Candlesticks are used to identify trading patterns that assist technical analysts in setting up trades on financial markets, more importantly, in forex trading.
Forex candlestick patterns are used to logically forecast the direction of future price movements or predict the price action of a certain currency pair. Candlestick patterns are formed by grouping two or more candlesticks in a specific pattern. A single candlestick may sometimes provide powerful signals.
Before we get into frequent powerful candlestick patterns in this post, some hands-on knowledge to interpret candlestick charts is necessary.
A candlestick is a method of showing information regarding the price movement of an asset.
Candlestick charts are one of the most popular components of technical analysis, allowing traders to comprehend price information quickly and from just a few price bars.
Individual candlesticks develop patterns over time that traders may use to identify important support and resistance levels. Several candlestick patterns indicate a market opportunity – some reveal the balance of buying and selling pressures, while others identify continuation patterns or market indecision.
Candlestick charts originated in Japan more than a century before the West developed bar charts and point-and-figure charts. In the 1700s, a Japanese man named Homma observed that, while there was a link between price and rice supply and demand, the markets were also strongly influenced by merchants’ emotions.
A daily candlestick chart displays the day’s open, high, low, and close prices. A candlestick’s “real body” is the wide or rectangle part that shows the relationship between opening and closing prices.
This real body shows the price range between the open and close of that day’s trading.
When the real body is filled with black or red, it indicates that the close is lower than the open and is referred to be a bearish candle. It shows that the prices opened, the bears pushed them down, and the prices closed lower than the opening price.
If the real body is empty, white, or green, the close is higher than the open, indicating a bullish candle. It demonstrates that the prices opened, the bulls pushed the prices higher, and the prices closed higher than the opening price.
The thin vertical lines above and below the real body are known as the wicks or shadows, and they indicate the trading session’s high and low prices.
The upper shadow shows the high price, while the lower shadow shows the low price obtained during the trading session.
Before we begin learning about distinct candlestick charts, a few assumptions must be made that are unique to candlestick charts.
Forex candlestick patterns can be tricky to learn. If you are new to this we suggest that you read our article on forex chart patterns for a broader understanding of price direction.
The candlestick patterns can be divided into:
Here is the list of the most common candlestick patterns:
Bullish Reversal candlestick patterns indicate that the ongoing downtrend will reverse into an uptrend. When bullish reversal candlestick chart patterns appear, traders should be cautious about taking short positions.
The following are the several forms of bullish reversal candlestick patterns:
The hammer pattern is a single candlestick pattern that appears towards the end of a downtrend and signals a bullish reversal. This candle’s real body is small and located at the top, with a lower shadow that should be more than twice the size of the real body. The upper shadow on this candlestick chart pattern is either absent or minimal.
The psychology behind this candle formation is that prices opened, and sellers pushed prices down. Suddenly, buyers pushed the market, pushing prices higher and closing the trading session at a higher price than the opening price.
This resulted in the formation of a bullish pattern, indicating that buyers are returning to the market and that the downtrend may be coming to an end. If a bullish candle forms the following day, traders may enter a long position with a stop-loss at the low of the Hammer.
Piercing is a numerous candlestick chart pattern that appears after a downtrend and indicates a bullish reversal. It is formed by two candles, the first of which is a bearish candle indicating the continuation of the downtrend.
The second candle is a bullish candle that opens the gap down but closes more than 50% of the previous candle’s real body, indicating that the bulls have returned to the market and a bullish reversal is imminent.
If a bullish candle forms the following day, traders may enter a long position with a stop-loss at the low of the second candle.
Bullish Engulfing is a multiple candlestick chart pattern that indicates a bullish reversal following a downtrend. It is made up of two candles, with the second candlestick swallowing the first. The first candle is a bearish candle, indicating that the downtrend will continue.
The second candlestick is a long bullish candle that totally engulfs the first and indicates that the bulls have returned to the market. If a bullish candle forms the following day, traders may enter a long position with a stop-loss at the low of the second candle.
The Morning Star is a multiple candlestick chart pattern that appears after a downtrend and indicates a bullish reversal. It is composed of three candlesticks, the first of which is a bearish candle, the second a Doji, and the third a bullish candle.
The first candle shows that the downtrend is continuing. The fact that the second candle is a Doji signals market hesitancy. The third bullish candle indicates that the bulls have returned to the market and that a reversal is imminent. The second candle should be fully separate from the first and third candles’ real bodies.
If a bullish candle forms the following day, traders may enter a long position with a stop-loss at the low of the second candle.
