Top candlestick patterns traders should know

Candlesticks are referred to as Japanese candlesticks for a reason; this is because they were founded in 18th-century Japan by Munehisa Homma. He was a famous Japanese rice trader who started using various candlestick chart patterns in the rice trading markets to see how the price of rice moved daily.

Candlestick patterns were later introduced to the Western world by Steve Nison, who was a leading authority in candlestick strategies.

Candlestick patterns illustrate an asset’s historical price movement over time. Each candle provides you with price information in a single unit of time.

If you were looking at the daily chart, each candle would represent one day’s price movement, and if you were looking at the four-hour chart, each candle would represent four hours of price movement.

The candlesticks will change with each time frame accordingly.

As mentioned above, a candlestick pattern is a way to interpret an asset’s price movement and forms part of technical analysis. Each candle has three main parts: the body, the shadow (or wicks), and the colour. 

Below, you’ll see a breakdown of each component in more detail.

• Body: The candle's body represents an asset’s open and closing price in an interval. The location of the open and closed points determines the direction of the price movement. In a bullish candlestick, the close is higher than the open, and in a bearish candlestick, the close is lower than the open.
• Shadow (wick): Each candlestick often contains one or two shadows or wicks, depending on the price movement during the interval. The shadows or wicks reflect the high and low points of prices for a specific interval. The highest point of the wick represents the highest point that price reached, while the lowest point of the wick represents the lowest point that price reached. When a candlestick only has one wick, depending on the direction of the wick, it means that the open or close price is the same as the high or low price in that specific interval.
• Colour: The colour of the candlestick represents the direction of price movement in a particular interval. When a candlestick is green or white, the price rises, whereas if the candlestick is red or black, the price decreases.

Unlike a simple line chart, with a candlestick chart, you have much more information available about the price movement. Candlesticks form chronologically one after the other and can help you see the overall trend of how prices move.

Before you can decide on what is currently happening in the market, you’ll first need to wait for the candlestick to close.

As mentioned above, there are a couple of factors to consider, such as the body of the candle, the wicks, and the colour. This will give you a complete picture and assist in your analysis.

When assessing a candlestick pattern, you must first wait for the intervals candle to close. Once the candlestick is closed, you can examine the candle's high, low, open, and closing points combined with the colour.

A candle's open and close price will either be at the top or bottom of the candle. In bullish candlesticks, the open price is at the bottom, and the close is at the top, and in bearish candles, the open price is at the top and the close at the bottom. You could also look at the wicks that form during the candle interval.

As mentioned above, the wicks are the highest and lowest point price reached in the interval, and sometimes there will only be one wick. This indicates how high and/or low the price moved before closing, indicating the buying or selling pressure during the interval.

Before the candlestick has closed completely, it can change colour, moving between green and red or white and black. That is why you’ll have to wait for the price to close before analysing whether it’s a bullish or bearish candle.

To get a better sense of the market trend, you'll have to look at the previous candlesticks and how those candles are moving.

This might also give you a better indication of where support and resistance zones are. We won’t focus on support and resistance in this article; however, if you want to learn more about support and resistance, we cover that in detail in our chart patterns article.

As previously mentioned, candlestick patterns fall into one of three categories: bullish, bearish, or continuation patterns.

Let’s have a look at some of the most common candlestick patterns in each of those categories.

Bullish candlestick patterns could indicate that a market could be about to rally. This could happen at the end of a downtrend, signalling that a possible uptrend is on the horizon.

Let’s take a look at the six most common bullish candlestick patterns below.

Hammer

A hammer candlestick is characterised by a small body, a long lower wick, and little to no upper wick. It could be seen as a sign of exhaustion when the market is in a downtrend and signals a possible bullish reversal coming.

A hammer means sellers drove the price to new lows during the session but could not maintain it. Instead, buyers resisted, and the market closed around its opening price or higher. If a hammer is red or black (bear), the market closed somewhat lower than it opened.

However, if it closes above the opening price and the candle is green or white (bull), the signal is stronger.

When analysing the candlestick's body, the wick should be twice or three times the length of the body to be considered a hammer.

Inverse hammer

An inverse hammer is the same as a regular hammer but upside down. It still has a small body, but this time, it has a long upper wick and little to no lower wick.

