Beginner's Guide to Candlestick Chart Patterns & Candlestick Indicators

Did you know we can visually analyze whether the Bulls or the Bears are winning? There are different types of candlestick chart patterns that help us understand the price movements of any stock on the charts.

Candlestick patterns tell a comprehensive story. The body and wicks of each candlestick reveal whether the bulls or bears are in control. They also provide key data, such as the opening and the closing prices, as well as the most highest and lowest prices reached over a given period—be it a day, week, or month.

It is essential for any technical analyst in the stock market to understand the interpretation of candlestick patterns. By recognizing these patterns, analysts can make informed decisions about future price movements.

Compared to bar charts, candlestick patterns offer a more visual representation of price action. They give more profound insights into how prices are likely to move in the future.

In this blog, we talk about 35 candlestick patterns that help us analyze the price movements of various securities.

How to Read Candlestick Charts?

Candlestick charts have their origins in Japan, where they were developed more than a century before Western analysts introduced bar charts or point-and-figure charts. In the 1700s, a Japanese rice trader named Homma observed that while rice prices were influenced by supply and demand, traders' emotions also played a significant role in market movements.

A daily candlestick chart provides a snapshot of a security's open, high, low, and close prices for the trading day. The rectangular part of the candlestick, known as the "real body," highlights the range between the opening and closing prices.

If the real body is shaded, black, or red, it represents a bearish candlestick pattern, which means that the price of closing was lower than the price of opening one. This indicates that sellers were stronger during the session, driving prices down.

On the other hand, if the real body is unshaded, white, or green, it's called a bullish candlestick patterns, where the closing price is higher than the opening price. This suggests that buyers were in control, pushing prices higher.

The thin vertical lines above and below the real body are called wicks or shadows. These lines show the highest and lowest prices reached during the trading session. The upper shadow represents the session's high, while the lower shadow marks the low point of the day.

Keep this information in Mind Before Learning Candlestick Patterns.

Before diving into the details of different candlestick chart patterns, there are some key assumptions that every trader should remember:

1. Bullish and Bearish Strength:
   1. A bullish candle (green or white) represents strength in the market, signalling that buyers are in control. Traders should aim to buy during a green candle day.
   2. A bearish candle (red or black) represents a weakness in the market, signalling that sellers are dominant. Selling is ideal on a red candle day.
2. Pattern Variations:
   1. While textbooks may define patterns with strict criteria, real-world scenarios often introduce minor variations due to market conditions. Traders should be flexible in identifying these variations without deviating too far from the core structure of the pattern.
3. Look for a Prior Trend:
   1. Bullish Reversal Patterns: These should appear after a bearish trend to confirm a potential upward reversal.
   2. Bearish Reversal Patterns: These should occur after a bullish trend to signal a potential downward reversal.

By keeping these foundational principles in mind, traders can approach candlestick analysis with greater confidence and precision.

Main Types of Candlestick Patterns

1. Continuation Patterns: These patterns guide that the current price trend will persist.
2. Bullish Reversal Patterns: It demonstrates a shift from a downtrend to an uptrend.
3. Bearish Reversal Patterns: Signal a transition from an uptrend to a downtrend.

What are Bullish Reversal Candlestick Patterns

Bullish reversal patterns occur at the end of a downtrend and suggest a potential price increase. Here are some common types:

1. Hammer

The Hammer is a single candlestick that appears at the bottom of a downtrend. It features a small body at the top with a long lower shadow at least twice the size of the body and little to no upper shadow.

What it Means: Sellers dominated initially, but buyers regained control, pushing the price higher by the close. This signals that the downtrend may be losing momentum.

How to Trade: Wait for the next candle to confirm the reversal before entering an extended position. Set a stop-loss below the Hammer's low.

2. Piercing pattern

This two-candle pattern features a bearish candle followed by a bullish candle. The bullish candle opens with a gap down but closes above the midpoint of the bearish candle.

