additional help, use the 35 powerful candlestick patterns pdf as your cheat sheet.
How do forex beginners read candlestick patterns?
Forex beginners can start reading candlestick patterns with basic patterns like bullish, bullish reversal, inverted hammer, shooting star, doji, etc., easily identifiable and understood patterns.
What are the three major bullish candlestick patterns?
The Morning Star, engulfing bullish and bullish harami.
How do you use candlestick patterns for day trading?
Inside bars is an effective candlestick pattern for day trading as it can help you identify entry and exit points on the market.
Which is the Best Book for Learning Candlestick Patterns?
Don’t Trade Before Learning These 14 Candlestick Patterns is one of the best candlestick pattern books for beginner and experienced traders. You can also download a free printable candlestick pattern cheat sheet PDF online.