With this candlestick pattern, bulls (buyers) grabbed control early in the day, driving the market higher following a downtrend.

However, the reversal failed to take hold, and the bears (sellers) came in and ensured its price remained approximately the same where it began. With that said, the bears (sellers) could not maintain the downturn, which could indicate a possible shift in momentum to the upside.

Bullish engulfing

A bullish, engulfing candlestick pattern is a combination of two different candles. The first candle is a red or black bear candle and appears as part of the downtrend.

The bear candle is immediately followed by a green or white bull candle that completely engulfs it. This indicates that buyers came in strong, starting at the previous candle's close, but eventually, the price rose and closed above the previous candle's high.

As the market concludes at or near the period’s top, barely declining, there should be minimal to no apparent upper or lower wick within the bull candle.

Piercing line

A piercing line is almost like a bullish engulfing candle pattern consisting of two candlesticks, which could indicate a potential market reversal. In this case, a red or black bear candle forms, immediately followed by a green or white bull candle.

In a piercing line pattern, the bear candlestick has a longer body and is not engulfed by the bull candle. Instead, the market often has a gap between the bear’s close and the bull's open but rises above the bear candle's midpoint.

We’re still seeing a market reversal, but the bears had complete control of the market until about halfway through the second session when the bulls came in and pushed the price higher.

Three white soldiers

After a solid downtrend, the three white soldiers come in and completely take over. This candlestick pattern consists of three consecutive green or white bull candles.

The first candle should close on the previous red or black bear candle range. The second bull candle should close above the bear candles open, and the third candle should close above the last bull candle close.

So, as the buying momentum grows, each one of the three candles should have a longer body than the previous. This is a strong indication that the downtrend will reverse into an uptrend.

Morning star

Many traders could see the morning star candle as a vital sign that a reversal from a downtrend is on the horizon. This candlestick pattern is made up of three different candles.

The first candle is a long red or black candle, followed by a doji or spinning top candle. It doesn’t matter if the doji or spinning top candle is bullish or bearish. What matters is the candle's size; it has to be small. The second candle also doesn’t overlap with the two candles next to it because the market will gap both on the open and the close.

The next immediate candle is then a long green or black bull candle.

This pattern indicates sellers came in but couldn’t continue with the downtrend. At this point, buyers started taking over, moving the market towards an uptrend.

Now that we’ve reviewed the six most common bullish candlestick patterns let’s look at the six bearish candlestick patterns. These patterns could signal a reversal when the market is in an uptrend.

Hanging man

A hanging man is much the same as a hammer, except it emerges after an uptrend. Like the hammer, it indicates a potential reversal in the market, this time taking it from an uptrend towards a possible downtrend.

During the session, sellers drove the price of an asset down until being beaten by buyers pushing the price back up. However, those buyers could not continue the surge, in which case they lost control, signalling the momentum may shift towards the downside.

Shooting star

The shooting star pattern is another indicator of a potential market reversal. The shooting star looks the same as a hanging man but in reverse. Instead of the candle's body being at the top with a long lower wick, it’s now at the bottom with a long upper wick.

The price movement is also similar to an inverse hammer, which we saw in the bullish candlestick patterns above. The sellers came beating back an early continuation of the advance. This pattern forms at the height of an uptrend, signalling a possible reversal.

Bearish engulfing

A bearish engulfing is the reverse of a bullish engulfing candle, where the green or white bull candle gets engulfed by the second red or black bear candle.

The first bull candle closes, and in the second session, there is a rapid shift, with the market beginning higher but swiftly plummeting as sellers start taking control.

As more sellers enter, the market falls. Supply increases while demand decreases, signalling the potential start of a downtrend.

There should be little to no wicks on the second candle on either end, just like with the bullish engulfing candlestick pattern.

Tweezer tops

The tweezer tops candlestick pattern is another pattern of two candles next to each other. The first candle should be a green or white bull candle, and the second a red or black bear candle. Both should have short bodies with extended upper wicks. 

The wicks should be levelled with each other; that is what forms the tweezer tops. In this pattern, the buyers tried to push the market to new highs twice but failed. The market then slid back to the first period open on the second candle.

