Last Updated on 21 September, 2020 by Samuelsson
As a trader, you can’t do without a price chart. There are many types of price charts, such as the line chart, bar chart, point and figure chart, candlestick chart, range bar, and Renko chart, but since its introduction to the Western world by Steve Nison, the candlestick chart has become one of the most popular and widely preferred methods of charting price action.
This shouldn’t come as a surprise though. The candlestick chart provides a lot of useful information about what price has done within the specified timeframe. And with its color coding and visible shapes and patterns, you can easily see what’s happening in the market at a glance.
So we’ve developed a guide to teach you about candlesticks and how to use them in your trading. In this guide, you will learn:
- The history of the candlestick chart
- How to read a candlestick chart
- If candlestick patterns work
- Why the timeframe you’re using matters
- why you don’t need to memorize candlesticks one by one.
- The different categories of candlestick patterns and how to use each of them to find trade setups
So let’s get to it! We have a lot of material to cover!
The History of Candlestick Patterns
Steve Nison is popularly credited with introducing the candlestick charting method to the West in 1989 when he authored an article on candlestick chart analysis in the Futures Magazine. Later on, in 1991, he wrote a book about this new charting method he learned from Japan and titled it, “Japanese Candlestick Charting Techniques”.
Since then, he has written a couple more books about candlestick charts. According to him, candlestick charting techniques originated in Japan in the 18th century. He traced the origin to a Japanese rice businessman, Munehisa Homma, who was trading rice in the city of Sakata.
Munehisa was born in 1724 to a family of rice merchants, and when his father died in 1750, he started managing his father’s business. Although he’s the youngest, he was allowed to do so because of his exceptional trading ability. It was during this period, while trading in Sakata, Osaka, and Edo (present-day Tokyo) rice exchanges, that he developed a technique for tracking the price of rice coupons.
Rice coupons — receipts for the supply of rice for the next harvest — were introduced to the exchanges in 1710 to facilitate rice trading. Munehisa noticed that the daily variations in the prices of these rice coupons were not only as a result of fundamental factors like weather, stock volumes, and harvest but also as a result of traders’ sentiments. He then developed a way to track traders’ sentiments by charting price movement.
His method of charting the open, high, low, and close prices for each trading session would later give rise to the candlestick chart. But, according to Steve Nison, the technique wouldn’t become popular until the 1850s when more rice traders started using it.
How to Read Candlesticks
Candlestick charts provide a lot of information about how the security has moved, and just like the bars in a bar chart, each candlestick represents the price movement for the specified period.
That period can be one minute, four hours, one day, one month, etc.
A candlestick clearly shows the following data points for the selected period:
Structurally, a candlestick consists of the following parts:
- The Body
- An Upper wick (shadow)
- A lower wick (shadow)
The body is the part between the open and close price, and it represents the price gain or loss for the specified period.
The wicks give you a visual representation of the levels that the security has traded at, but either risen or fallen from before the end of the time period.
Candlesticks are color-coded to make it easy to spot if the price has risen or fallen. Typically, a positive candlestick is green or white, whereas a negative candlestick is red or black
Here is an image that hopefully makes it easier to understand!
Bullish and Bearish Candlesticks
A candlestick is said to be bullish if the close price is higher than the open price. As a trader, you can choose any color you want to represent a bullish candlestick, but white or green is normally used to indicate a bullish direction. The upper wick lies between the period’s high and close price while the lower wick lies between the period’s low and open price.
A candlestick is said to be bearish if the close price is lower than the open price. You can represent a bearish candlestick with any color you want, but black or red is usually the color of choice for a bearish candlestick. The upper wick lies between the period’s high and open prices while the lower wick lies between the session’s low and close prices.
The Main Benefits of Candlesticks
Since its introduction less than three decades ago, the candlestick charting method has become a widely used alternative to the bar chart and the point and figure chart. There are many reasons why it has gained such acceptance among traders, and here are some of them:
Price action is Easy to Read
Candlesticks are very easy to interpret and even an amateur can easily figure out how the price has moved. The colored bodies of the candlesticks make them easily visible, so a trader can see the price direction at once.
This simplifies chart analysis since you can easily take in the information from the chart and use your time analyzing the market instead of reading it.
Candlesticks can form patterns
A single candlestick can adopt any shape based on how the price has moved, and these shapes have cool names that are easy to remember. Some examples that we will cover later include the hammer, shooting star, hanging man, marubozu, doji, and spinning top.
Furthermore, a group of two or more candlesticks can form patterns that are easily recognizable, and just like the shapes, these patterns also have beautiful names like harami, hikkake, evening star, abandoned baby and tweezers.
All these patterns tell different stories about what the market has been up to, and how supply and demand has shaped the price graph.
It Can Give You an Advantage in the Markets
Since the shapes and patterns of the candlesticks tell us important stories about what happened in the market, that information could be used to try to predict what will happen in the future.
For example, some of the candlestick patterns can indicate potential market reversal levels while others may indicate trend continuation.
In other words, the patterns can help in market analysis. In fact, some price action traders rely heavily on these patterns in their technical analysis.
How to Trade Candlesticks without Memorizing Them
In this guide, we cover A TON of different candlestick patterns, and obviously, they are too many for you to memorize.
However, in order to take advantage of candlesticks, you do not have to learn the exact definition of every candle. The most important thing is to understand how candlesticks mirror market behavior and make it easier to see what the market is doing. Here are some tips on how to read candlesticks without memorizing patterns one by one.
The Pattern’s Close Price
Checking where the last candlestick closed relative to the range of the candle will help you know whos’s in control at the moment.