The Three White Soldiers pattern is a multiple candlestick pattern that appears after a downtrend and indicates a bullish reversal.
These candlestick charts are composed of three long bullish bodies with no long shadows that are open inside the real body of the previous candle in the pattern.
The White Marubozu is a single candlestick pattern that appears after a downward trend and indicates a bullish reversal.
This candlestick has a long bullish body with no upper or lower shadows, indicating that the bulls are applying buying pressure and that the markets are likely to become bullish. Sellers should use caution and close their short positions when this candle forms.
The Three Inside Up candlestick pattern is formed after a downtrend and indicates a bullish reversal. It comprises three candlesticks, the first of which is a long bearish candle, the second of which is a small bullish candle that should be in the same range as the first.
The third candlestick should be a long bullish candlestick, indicating the bullish reversal. The first and second candlestick relationships should follow the bullish harami candlestick pattern. Traders might enter a long position when this candlestick pattern is completed.
Bullish Harami is a multiple candlestick chart pattern that appears after a downtrend and indicates a bullish reversal. It consists of two candlestick charts, the first of which is a tall bearish candle and the second of which is a small bullish candle that should be in the range of the first.
The first bearish candle indicates that the bearish trend is continuing, while the second candle indicates that the bulls have returned to the market. Traders might enter a long position following the completion of this candlestick pattern.
Tweezer Bottom is a bullish reversal candlestick pattern that forms towards the end of a downtrend. It is made up of two candlesticks, the first of which is bearish and the second of which is bullish.
Both candlesticks make almost or exactly the same low. The prior trend is a downtrend when the Tweezer Bottom candlestick pattern is formed. A bearish tweezer candlestick forms, indicating that the current downtrend will continue. The low of the second day’s bullish candle indicates a support level the following day.
The bottom-most candles with almost the same low indicate the strength of the support and also indicate that the downtrend may be reversed to build an uptrend. As a result, the bulls take action and drive the price higher.
This bullish reversal is reinforced the following day by the formation of a bullish candle.
An Inverted Hammer forms at the end of a downtrend, signalling a bullish reversal. The real body is at the end of this candlestick, and there is a long upper shadow. The Hammer Candlestick pattern is its inverse.
This pattern appears when the opening and closing prices are close to each other, and the upper shadow is more than twice the size of the real body.
The first and second candlestick charts should have a Bullish Engulfing candlestick pattern relationship. Traders might enter a long position following the completion of this candlestick pattern.
After a downtrend, a neck pattern occurs when a long, real-bodied bearish candle is followed by a smaller, real-bodied bullish candle that gaps down on the open but closes around the prior candle’s close.
The pattern is termed a neckline because the two closing prices are the same or almost the same across the two candles, making a horizontal neckline.
The bullish counterattack pattern is a bullish reversal pattern that predicts the market’s current downtrend will reverse. This candlestick pattern is a two-bar pattern that develops during a market downtrend. A pattern must match the following criteria to be considered a bullish counterattack pattern.
Bearish Reversal candlestick patterns indicate that the ongoing uptrend will reverse to a downtrend. When bearish reversal candlestick patterns appear, traders should be cautious about taking long positions.
The following are the different types of bearish reversal candlestick chart patterns:
The Hanging Man pattern is a single candlestick pattern that appears towards the end of an uptrend and signals a bearish reversal. This candle’s real body is small and located at the top, with a lower shadow that should be more than twice the size of the real body. The upper shadow on this candlestick pattern is either absent or minimal.
The psychology behind this candle formation is that prices opened, and sellers pushed prices down. Suddenly, buyers pushed the market and attempted to raise prices but were unsuccessful since the prices closed below the opening price.
This resulted in the formation of a bearish pattern, indicating that sellers have returned to the market and the uptrend may be coming to an end. If a bearish candle forms the following day, traders may enter a short position with a stop-loss near the high of Hanging Man.
Harmonic patterns - Advanced technical analysis — 2023
Dark Cloud Cover is multiple candlestick patterns that appear after an uptrend and indicates a bearish reversal. It is composed of two candles, the first of which is a bullish candle indicating the continuation of the uptrend.
The second candle is a bearish candle that opens a gap up but closes more than 50% of the previous candle’s real body, indicating that the bears have returned to the market and a bearish reversal is imminent.
If a bearish candle forms the following day, traders may enter a short position with a stop-loss at the high of the second candle.
Bearish Engulfing is multiple candlestick patterns that appears after an uptrend and indicates a bearish reversal. It is made up of two candles, with the second candlestick engulfing the first. The first candle, which is a bullish candle, indicates that the uptrend will continue.
