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Candlestick Pattern
Candlestick Pattern
Technical analysis offers tools to help traders identify trends and predict reversals. Besides technical indicators, another great approach to price action analysis is candlestick charts and its patterns.
As you probably already know, there are several ways to display the price history of an asset, be it forex pairs, corporate stocks, or cryptocurrencies. The three most common chart types are linear charts, bar charts, and candlestick charts . Most traders prefer the latter because it provides lifelong patterns that predict trend reversal or continuation with a certain degree of accuracy.
A candlestick pattern is the movement of an asset’s price that is graphically displayed on a candlestick chart to predict a particular market action. Traders observe that prices move in similar ways when specific patterns appear on candlestick charts. Therefore, they isolated these patterns and organized them into different categories to use as technical analysis tools. But, what are candles?
What Are Candles?
Candlestick charts are a method of displaying historical price fluctuations of an asset over time. Each candle represents a certain period of time, depending on the timeframe chosen by the trader. For example, if you set up the D1 chart, each candlestick represents one day.
Researchers agree that a Japanese rice trader was the first to formulate the concept of a candle. The abstraction of candlesticks then reached the Western world with the book by Steᴠe Nixon titled “Japanese Candlestick Charting Techniques”.
Here are some important components that make price analysis intuitive to understand the purpose of the candle.
Candle Body
The body represents the opening and closing prices of the asset. The position opens or closes depending on the candlestick pattern and the price increases or decreases in a certain period of time. In a bull market, the closing price will be higher than the opening price and vice versa.
Candlestick/Shadow
Each candle usually has two so-called shadows, or wicks, although this is not generally a rule. Candlestick shadows represent the highs and lows of the price over a certain period of time. Therefore, the upper shadow represents the top, and the lower shadow represents the lowest point that the price reached. Sometimes only one candle is seen. It occurs when the high or low coincides with the opening or closing price.
Candle Color
The north color of the body represents the direction of price movement. Usually, the green (or white) body suggests bullishness and the red (or black) body indicates bearishness. You will see green and red bodies on most platforms. Like so, if the body is green, its upper limit will indicate the closing price.
How Do Candles Work in Trading?
Candlestick charts are by far the most comprehensive style for displaying asset prices. Cryptocurrency traders have borrowed this chart type from stock and forex trading. Unlike linear charts, which only show closing prices, candlestick charts provide a wealth of information about price history thanks to its structure discussed above.
Candlesticks form in chronological order and help you see the general trend as well as resistance and support lines even without technical indicators. In addition, they can form certain patterns that act as buy or sell signals. The use of candlestick charts is particularly relevant to cryptocurrencies, which are highly volatile and require detailed technical analysis.
16 Types of Best Candle Patterns
Although there are many candlestick patterns, we will list the most popular and reliable ones. Starting with bullish patterns, appear after a downtrend and predict a reversal. Cryptocurrency traders often open long positions when these patterns appear.
They are as follows:
1. Hammer Model
The hammer consists of a short body with a much longer lower shadow. As a rule, you will find it at the bottom of a downtrend. The pattern shows that the price increase has resisted selling pressure for a certain period of time and pushed the price up again. Although the hammer has a red candlestick, the hammer indicates a stronger uptrend than the red hammer.
2. Reverse Hammer
The inverted hammer is quite similar to the model described above. It differs from the standard hammer in that it has a much longer upper shadow while the lower wick is very short. The pattern shows buying pressure, followed by an unsuccessful attempt of the downward momentum to pull the price of drinks. As a result, buyers came back under even stronger pressure and pushed prices higher.
3. Bulliѕh Engulfing (Sink Increase)
Unlike the previous two patterns, the bull engulfing is made up of two candles. The first candle should be a short red real body engulfed by a larger, smaller candle. While the second candle opened lower than the previous red candle, buying pressure increased, leading to a bearish reversal.
4. Piercing Line
Another two-candlestick pattern is the line, which can appear at the bottom of a downtrend, at support, or during a pullback. The pattern consists of a long red candle, accompanied by a long green candle. The important aspect of this pattern is that there is a significant gap between the closing price of the red candle and the opening price of the green candle. The fact that the British candle opened more highs led to buying pressure.
5. Morning Star
The morning Star pattern is more complicated because it consists of three candles: a long red candle followed by a short body candle and a long candle. Normally, the candle in the middle will not have an overlap with the longer candles. The morning star suggests that the selling pressure of the first phase is easing, and a bull market is forming.
6. Three White Soldierѕ
Another three candlestick pattern is the three White Oldier (three musketeers). It is made up of three consecutive long blue candles, often with very small shadows. The condition is that three consecutive candlesticks must have a higher opening and closing price than the previous period. It is considered a strong bullish signal that appears after a downtrend.