If the close price is near to the overall high, it shows a strong bullish pressure. On the other hand, if it’s nearer to the low, the control lies with the bears.
For example, in a bullish engulfing pattern, the closing price is close to the high. This shows that the bulls are dominating at that moment. If you look at the bearish engulfing pattern or dark cloud cover, the closing price of the candle is near the low, so the bears are in charge. (these patterns will be covered soon)
Always keep this in mind: to know who’s in control, check where the price closed relative to the range of the candle.
Here, the price closed near the top of the pattern.
Here, the price closed near the low of the pattern.
The Size of the Pattern Relative to Other Candlesticks
When you compare the size of the candlesticks in the pattern to the other candlesticks around, you can gauge the level of conviction of the traders behind the move. It tells you the strength of the dominating party — bulls or bears.
If the candlesticks that formed the pattern are larger than the rest of the candles, the move may have some strength and the pattern may play out well. On the other hand, if the candlesticks in the pattern are smaller than the other candles, it may indicate weakness, and the pattern may not play so well.
In the image below, you see that the small bearish reversal candles made a relatively smaller move than the big bullish engulfing candle, which brought a bigger move.
However, you should experiment to see if this applies to the particular pattern you want to trade. There might be cases where the exact opposite holds true!
Pay attention to gaps, since what happens when the market is closed can be of great significance when it comes to what happens next.
In addition to noting what direction the gaps were, you should also note whether the gaps were filled or not. An unfilled gap could be a sign that the market is not strong enough to revert back and fill the gap.
Of course, such an insight could impact your analysis of the market.
How the pattern fits the overall market structure
Price action often forms structures in the market. Some of the important structures include head and shoulder, inverse head and shoulder, double bottom or top, triangles, flags and pennants, wedges, and rectangles.
For example, a bullish reversal pattern forming at the top of the right shoulder of a head and shoulder market structure may not make much sense, but if it’s a bearish reversal pattern that forms in such a situation, the pattern would make sense because it’s playing along with the overall market structure.
Here, an evening star formed at the top of the right shoulder.
However, to be honest, chart patterns like head and shoulders tend to not work that well, so be careful with what you choose to add to your market analysis! As always, the key to uncovering what works is to test it yourself, preferably in backtesting software!
How the Timeframe Impacts Candlesticks
Just like other time-based charts, the timeframe you analyze the candlestick chart is very important. The timeframe would determine the significance of the candlestick patterns. A reversal pattern you see on a 1-minute chart will not be as significant as the one you see on a daily timeframe.
Analyzing the candlestick chart on higher timeframes is more important due to the following reasons:
The higher the session, the more the transaction covered
Each candlestick represents all the transactions in one trading session. The volume of transactions that occurs in shorter sessions cannot be compared to those of longer trading sessions.
For example, while a five-minute session may not be enough for the market to absorb a single order from a high-volume trader, a daily session represents all the orders transacted that day. So more transactions are covered in higher timeframes, making such candlesticks more significant.
Higher timeframes have less noise
What appears to be a big move on a lower timeframe may not even be noticeable on the larger timeframes. A trend you see on a 5-minute chart, for example, may just be a single candlestick on the 4-hour timeframe. Price tends to swing more often on the lower timeframes, creating so much noise. The higher the time frame, the less the noise.
Higher timeframes show the predominant trend
The higher timeframes offer a better view of the overall structure of the market and show the direction of the main trend. So you can analyze the candlestick patterns bearing in mind the direction of the market. This will help you make better analysis and avoid going against the predominant trend.
So, Do Candlestick Patterns Work?
The most common way of using candlesticks is to form candlestick patterns that give you some clues about where the price is heading next. Many new traders eagerly embrace candlestick patterns since they provide clear and easy to follow rules, that seem to make a lot of sense. However, things are not always as easy as they seem!
Many of the widely known patterns are not suitable for trading since they are not accurate enough.
Do never try to trade a candlestick pattern all by itself, but use it as inspiration, and try to come up with your own trading strategy.
In this guide, we are covering the main candlesticks and what they are though to mean by most people. However, keep in mind that many beliefs people hold aren’t accurate, and won’t lead to profitable trading!
Having that said, learning candlesticks patterns is a great way of trying to understand the driving forces of the market. Just don’t take them for the one and only truth there is!
The Patterns We Will Cover
Candlestick patterns can be categorized based on the number of candlesticks involved or the type of trade setup shown. Here, we will classify them based on the type of trade setup, and on that basis, these are the various types of candlestick patterns:
- Bullish reversal candlestick patterns
- Bearish reversal candlestick patterns
- Bullish continuation candlestick patterns
- Bearish continuation candlestick patterns
- Indecision candlestick patterns
Bullish Reversal Candlestick Patterns
This group of candlestick patterns indicates that the current price swing — a bearish swing — has lost momentum, and that the price may be about to change direction to the upside. In other words, the price has been going down before any of the bullish reversal patterns show up.
But the presence of these patterns is not enough to assume that a price reversal is underway; that would be too early. On their own, the patterns don’t carry high odds of success. It is very important to combine them with other forms of technical analysis to increase the odds of the trade. We will get to that soon!
That said, these are some of the most common bullish reversal candlestick patterns:
- Bullish engulfing
- Piercing pattern
- Tweezer bottom
- Bullish harami
- Bullish hikkake
- Morning star
- Bullish abandoned baby
Now, let’s go through them one by one!
The hammer is a single-candlestick bullish reversal pattern that is seen after a bearish price swing. A similarly shaped candlestick after a bullish swing is not a hammer, but a hanging man pattern (which is covered later under “Bearish Reversal Candlestick Patterns”)
It has a small body which can be of any color. In other words, the security may close higher or lower than it opened.