What it Means: Although the session starts with selling pressure, buyers take over and drive the price upward, signalling a potential reversal.

How to Trade: Enter a long position after a confirming bullish candle and set a stop-loss below the low of the second candle.

3. Bullish Engulfing

This pattern consists of two candles: the first is bearish, and the second is a larger bullish candle that completely destroys the first one.

What it Means: The reversal becomes evident as buyers overpower sellers, suggesting a shift in market sentiment.

How to Trade: Look for confirmation on the next candle and set your stop-loss below the second candle's low.

4. Morning Star

The Morning Star is a three-candle pattern consisting of a bearish candle, a small indecisive candle (often a doji), and a bullish candle.

What it Means: The bearish candle continues the downtrend, the doji signals market indecision and the bullish candle confirms a shift toward an uptrend.

How to Trade: Enter a long position after the bullish confirmation and place a stop-loss below the doji's low.

5. Three White Soldiers

This pattern features three consecutive long bullish candles with small shadows. Separately, every candle opens within the earlier one's body and closes higher.

What it Means: A strong buying momentum drives this pattern, indicating a sustained reversal.

How to Trade: Use this pattern to identify a robust uptrend and set stop-loss levels based on recent lows.

6. White Marubozu

A White Marubozu is a single candle with an entire bullish body and no shadows, indicating vigorous buying activity.

What it Means: Buyers dominate throughout the session, suggesting a bullish trend.

How to Trade: Enter a long position, as this pattern often signals the start of an uptrend.

7. Three Inside Up

This pattern features three candles: a long bearish candle, a smaller bullish candle within its range, and a third bullish candle confirming the reversal.

What it Means: Selling pressure eases as buyers step in, followed by a clear bullish signal.

8. Bullish Harami

The Bullish Harami consists of a large bearish candle followed by a smaller bullish candle contained within the first candle's body.

What it Means: The bearish trend slows, and buyers start gaining control, signalling a possible reversal.

9. Tweezer Bottom

This two-candle pattern has nearly identical lows: the first is bearish, and the second is bullish.

What it Means: The equal lows indicate strong support, suggesting a potential price reversal.

10. Inverted Hammer

The Inverted Hammer appears at the end of a downtrend, with a small body at the bottom and a long upper shadow.

What it Means: Although sellers dominated early, buyers pushed the price higher, signalling a possible reversal.

How to Trade: Wait for confirmation before entering an extended position.

11. Three Outside Up:

The Three Outside Up is a numerous candlestick pattern that is formed behind a downtrend, indicating a bullish reversal.

It consists of three candlesticks:

1. The first is a short, bearish candle.
2. The second is a large bullish candle that engulfs the first candlestick.
3. The third is a long bullish candlestick, confirming the bullish reversal.

The relationship between the first and second candlesticks should follow the Bullish Engulfing pattern.

Traders can consider taking a long position after the completion of this candlestick pattern.

12. On-Neck Pattern:

The On-Neck Pattern appears after a downtrend when a long, real-bodied bearish candle is tracked by a smaller real-bodied bullish candle. This bullish candle opens with a gap down but closes near the previous candle's close.

The pattern is called a neckline because the two closing prices are almost the same across the two candles, forming a horizontal flat neckline.

13. Bullish Counterattack:

The Bullish Counterattack pattern is a bullish reversal pattern that predicts an upcoming reversal of the current downtrend in the market. This two-bar pattern forms under the following conditions:

1. There should be a strong downtrend in the market.
2. The first candle is a long or extended bearish candle with a whole body.
3. The second candle is a long bullish candle, ideally equal in size to the first candle, and closes near the first candle's close.

This pattern indicates that buyers are regaining control, and a bullish reversal is imminent.

Bearish Candlestick Patterns:

Bearish reversal candlestick patterns signal a potential shift from an uptrend to a downtrend. These patterns warn traders to exercise caution with their long positions and prepare for potential market declines.