Next, we will discuss a series of bearish patterns that predict uptrend reversals and often occur at areas of resistance. These patterns often prompt traders to close long positions or open short positions. They are as follows:
7. Hanging Man
The Hanging Man is similar to the hammer model, just the opposite. It is formed by a red or red candle with a short body and a long lower shadow. It appears at the end of an uptrend. It indicates a significant sell-off for a given period of time, but the upward momentum can temporarily push prices higher, after which they will get out of control.
8. Shooting Star (Meteor)
Shooting Star is the opposite of the inverted hammer pattern. It consists of a red candle with a short body and a long upper shadow. Overall, the market will spread slightly higher on the open candle and will rally to a local top before closing just below the open. The real body is sometimes almost non-existent.
9. Beariѕh Engulfing (Sink Drop)
Beariѕh engulfing (bearish engulfing) is the opposite version of bullish engulfing. The first candle has a small orange body that is completely covered by the next long red candle. This pattern appears at the top of an uptrend and suggests a reversal. The lower the second candle continues, the more bearish momentum will be.
10. Eᴠening Star
Again, the rising star is the inverse version of the morning, and it represents a three-candlestick pattern. It consists of a short body candle between a long candle and a large red candle.
11. Three Black Croᴡ
Three black croᴡ is similar to the three musketeers but reversed. It consists of three long straight red candles with short or almost no shadows. Each new candle opens relatively at the same price as the previous one, but it will be much lower after each close. This is considered a strong bearish signal.
12. Dark Cloud Coᴠer
The dark cloud coer pattern predicts a bearish reversal. The pattern consists of two candles – a red candle that opens above the body of the previous candlestick and closes below its midpoint. It shows that downward momentum has taken control of the market, pushing drink prices lower. If the shadow of the candle is short, then traders can expect a strong downtrend.
Besides bullish and bearish patterns that predict trend reversals, there are neutral candlestick patterns that indicate a continuation of a trend, be it bullish or bearish.
Here are four such models:
- Doji
- Spinning Top
- Falling Three Methodѕ (Three Steps of Falling)
- Riѕing Three Methodѕ (Three Steps Increment)
13. Doji
Doji candles have a particularly small body and long shadow. Although it is often considered a trend continuation pattern, traders should be careful as it can also end in a reversal. To avoid confusion, you should open a position on the post Doji candlestick when the situation becomes clear.
14. Spinning Top
Like the Doji, the Pinning top is a candle with a short body. However, the two shadows are of equal length, with the body in the middle. This pattern indicates indecision and can suggest a period of rest or consolidation following a significant rally or decline in price.
15. Falling Three Methods
Falling three-method is a pattern consisting of five candles, indicating the continuation of a downtrend. It consists of one long red body, followed by three consecutive small blue bodies and another long red body. The candlesticks are all covered in bearish red, showing that the uptrend does not have enough strength to reverse the downtrend.
16. Riѕing Three Methods
There is also a three method rising pattern, which can be observed in uptrends. The pattern consists of one long candle, followed by three small red candles and then another long candle.
How To Read Candlestick Charts?
Even novice or advanced traders can read candlestick charts by looking at the general trend. These visualizations often provide insights that help traders identify specific patterns in candlesticks and their formations, especially at resistance and support levels.
Common Terms In Candlestick Charts
Here is a glossary that you should study every time you trade on candlestick charts:
Emerging patterns – Emerging patterns – these are candlestick patterns that are in the forming stage.
Completed patterns – These are patterns that have developed and can be considered bullish or bearish signals.
Open – Open – The opening price of a candle.
Close – Close – the closing price of a candle.
High – High – The highest level that the price reaches during the period of a candle.
Low – Low – The lowest level the price reaches during the period of a candle.
Benefits of Using Candlestick Patterns
Candlestick patterns provide crypto traders with greater clarity on expected potential moves. In other words, they act as trading signals that help traders decide when to open long or short positions or to exit the market. For example, reversal traders rely on candlestick charts as reversal trading indicators to identify continuation or reversal trading patterns.
They help traders identify trends, understand momentum, and recognize current market sentiment in real time.
How To Quickly Remember Candlestick Patterns?
To spot candlestick patterns quickly, traders need to familiarize themselves with them through the practice of charting and trading small amounts. A great way to start is to mark individual candlestick formations and analyze candlesticks to find two-candlestick patterns.
It is better to start with a pattern and work on it until you feel confident that you can easily spot it when the price fluctuates.
Conclusion
Candlestick patterns should be in the arsenal of every crypto trader, including crypto day traders, as they show the same effect as in the forex or stock markets.
While they can provide important single trading signals, we recommend combining these patterns with technical analysis indicators to confirm or refute them.
FAQ:
Can Candlestick Patterns Be Used To Forecast Market Turning Points?
Yes, Several candlestick patterns are used to do just that – predict trend reversals. However, it does not mean that they have a 100% success rate.
Are Candlesticks Different From Bar Charts?
Yes, candlestick charts are different from bar charts, but they have some similarities as they both show the same amount of price data. However, most traders agree that candlestick charts are easier to read.