This is how you can identify a hammer:
- It has a tiny or no upper wick
- The lower wick is about twice or thrice the size of the body
- Its close price is at the upper one-fourth of its range
This is what the hammer signifies:
- Sellers were initially in control, pushing the price lower
- Buyers later overcome the sellers and push the price up towards or above the opening price
This candlestick pattern is very similar to the hammer candlestick, but just like the name suggests, it’s inverted.
Here is how to identify the inverted hammer:
- The candle has a small body (any color) and a small or nonexisting wick
- It has a long upper wick that is twice or thrice the size of the body
The pattern implies that:
- The market was in a downtrend
- A sudden burst of buying pressure pushed the price up. However, soon the bears were back and pushed the price back.
Even if the candle did not close in the upper region of the range, the long wick is a sign that the market sentiment may be about to change soon.
Bullish Engulfing Pattern
The bullish engulfing pattern is a 2-candlestick bullish reversal pattern which appears after a price swing low.
Here’s how you can identify a bullish engulfing:
- The first candlestick is a bearish one
- The second candlestick is bullish, and its body completely engulfs the body of the first
Just like the hammer, the bullish engulfing pattern tells an interesting story about the market:
- Sellers initially pushed the price down, and the first candle closed lower than it opened
- Later on, there’s a strong buying pressure, and the second candle closed with a convincing stretch to the upside
The fact that the second candle succeded to break the open of the first, bearish candle, is a sign of market strength. This is especially true considering that the move of the bullish candle was substantially larger than the preceding bearish candle.
In fact, on the next higher time frame, the bullish engulfing pattern would take the shape of a hammer. For example, a bullish engulfing pattern on the 30-minute timeframe would be a hammer (with a bullish color) on the 1-hour timeframe.
This is another 2-candlestick bullish reversal pattern which shows up after a decline in price. It is similar to the bullish engulfing pattern, but the second candle doesn’t completely cover the first.
This is how to identify a piercing pattern:
- A bearish first candle
- A bullish second candle that opened below the first candle’s low but closed above its midpoint
This pattern implies that:
- Sellers were initially in control, pushing the first candle to close lower
- Although the second candle opened with a gap down, buyers quickly took control and pushed it up to close beyond the midpoint of the first candle
As with the bullish engulfing pattern, the fact that the price managed to rise after a substantial gap down, after a bearish trend, is a sign of market strength. However, the fact that this pattern doesn’t manage to close above the open of the previous candle, but only over its midpoint, might suggest that the piercing line is a less powerful signal than the bullish engulfing.
On the immediate higher timeframe, the piercing pattern would assume the shape of a hammer (with a bearish color).
The tweezer bottom pattern is another 2-candlestick pattern which occurs after a bearish price swing, and consists of two or more candlesticks that all have the same low point.
And here’s how you can identify it:
- The first candle is bearish or bullish and has a wick to the downside.
- The second candle also shows price rejection at that level, meaning that the wick extends to the low point of the previous candle, but never exceeds it
- As long as the low point isn’t breached, following candles become part of the pattern.
The implication is that:
- Sellers pushed the price down but were met with a strong buying pressure
- They made another attempt and pushed the price to the previous low, but buyers defended that level and pushed the price up
So, a tweezer bottom shows that a certain low price level has been successfully defended by buyers. In fact, in a much lower timeframe, you would see a double bottom price structure. For example, a tweezer bottom on the daily timeframe would be a double bottom on the 1-hour or 30-minutes timeframe.
A harami pattern is a 2-candlestick pattern that can form in any trend. The bullish harami, however, is a harami pattern that forms after a price swing low. Sometimes, the price may continue going lower, so some traders choose to view it as a continuation pattern.
This is how to identify a bullish harami:
- The first candlestick is bearish and has a large body
- The second candlestick is bullish, has a small body and is contained within the range of the previous candle
This is what happens in the market:
- Sellers dominate and push the price down.
- The next day/period, the buyers regain control, and push the price up again, starting with a gap to the upside.
The opening gap is a powerful sign that the trend might be about to change, and once followed by a bullish candle, that becomes a sort of confirmation.
The bullish hikkake pattern is a multiple-candlestick pattern that may indicate a potential bullish reversal when occurring after a bearish price swing. It forms when there’s a false downward breakout of an inside bar.
An inside bar simply is when the range of the current bar trades within the range of the preceding bar.
Here’s how to identify a bullish Hikkake:
- Wait for an inside bar to occur.
- See if the price breaks below the low of the inside candle.
- If the price goes above the high of the inside candle, you have a bullish Hikkake
Here is what might have happened:
- An inside bar pattern occurred, signaling uncertainty in the market
- The next candle breaks through the low of the inside candle, signalling that the trend might not be ready to change direction
- Then, buyers manage to take control again, and push the price upwards.
- Once the price goes over the high of the inside bar, the market has proven that there is enough buying pressure to make the price go even higher
The Bullish Hakkake relies on a sort of breakout logic, where the breakout level becomes the high of the inside bar.
The morning star pattern is a 3-candlestick bullish reversal pattern which forms at the end of a bearish price swing.
This is how you can identify a morning star:
- The first candle is a big bearish candle
- The second candle, which is a small candle, opens with a small gap from the first candle, but the upper wick usually covers the gap
- The third candle is a big bullish candle
And this is what the morning star implies:
- At first, the sellers were in control, pushing the price lower
- Then, the sellers started having doubts, and buyers were still not sure what to do
- Later on, the buyers took control and pushed the price up
If the body of the second candle is nonexistent, or extremely small, the pattern is instead called a ” Morning Doji star”. Below is an example of a Morning Doji Star:
A doji is a candle where the open and close occurred at the same level, thus making the body look like nothing more than a narrow line!