Here are the key bearish reversal candlestick patterns:

14. Hanging Man:

1. A single candlestick pattern formed at the end of an uptrend indicates a bearish reversal.
2. Features a small real body at the top and a long lower shadow (at least twice the actual body), with no or minimal upper shadow.
3. Formation psychology: Prices opened high, but sellers drove them lower. Buyers attempted a recovery, but the close remained below the opening price.
4. Trading approach: Enter a short position if the following day forms a bearish candle, with a stop-loss at the high of the Hanging Man.

15. Dark Cloud Cover:

1. A two-candle pattern indicates a bearish reversal.
2. The first candle is bullish, continuing the uptrend. The second is a bearish candle that opens with a gap up but closes below 50% of the prior candle's real body.
3. Trading approach: Enter a short position if the next day forms a bearish candle, with a stop-loss at the second candle's high.

16. Bearish Engulfing:

1. A two-candlestick pattern where a long bearish candle engulfs the prior bullish candle, signalling a bearish reversal.
2. Trading approach: Enter a short position if the next day forms a bearish candle, with a stop-loss at the high of the engulfing candle.

17. Evening Star:

1. A three-candlestick pattern signals a bearish reversal.
   1. First candle: Bullish, continuing the uptrend.
   2. Second candle: Doji, showing indecision.
   3. Third candle: Bearish, confirming the reversal.
2. Trading approach: Enter a short position if a bearish candle follows, with a stop-loss at the second candle's high.

18. Three Black Crows:

1. A three-candle pattern with three consecutive long bearish candles, each opening within the prior candle's body, confirming a bearish reversal.

19. Black Marubozu:

1. A single candle with a long, bearish body and no shadows indicates strong selling pressure.
2. Trading approach: Close long positions and prepare for further declines.

20. Three Inside Down:

1. A three-candlestick pattern:
   1. First: Long bullish candle.
   2. Second: Small bearish candle within the first candle's range.
   3. Third: Long bearish candle confirming the reversal.
2. Trading approach: Enter a short position after the pattern completes.

21. Bearish Harami:

1. A two-candle pattern where a small bearish candle forms within the range of a preceding bullish candle.
2. Trading approach: Enter a short position after the pattern is confirmed.

22. Shooting Star:

1. A single candle with a small real body near the low and a long upper shadow (at least twice the body), resembling an inverted Hanging Man.
2. Formation psychology: Prices rose sharply but closed near the open, signalling a bearish reversal.
3. Trading approach: Enter a short position if the next day forms a bearish candle.

23. Tweezer Top:

1. A two-candlestick pattern at the end of an uptrend:
   1. First: Bullish candle.
   2. Second: Bearish candle of similar height.
2. Formation psychology: Both candles' highs act as resistance, signalling a potential reversal.
3. Trading approach: Confirm the reversal with subsequent bearish candles.

24. Three Outside Down:

1. A three-candle pattern:
   1. First: Short bullish candle.
   2. Second: Large bearish candle engulfing the first.
   3. Third: Long bearish candle confirming the reversal.
2. Trading approach: Enter a short position after the pattern forms.

25. Bearish Counterattack:

1. A two-candle pattern appearing in an uptrend:
   1. First: Long bullish candle.
   2. Second: Long bearish candle closing near the first candle's close.
2. Formation psychology: Bears regain control, signalling a downtrend.

Continuation Candlestick Patterns:

Continuation patterns signal a pause in the current trend but not a reversal. These patterns suggest that the prevailing trend is likely to continue after a brief consolidation or interruption.

26. Doji:

1. A single candlestick pattern of indecision is formed when the opening and closing prices are almost equal.
2. Formation psychology: Bulls and bears are equally matched, with no clear winner in the battle to control prices.
3. Appearance: Looks like a cross with a tiny real body and long shadows.

27. Spinning Top:

1. Similar to the Doji, it indicates indecision in the market but has a slightly larger real body.
2. Formation psychology: Neither bulls nor bears have significant control, resulting in a balanced market sentiment.
3. Appearance: A candlestick with a small real body and long shadows on both sides.