This symmetry indicates the momentum shift, indicating a potential downtrend could be expected.

Evening star

The evening star pattern is the same as the morning star pattern, where three candles make up the pattern. The first candle will be a green or white bull candle, the second candle will be a small doji or spinning top candle, and the third will be a red or black bear candle.

The colour of the second candle isn’t as important; what is important is the size. It has to be a doji or spinning top.

Also, like with the morning star, the doji or spinning top in the evening star doesn’t overlap with the two candles next to it because the market will gap both on the open and the close.

Before this pattern forms, the market surge continues in the first session before stalling in the second session. By the third session, a retracement had begun as more traders closed their long positions and sellers started opening their short positions.

Three black crows

The three black crows are similar to the three white soldiers. However, instead of three consecutive bull candles, it’s three consecutive bear candles in a row, signalling a strong possible reversal.

The first candle should close on the previous green or white bull candle range. The second bear candle should then close below the bull candles open, and the third bear candle should close below the previous bear candles close.

The selling momentum grows with each of the three candles, where each bear candle should have a longer body than the previous candle. This is a strong indication that a market reversal is about to occur.

The following candlestick patterns are continuation patterns. These candlestick patterns don’t necessarily indicate a change in the market direction but could help traders identify rest periods instead.

This is when the market is indecisive, which could indicate that the market might continue on the current trend. However, that is only sometimes the case because the market can be unpredictable, especially at times of high volatility.

Let’s look at four of the most common continuation patterns below.

Doji

The doji is easy to identify because it resembles a plus sign with a small to non-existent body. 

The wicks on either side must also be small, although the lengths could vary. The most important part of the candle is the small to non-existent body.

The doji indicates a struggle between buyers and sellers; however, none comes out on top. The open and closed points of the candle are almost the same.

This candlestick indicates indecision in the market. However, as seen above, when this candlestick is combined with two other candles, it could result in a reversal, such as with the evening star and morning star.

Spinning tops

The spinning tops candlestick pattern consists of two candlesticks with small bodies and wicks equal in length. The buyers tried to push the price higher, and the sellers tried to push the price lower, resulting in a stalemate with the price closing close to where it opened.

This candlestick pattern indicates a period of consolidation in the market and mainly forms after a significant up or downtrend. 

This candlestick pattern could show that the current market trend will continue due to the rest period. Or, it could indicate a market reversal when it forms at the top of an uptrend or the bottom of a downtrend.

The reason for this is that it could signify that either buyers or sellers are losing control depending on the current trend of the market.

Falling three methods

This candlestick pattern involves five candles following each other. This indicates that the current market trend might be set to continue.

It starts with a long red or black bear candle during a downtrend. It’s immediately followed by three smaller green or white bull candles and another long red or black bear candle. 

The three green or white bull candles form inside the range of the two red or black bear candles.

Essentially, the buyers didn’t have enough strength to push the price higher, with sellers coming in and driving the price lower again, continuing the downtrend.

Rising three methods

The rising three-method candlestick pattern is identical to the falling three-method candlestick pattern, but instead of a downtrend, this candlestick pattern occurs in an uptrend. It also consists of five candlesticks after each other to complete the pattern.

It starts with a long green or white bull candle followed by three smaller red or black bear candles and another long green or white bull candle. Like the falling three methods, the three red or black bear candles have to form inside the range of the two long green or white bull candles.

This indicates sellers coming in but aren’t strong enough to push the price lower, resulting in buyers driving the price higher, continuing the uptrend.

Traders use candlestick patterns to determine when to buy or sell and when to take profits or cut losses. There is no analysis or pattern that works 100% of the time. However, many traders are enthusiastic about using candlestick patterns.

Candlestick patterns may be beneficial if a trader follows the criteria and waits for confirmation. It might be best to wait for a candle to close before deciding to open a trade.

The idea behind candlestick patterns is to try and determine where the market might be going. Candlestick patterns could help predict the current or future trend and lessen the risk of missing a trade or having a trade go against you.

It might be essential to remember that candlesticks on higher time frames, such as the daily or four hours, might be more reliable than those on shorter time frames, such as the 15-minute or five minutes.

It might also be best to practise reading candlestick patterns on a demo account first and find other factors that align with your trading style and goals.