We are going to cover Dojis more in-depth later in the article!
Bullish Abandoned Baby
Another 3-candlestick bullish reversal pattern, the bullish abandoned baby resembles the morning doji star pattern.
And this is how to identify a bullish abandoned baby pattern:
- A large, bearish first candle
- A doji that gaps down from the first candle
- A big bullish candle that gaps up above the high of the doji
The bullish abandoned baby implies:
- An initial selling pressure
- A high level of indecision later
- An overwhelming buying pressure much later
How Trade Bullish Reversal Candlesticks
As we mentioned earlier, the candlestick patterns alone don’t provide high probability trade setups. You need to bring other technical analysis tools that can help your analysis and improve the odds of your trades. Some technical analysis tools you can use include:
- Support and resistance levels
- Moving averages
- Trading Indicators
It’s best to look for buying opportunities when the market is in a long term bullish state. In these markets conditions, many traders often look to buy the dips.
Here is one example of how some traders might go about catching reversals in a long term rising market:
Wait for a pullback to a support level, trendline, or moving average, and then, look for bullish reversal candlestick patterns. Trendlines and moving averages act like dynamic support line, so reversal patterns around them have higher odds of success.
Bullish Reversals In Oversold Territory
Another way of increasing your odds is to ensure that the market is oversold before you take the signal. When stocks and indexes get pushed down too much, they have a tendency to bounce up again, and if you find a bullish reversal signal in an oversold situation, the probabilities will shift in your favor.
If the price gets to the support level and forms a bullish reversal pattern, check your stochastic or RSI indicator to know if the market is oversold. The time to buy is when the stochastic or RSI shows low readings.
If you use the Stochastic Indicator, you may also wait for the signal line to get crossed to confirm the new swing to the upside.
From the image above, you can see a hammer candlestick bouncing off a support level, and the stochastic crossed to start ascending.
Bearish Reversal Candlestick Patterns
These candlestick patterns indicate that the current bullish price swing has lost momentum, and the price may potentially change direction to the downside. So for the patterns to be worthwhile, the price must have been going up before they form.
However, you shouldn’t assume that the price will reverse just because you see any of these patterns; that would be very wrong. On their own, the patterns don’t assure a change of price direction. You need to combine them with other forms of technical analysis to increase the odds of the trade.
Having said that, these are the common bearish reversal candlestick patterns:
- Shooting star
- Bearish engulfing
- Dark cloud cover
- Tweezer top
- Bearish harami
- Bearish hikkake
- Evening star
- Bearish abandoned baby
This is a single candlestick bearish reversal pattern which occurs at the end of a bullish price swing. It can take any color, but the large wick on the upside and small body is a sign that the market is hesitating to move up.
This is how you can identify a shooting star:
- It has a small wick to the downside, if any at all
- The body is small, and it closes within the lower one-fourth of the range
- The upper wick is about twice or thrice the size of the body
Here’s what a shooting star implies:
- Buyers initially pushed the price up
- Sellers overcame the buyers and pushed the price down close to or below the opening price
Even if the definition of the shooting star makes clear that it doesn’t matter if the candle closes higher or lower than the open, a shooting star that closes lower than the open is generally considered more bearish.
A Shooting star that occurs after a bearish trend, is called an inverted hammer, and is a bullish candlestick.
Bearish Engulfing Pattern
This is a 2-candlestick bearish reversal pattern which appears after a bullish price swing.
Here’s how you can identify a bearish engulfing pattern:
- The first candle is a bullish candle
- The second candle, which is bearish, completely consumes the body of the first
This is what the bearish engulfing pattern implies:
- Buyers initially pushed the price up, making the first candle to close higher
- A strong buying pressure later set in, and the second candle closed bearishly
The fact the bearish candle manages to engulf the preceding bullish candle, is a strong sign that the sellers are in power for the moment.
On the immediate higher time frame, the bearish engulfing pattern would assume the shape of a shooting star. For example, a bearish engulfing pattern on the 30-minute timeframe would be a shooting star (with a bearish body color) on the 1-hour timeframe.
Dark Cloud Cover
The dark cloud cover is another 2-candlestick bearish reversal pattern which occurs after a price swing high. It is similar to the bearish engulfing pattern, but the second candle doesn’t completely cover the first.
This is how to identify á dark cloud cover:
- The first candlestick is bullish
- A bearish second candle opened above the first candle’s high, but closed below its midpoint
And here’s what the dark cloud cover means:
- Buyers were initially in control, pushing the first candle to close higher
- A strong buying pressure made the second candle to open with a gap up, but sellers quickly took control and pushed it down to close below the midpoint of the first candle
On the immediate higher timeframe, the piercing pattern would take the shape of a shooting star with bullish body color.
This is yet another 2-candlestick bearish reversal pattern which occurs after a bullish price swing.
And here’s how you can identify a tweezer top:
- The first candlestick has a visible upper wick signifying price rejection at high
- The second candle also has an upper wick that touches but never exceeds the level of the high of the previous bar
The tweezer top is an indication that:
- Buyers pushed the price up but were met with a strong selling pressure
- They made another attempt and pushed the price to the previous high, but again, sellers defended that level and pushed the price down
A tweezer top shows that the high has been successfully defended by bears. In a much lower timeframe, you would see a double top price structure. For instance, a tweezer top on the daily timeframe would be a double top on the 1-hour or 30-minutes timeframe.
The more times a level has been defended, the stronger it generally gets.
The bearish harami pattern is a harami pattern that occurs at the end of a bullish price swing. Some traders regard it as a continuation pattern if the price breaks out higher.