28. Falling Three Methods:

1. A bearish five-candle continuation pattern that signals a temporary interruption in a downtrend.
   1. Structure: Two long bearish candles at the beginning and end, with three smaller bullish candles in between.
2. Formation psychology: The counter-trend candles show a temporary rally, but the bears regain control to continue the downtrend.

29. Rising Three Methods:

1. A bullish counterpart to the Falling Three Methods, signalling a temporary pause in an uptrend.
   1. Structure: Two long bullish candles at the beginning and end, with three smaller bearish candles in between.
2. Formation psychology: The counter-trend candles show a temporary pullback, but the bulls maintain control to resume the uptrend.

30. Upside Tasuki Gap:

1. A bullish continuance pattern or imprint that occurs in an uptrend.
   1. Structure:
      1. A long bullish candle.
      2. A second bullish candle that gaps up.
      3. A bearish candle that partially fills the gap between the first two candles.
   2. Formation psychology: The bulls dominate despite the bearish correction.

31. Downside Tasuki Gap:

1. A bearish continuation design or pattern that occurs in a downtrend.
   1. Structure:
      1. A long, bearish candle.
      2. A second bearish candle that gaps down.
      3. A bullish candle that partially fills the gap between the first two candles.
   2. Formation psychology: The bears remain in control despite the temporary bullish correction.

32. Mat Hold:

1. A continuation pattern that can be either bullish or bearish.
   1. Bullish version:
      1. Starts with a large bullish candle.
      2. Followed by three smaller bearish candles staying above the first candle's low.
      3. Concludes with a large bullish candle resuming the uptrend.
   2. Formation psychology: Brief consolidation before the prevailing trend continues.

33. Rising Window:

1. A bullish continuation pattern with two bullish candles separated by a gap.
2. Formation psychology: High volatility leads to a price gap, reflecting strong buyer momentum.

34. Falling Window:

1. A bearish continuation pattern with two bearish candles separated by a gap.
2. Formation psychology: High volatility leads to a price gap, reflecting strong seller momentum.

35. High Wave:

1. An indecision pattern typically occurs at key support or resistance levels.
2. Appearance: Long wicks on both sides and a small real body.
3. Formation psychology: Significant price movement occurs during the session, but the price ultimately closes near its opening level, indicating a balance between bulls and bears.

Conclusion:

It's important to remember that candlestick charts and patterns should be used in conjunction with other technical indicators, as they can sometimes generate false signals. Understanding the meaning behind each candlestick formation pattern or patterns candlestick charts enhances your trading analysis, but always confirm with additional tools before making decisions. The above list of candlestick graph patterns provides a foundation for recognizing different market scenarios, including bullish candle patterns and bullish candlestick formations and their implications.

Leveraging candle chart patterns, candlestick indicators, and analyzing candlestick formations can significantly improve your ability to interpret candle stick charts. Whether you're studying candlestick pattern bullish movements or identifying patterns in candlestick charts, a thorough understanding of candle graph patterns will strengthen your trading strategy.

Frequently Asked Questions (FAQs)

1. What is the candlestick pattern?
   Candlesticks are charts representing price movements over a specific time. They typically display the opening, high, low, and closing prices of a financial instrument. A filled candlestick (black or red) forms when the opening price surpasses the closing price.

2. Which candlestick pattern is bearish?
   The "falling three methods" is a bearish pattern composed of three small green candles confined within two large red candles' range. It demonstrates the bulls' inability to reverse the trend.

3. What is the 15-minute candlestick strategy?
   This strategy involves identifying inside candles on a 15-minute timeframe chart and trading in the way of the breakout, potentially capitalizing on shifts in market sentiment.

4. Which time frame is best for trading?
   For observing broader trends during the day, a 10- or 15-minute chart is ideal. This time frame allows traders to avoid getting caught up in minor fluctuations while focusing on significant price movements.