Here’s how to identify a bearish harami:
- The first candle is bullish and has a large body
- The second candle has a small body and range and is bearish
- The second candle’s range lies within that of the first candle
A bearish harami is an indication that:
- The current bullish trend continues in the first bullish candlestick
- Since the market then gaps down, it’s an indication that the market participants don’t hold as much faith in the uptrend, an let the market open lower. The following down-candle adds to the loss of sentiment.
This is a multiple-candlestick pattern that may indicate a potential bearish reversal if it occurs after a bullish price swing. It forms when there’s a false breakout of an inside bar pattern.
This is how to identify a bearish Hikkake:
- An inside bar after a bullish price swing
- Price breaks above the high of the small inside candle
- The breakout fails, and the price falls and closes below the small inside candle’s low — the number of candles that complete the hikkake pattern after the harami pattern can vary from one to three
A bearish Hikkake implies that:
- The inside bar indicates that the market is becoming hesitant
- Once the following candle closes above the high of the inside bar, there is a breakout.
- However, in the following candle, it becomes apparent that the breakout was false, and the price continues down.
The evening star pattern is a 3-candlestick bearish reversal pattern which occurs after a bullish price swing.
This is how you recognize an evening star:
- The first candle is a big bullish candle
- The second candle is a small candle that opens with a little positive gap from the first candle, but its lower wick would normally cover the gap
- The third candle is a big bearish candle
And the pattern may mean that:
- At first, the buyers were in control and pushed the price higher
- Later on, there was indecision which gave rise to the small second candle
- Eventually, sellers took control and pushed the price down
If the second candle is a doji candle, the pattern is called an “evening doji star”.
Below is an example of an evening doji star:
Bearish Abandoned Baby
The bearish abandoned baby is another 3-candlestick bearish reversal pattern. It resembles the evening doji star pattern.
And here’s how you can recognize a bearish abandoned baby:
- A large, bullish first candlestick
- A doji that is completely separated from the first candle by a gap to the upside
- A big bearish third candle that gaps below the low of the doji
A bearish abandoned baby implies that:
- There’s an initial buying pressure
- In the second candle, it is followed by a high level of indecision
- Later on, there’s a very strong selling pressure
How to Trade Bearish Reversal Patterns
Many traders just trade bearish reversal pattern in a downtrend.
What they do, is to wait for a pullback to a resistance level, trendline, or moving average, and then, look for bearish reversal candlestick patterns
. Bearish reversal patterns around these levels have higher odds of success.
If the price gets to the resistance level and forms a bearish reversal pattern, check the stochastic or RSI indicator to know if it’s oversold.
If you’re using the stochastic indicator you may also look for a signal line cross. Shorting at oversold conditions allows you to ride the next price swing down.
In this chart, you can see a tweezer top pattern formed at the resistance level. The stochastic was also at the overbought level and turned to head downwards.
Below, you can see a down-sloping trendline (black) and a resistance line (yellow). As price hit that level, it formed a bearish engulfing pattern. Meanwhile, the stochastic turned downwards after being oversold.
Be careful with Short selling!
Short selling in the equities markets is much harder than going long, due to the long term rising trend of these markets!
We suggest that new traders don’t try to go short, but instead focus on going long. That way you will substantially increase your chances of success!
Bullish Continuation Candlestick Patterns
The candlestick patterns in this group indicate that the price may continue going up even though it appears to be taking a breather at the moment. In other words, you see these patterns when the price is already trending up, and they show that price is likely to go even higher.
However, nothing is certain in the market; although the price may continue going up, it can also change direction without warning. The presence of these patterns alone is not enough to assume that the price will forever go up. Use them in combination with other technical analysis tools to improve your odds of success.
These are some of the most common bullish continuation candlestick patterns:
- Deliberation pattern
- Rising three methods
- Bullish separating lines
- Mat hold pattern
- Upside Tasuki gap
- Bullish trend doji star
- Upside gap two crows
- Bullish side by side white lines
- Advance block
- Hanging man
- Matching high
- Bullish trend harami
The deliberation pattern, also called the stalled pattern, is a 3-candlestick pattern that is traditionally seen as a bearish reversal pattern, but according to some, the pattern tends to be followed by a rising market more often than not.
This is how you can identify a bullish deliberation pattern:
- Three consecutive bullish candles in an uptrend
- The first and second candles have tall bodies, but the third has a small body
- Each candle’s open and close prices are higher than the preceding one
And the deliberation pattern implies that:
- Buyers were initially enthusiastic but later started having doubts
- Sellers are scared to enter the market since they do not provide enough selling pressure to make the last candlestick close lower, so buyers will resume their party soon
As said, this pattern is traditionally considered a bearish reversal pattern. Do your own testing and see what works best!
Rising Three Methods
The rising three methods is a 5-candlestick pattern seen in an uptrend. It looks like a flag or pennant.
This is how you identify a rising three methods candlestick pattern:
- The first candle is a long bullish candle
- The second, third, and fourth candles are small candles that trend lower but never closed below the low of the first candle
- The second and fourth candles are bearish, but the third can be of any color
- The fifth candle is a tall white candle that closes above the first candle’s close
And this is what a rising three methods implies:
- The bulls were taking some rest
- The bears used the opportunity to push back but didn’t have enough strength to push it past the low of the first candle
- Realizing that the bears didn’t have what it takes, the bulls took back control
Bullish Separating Lines
The bullish separating line is a 2-candlestick pattern that forms in an uptrend.
This is how you identify a bullish separating line :
- There must be a tall bearish candle in an uptrend followed by a tall bullish candle
- The bullish candle must have the same open price as the preceding bearish candle
Here’s what a bullish separating line signifies:
- The bears had the strength to push the price down
- The bulls came back with anger, and price gaped up at the previous candle’s open
Mat Hold Pattern
The mat hold is a 5-candlestick pattern that occurs in an uptrend. It is a variation of the rising three methods, and also resembles a flag or pennant.
Here’s how to recognize a mat hold pattern:
- The first candle is a tall bullish candle
- The second candle is a small bearish candle that gaps up
- The third candle is of similar size to the second and can be bullish or bearish but must close the gap
- The fourth candle is a small bearish candle that closes into the body of the first candle
- The fifth candle is a tall bullish candle that closes above the rest of the candles
The mat hold pattern signifies:
- After surging so high, the bulls took a break
- The bears couldn’t push the price down
- Bulls seized control again
Upside Tasuki Gap
An upside Tasuki gap is a 3-candlestick pattern that forms in an uptrend.
This is how you can recognize an upside Tasuki gap:
- A gap occurs between two bullish candles
- The third candle is a bearish candle that opens below the second candle’s close and closes below its open
- The third candle doesn’t completely fill the gap
And here’s what an upside Tasuki gap means:
- The buying pressure lead to a bullish gap
- There’s profit-taking but the bulls were in control and the selling pressure was not too strong, since the gap never got filled.
Bullish Trend Doji Star
A doji star is a 2-candlestick continuation pattern that can occur in an uptrend. It is an evening doji star that lacks the vital third, bearish candle.
Here’s how to identify Bullish trend Doji star:
- The first candle is a tall white candle
- The second candle is a doji that opened with a gap from the first candle
- The next candle doesn’t confirm an evening doji star pattern
This is what the bullish trend Doji star means:
- The bulls continue to push the price higher
- The market hesitates, but the bears do not win the battle.
Bullish Side by Side White Lines
This is a 3-candlestick continuation pattern that forms in an uptrend.
You can identify a Bullish Side by Side White Lines this way:
- The first candle is a tall white candle
- The second candle is a smaller white candle that opens with a gap from the first candle
- The third candle is similar to the second and opens and closes near the open and close levels of the second candle,
And here’s what the pattern means:
- Bulls were aggressive, causing the price to gap up
- Profit-taking set in, causing the second candle to gap down, but the bulls maintained the buying pressure
Upside Gap Two Crows
The upside gap two crows is a 3-candlestick pattern that is classically seen as a bearish reversal pattern, but some traders instead use it as a continuation pattern. You will have to do the testing yourself to know where it works best!
You can identify the Upside Gap Two Crows this way:
- The first candle is white/green and tall
- The second candle gaps above the first candle but closes bearish
- The third candle is also bearish and engulfs the second candle, after gapping up above the second candle’s open, but its close remains above the first candle’s close
Here’s what Upside Gap Two Crows means:
- First, bulls are in control and push the price higher.
- The second candle gaps up and shows that the bulls still are in control. However, the bears continue to drag the price down, which makes the candle close lower than it opened.
- The bulls once again drag the price up, and the third candle gaps up again, but the bears once again drag the price down.
As you can see, the bulls and bears are equally strong and take turns to drag the price in their direction. This balance is a sign that the price might wander the path of least resistance, which is to the upside.
The advance block pattern is a 3-candle pattern that is classically taken as a bearish reversal pattern, but again, many traders use this pattern as a bulllish continuation pattern.
Here’s how you can identify an advance block:
- Three consecutive bullish candles in an uptrend
- The body of each of the last two candles gets smaller than the preceding candle while the upper shadow gets taller
- Each candle’s open price is within the body of the preceding candle
And the advance block implies that:
- Buyers were initially in control but later started having doubts
- Selling pressure is not strong enough, so buyers will resume their party soon
This is a single candlestick pattern that is generally taken as a bearish reversal pattern, but many traders choose to regard it as a continuation pattern.
This is how to identify a hanging man:
- Price is trending up
- The candle has a small body (any color), little or no upper wick, and a long lower wick that is twice or thrice the size of the body
A hanging man implies that:
- Bears tried to push the price down
- Bulls later regained the upper hand
The matching high is a 2-candlestick pattern that is theoretically seen as a bearish reversal pattern, but many times the price continues in the direction of the trend.
This is how you identify a matching high:
- The first candle is a bullish candlestick that closes around its high
- The second candle gaps down and is smaller, but it closes at a similar level to the first candle
Here’s what the matching high pattern means:
- The bulls are in control of the price and make it rise
- The bears push the price down, and the second candle opens with a gap
- The bulls are not giving up and the second candle closes at the same level as the preceding candle.
Bullish trend Harami
We have discussed this candlestick pattern under the bearish reversal patterns, but we mentioned that it could also be a continuation pattern if price breaks above the high of the second candle.
Here’s how to identify a bullish trend harami:
- The first candle is big and bullish
- The second bearish candle is small, and its range lies within that of the first candle
The bullish trend harami might mean that:
- There’s a strong buying pressure as shown by the big bullish first candle.
- Profit-taking and indecision later set in. However, since the low of the first candle is not breached, the bulls might be strong enough to return!
How to Trade Bullish Continuation Candlestick Patterns
Bullish continuation patterns offer good opportunities to add to long positions if other forms of technical analysis indicate that the uptrend is in good shape. Trendlines and moving averages are good tools to use and check the trend. The momentum indicators like stochastic and MACD can help you gauge the upward momentum as well.
Once the price is in a strong uptrend and the momentum indicators are showing healthy price momentum, the bullish continuation patterns have the probabilities in their favor.
In this image, you can see that the price is above the moving average and rising fast. When the upside Tasuki gap pattern formed was a great opportunity to add more long orders. You could see that the MACD was also rising as well, indicating strong bullish momentum.
Here, you can see an upward trendline showing that the price is in an uptrend. After a pullback to the trendline, the price surged upwards. The first position would have been bought as the price was turning upwards from the trendline. Then, when the bullish continuation pattern (side by side white lines) appeared, adding to your long positions would have been great. The stochastic has gone from oversold level and is now rising steadily.
Bearish Continuation Candlestick Patterns
These candlestick patterns indicate that the price may continue trending lower even though it appears to be heasitant at the moment. In other words, you see these patterns when the price is in an established downtrend, and they show that price may fall lower.
These are some common bearish continuation candlestick patterns:
- Concealing baby swallow
- Falling three methods
- Bearish separating lines
- Bearish side by side white lines
- Bearish trend doji star
- Stick sandwich
- Downside Tasuki gap
- On neck line
- In neck line
- Inverted hammer
- Matching low
- Unique three rivers
- Bearish trend harami
Concealing Baby Swallow
This is a 4-candlestick pattern that forms in a downtrend. Although it is theoretically seen as a bullish reversal pattern, a lot of traders actually consider this one a bearish continuation pattern.
This is how you identify a Concealing Baby Swallow:
- The first two candles are tall and bearish
- The third candle, which opens with a gap, is also bearish and has a long upper wick
- The fourth candle is bearish too and completely engulfs the third candle
And here’s what a Concealing Baby Swallow implies:
- Bears are completely in control
- Any bullish attempt is met with massive selling pressure
Falling Three Methods
The falling three methods is a 5-candlestick pattern that occurs in a downtrend.
Here’s how to identify the falling three methods candle:
- The first candle is a long bearish candle
- The second, third, and fourth candles are small candles that trend higher without closing above the high of the first candle
- The second and fourth candles are white, but the third can be of any color
- The fifth candle is a tall black candle that closes below the fifth candle’s close
And this is what the falling three methods implies:
- The bears pushed the price down, but then took a break
- And the bulls used the opportunity to push back, but the buying pressure was weak
- The bears took back control when it’s clear the bulls didn’t stand a chance
Bearish Separating Lines
The bearish separating line is a 2-candlestick pattern that occurs in a downtrend.
Here’s how to identify bearish separating lines:
- A tall white candlestick in a downtrend followed by a tall black candlestick
- The black candlestick has the same open price as the preceding bullish candlestick
This is what bearish separating lines means:
- Buyers showed a sudden strength to push the price up
- But sellers came back with anger, and the price gaped down to the previous candle’s open
Bearish Side by Side White Lines
This 3-candlestick continuation pattern occurs in a downtrend.
Here’s how you can identify bearish side by side white lines:
- The first candlestick is tall and bearish
- The second candlestick is a smaller bullish candle that opens with a down gap from the first candlestick
- The third candle is similar to the second and opens close to the second candle’s open
This is what the bearish side by side white lines means:
- Sellers were very aggressive, as indicated by the tall bearish first candle and the gap
- Bulls fought back but despite their best effort, they couldn’t overcome the bears
Bearish Trend Doji Star
The doji star pattern is a 2-candlestick continuation pattern that can form in a downtrend. It is a morning doji star that lacks the vital third, bullish confirmatory candle.
This is how to identify bearish trend doji star:
- The first candlestick is a tall bearish one
- The second candle is a doji that opens with a down gap from the first candle
- The subsequent candlestick does not confirm a morning doji star pattern( it is not bullish)
And here’s what the bearish trend pattern means:
- The selling pressure, seen in the bearish first candle, pushed the price down
- Bears were taking a break, but bulls couldn’t push back
If the pattern is not followed by a bullish candle, the bulls probably failed to push the price up again, and the downtrend is likely to continue.
This 3-candlestick pattern is typically seen as a bullish reversal pattern, but many traders instead see this as a bearish continuation pattern.
Here’s how to identify a stick sandwich:
- The first candle is bearish and gaps down
- The second candle opens well above the first candle’s close and closes bullishly
- The third candle is bearish, gaps down below the open of the previous candle, and closes near the first candle’s close
A stick sandwich pattern implies that:
- Bears were in full control
- The small bullish attempt was decimated
Downside Tasuki Gap
A downside Tasuki gap is a 3-candlestick pattern that occurs when the price is trending down.
And this is how you may identify a Tasuki gap:
- The first candlestick is a black candle
- The second candlestick, which is also black, opens with a gap from the first one
- The third candle is a white candle that opens above the second candle’s close and closes above its open
- Although the third candle closes into the gap, it doesn’t cover it
This is what the Tasuki gap signifies:
- The bears are in control even though there may be profit-taking, which makes the second candle to gap up a bit
- The buying pressure from profit-taking isn’t strong enough to bother the bears, and the price continues down
On Neck Line
The on-neck line is a 2-candlestick pattern seen in a price that is trending downwards.
Here’s how you can recognize an on neck line:
- A tall black candle in a downward trend
- The second candle is white and opens with a down gap from the first candle
- The second candle’s close matches (or nearly matches) the first candle’s low price
And this is what the on-neck line pattern means:
- The bears aggressively pushed the price down but appeared to take a break after causing the second candle to gap down
- The bulls pushed back up but couldn’t gain much ground before the bears stopped them at the resistance level around the previous candle’s close
In Neck Line
This is a 2-candlestick bearish continuation pattern. It looks like the on-neck line, but the second candle closes at or slightly above the preceding candle’s close.
This is how to recognize an in neck line:
- The first candle is long and bearish
- The second candle opens with a down gap but rallies to cover the gap
- This second candle closes at the same level or slightly above the close of the first candle
And here’s what an in neck means:
- The bulls attempted to push back but couldn’t manage to push it beyond the middle of the previous candle — where it would become the piercing pattern, a bullish reversal pattern
- The bears would seize back control and move the price lower
This 2-candlestick pattern is normally seen as a bullish reversal pattern, but some tests we’ve made suggest otherwise.
This is how you can identify a matching low pattern:
- A tall black candlestick that closed around its low
- A second, smaller candlestick that closed near the close of the prior candle
Here’s what the matching low candle means:
- After the first down candle, bulls try to push the price upwards, and the second candle opens with a gap.
- However, it stops around the close of the previous bar which has now been turned into a resistance level. Yet, the bear pressure is still strong and will most likely push the price past the resistance level.
Unique Three Rivers
The unique three rivers pattern is believed to be a bullish reversal pattern, but it behaves more like a bearish continuation pattern on performance tests.
Here’s how you can identify the unique three rivers pattern:
- A long black candle in a downtrend is followed by another black candle that has a long lower wick
- The second candle gaps up
- The low of the second candle is below the first candle’s low
- The third candle is a small bullish candle that lies below the second candle’s body
The unique three rivers implies that:
- Bulls are trying to push the price up
- But the bearish pressure is too strong, since the highs constantly get lower with every candlestick.
Bearish Trend Harami
This candlestick pattern was discussed under the bullish reversal patterns, but as we stated there, it could also be a continuation pattern if price breaks below the low of the second candle.
This is how to identify the Bearish Trend Harami:
- The first candlestick is long and bearish
- The range of the second candlestick lies within that of the first candle
And here’s what the Bearish Trend Harami could mean:
- A strong bearish pressure as shown by the big black first candle
- Temporary indecision and profit-taking which leads to a bullish candle that is confined within the range of the first candle.
How to Trade Bearish Continuation Candlestick Patterns
If other technical analysis tools indicate that the price is headed downwards, bearish continuation patterns may provide good opportunities to add more short positions. You can use moving averages and trendlines to confirm downward price bias. Also, the momentum indicators like stochastic and MACD can help you gauge the downward momentum.
Once the price is in a strong downtrend and the momentum indicators are showing healthy price momentum, a bearish continuation pattern has a high odd of success.
In the picture, there’s an obvious downtrend, and the price has already reversed (with a bearish engulfing pattern) from a minor pullback. Then, a bearish doji star formed and price gaped down. Meanwhile, the MACD is also showing downward momentum.
Here, you can see the price has crossed the moving average and then formed a falling three methods. The stochastic was also showing strong downward momentum.
Indecision Candlestick Patterns
This group of candlestick patterns shows that buyers and sellers are equally strong, so the price tends to close near its open. They are single candlesticks, and they indicate an equilibrium in the market.
These are the most common indecision candlestick patterns:
- Neutral doji
- Dragonfly doji
- Gravestone doji
- Spinning top
This is a very common candlestick, and it indicates that the price opened and closed at the same level, even though it traded to higher and lower levels during the session.
Here’s how to identify a neutral doji:
- The upper and lower wicks are small and ruffly equal in size
- The candlestick has no real body since it opens and closes at the middle
The neutral doji pattern shows that:
- The bulls and bears mounted buying and selling pressure in the market
- The session closed without a clear winner
The dragonfly is a type of doji candlestick where the open, high, and close prices of the session are at the same level, but the session traded lower at some point.
This is how you can identify a dragonfly doji:
- The candlestick has no real body since it opens and closes at the same point
- The lower wick is long, but it has no upper wick
Here’s what a dragonfly doji signifies:
- There was aggressive selling initially
- Buyers stepped in and pushed the price back to where it opened
This is another type of doji candlestick. In this type, the open, low, and close prices of the session are at the same level, although the session trader higher at some point.
Here’s how to recognize a gravestone doji:
- It has no real body
- The upper wick is long, but there’s no lower wick
This is what the gravestone doji signifies:
- A strong buying pressure early in the session
- Bears later took control and pushed the price lower
A spinning top is a candlestick pattern with a short real body and same-sized wicks. It shows indecision in the market.
How to recognize a spinning top:
- It has a small body at the center
- Color doesn’t matter
- The upper and lower wicks are long and about the same size
And this is what the spinning top pattern means:
- Bulls and bears battled for control, as signified by the long wicks
- Neither of them could gain the upper hand, so the price closed near the open
How to Trade Indecision Candlestick Patterns
The best way to use these indecision candlesticks is in combination with other candlesticks when they form a recognizable pattern. For example, a harami cross as can be seen in the picture below.
Here, a doji candlestick formed an inside bar at a resistance level. The resistance level and the situation of the stochastic showed that placing a short-term short position would have been the wisest decision at that point, especially for a swing trader.
Another example can be seen in this picture below where a spinning top was part of a tweezer top pattern. Shorting would have been wise here too.
And lastly, gravestone and dragonfly dojis tend to act like shooting stars and hammers respectively. What is import here really is the long wick, which signifies indecision in the market.
Take a look at this gravestone doji acting just like a shooting star pattern in the image below:
The candlestick chart has become an invaluable tool in technical analysis. It has a customizable color which easily shows price direction at a glance. In addition, the candlesticks can form patterns that may indicate where the price may be headed next, but it’s not advisable to base your trading decisions on the patterns alone.
To improve the outcome of your trades, you must combine the candlestick patterns with other forms of technical analysis, such as the market structure, the direction of the trend, overbought and oversold conditions, and important support and resistance levels.