The second candlestick chart shows a long bearish candle that totally engulfs the first candle and indicates that the bears have returned to the market.
If a bearish candle forms the following day, traders may enter a short position with a stop-loss at the high of the second candle.
The Evening Star is multiple candlestick patterns that appear after an uptrend and indicates a bearish reversal. It is composed of three candlesticks: a bullish candle, a Doji candle, and a bearish candle.
The first candle indicates the continuation of the uptrend, the second candle, a Doji, indicates market indecision, and the third bearish candle indicates that the bears have returned to the market and a reversal is imminent.
The second candle should be completely separate from the first and third candles’ real bodies.
If a bearish candle forms the following day, traders may enter a long position with a stop-loss at the high of the second candle.
The Three Black Crows pattern is a multiple candlestick patterns that appears after an uptrend and indicates a bearish reversal.
These candlesticks are composed of three long bearish bodies with long shadows that open inside the real body of the previous candle in the pattern.
The Black Marubozu is a single candlestick pattern that appears after an uptrend and indicates a bearish reversal.
This candlestick chart displays a long bearish body with no upper or lower shadows, indicating that the bears are exerting selling pressure on the markets and that the markets may turn bearish.
Buyers should use caution and close their positions when this candle forms.
The Three Inside Down candlestick pattern is formed after an uptrend and indicates a bearish reversal. It consists of three candlesticks, the first of which is a long bullish candle, the second of which is a small bearish candle that should be in the range of the first candlestick.
The third candlestick chart should be a long bearish candlestick, confirming the bearish reversal. The first and second candlesticks should have a bearish Harami candlestick pattern relationship. Traders might take a short position following the completion of this candlestick pattern.
The Bearish Harami is a multiple candlestick pattern that appears after an uptrend and indicates a bearish reversal. It is made up of two candlesticks, the first of which is a tall bullish candle and the second of which is a small bearish candle that should be in the range of the first candlestick chart.
The first bullish candle indicates that the bullish trend is continuing, while the second candle indicates that the bears have returned to the market. Traders might take a short position following the completion of this candlestick pattern.
A Shooting Star forms towards the end of an uptrend and signals a bearish reversal. The real body is at the end of this candlestick chart, and there is a long upper shadow. The Hanging Man Candlestick pattern is the inverse.
This pattern appears when the opening and closing prices are close to each other, and the upper shadow is more than twice the size of the real body.
Tweezer Top is a bearish reversal candlestick pattern that appears towards the end of an uptrend. It is made up of two candlesticks, the first of which is bullish and the second of which is bearish. The tweezer candlestick produces almost the same high.
The prior trend is an uptrend when the Tweezer Top candlestick pattern is formed. A bullish candlestick forms, indicating that the current uptrend will continue. The high of the second day’s bearish candle indicates a resistance level the following day. Bulls seem to be raising the price, but they are now unwilling to purchase at higher prices.
The top-most candles with nearly high highs indicate the strength of the resistance and also indicate that the uptrend may be reversed to produce a downtrend. This bearish reversal is verified when the bearish candle forms the following day.
The Three Outside Down candlestick pattern is formed after an uptrend and indicates a bearish reversal.
It consists of three candlesticks, the first of which is a short bullish candle, the second of which is a massive bearish candle that should cover the first.
The third candlestick should be a long bearish candlestick, confirming the bearish reversal. The first and second candlesticks should have a Bearish Engulfing candlestick pattern relationship. Traders might take a short position following the completion of this candlestick pattern.
The bearish counterattack candlestick pattern is a bearish reversal pattern that develops in the market during an uptrend. It predicts that the current market uptrend will end and a new downtrend will take over
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In the financial markets, a continuation pattern indicates that the price of a stock or other asset will continue to move in the same direction even after the continuation pattern has been completed. There are various continuation patterns that technical analysts employ to continue the continuation of a price trend.
Here are a few of the most common continuation candlestick patterns:
The Doji pattern is a candlestick pattern of indecision formed when the opening and closing prices are almost equal. It forms when both bulls and bears compete for price control, but neither one succeeds in gaining complete control. The candlestick pattern resembles a cross, with a small real body and long shadows.
When seen alone, a Doji indicates that neither buyers nor sellers are gaining – it is a sign of indecision. Some traders assume that the Doji indicates an upcoming price reversal when evaluated with other candlestick patterns. However, this is not always the case.
It might mean that buyers or sellers are gaining momentum to continue the current trend. It’s important to realise that the Doji candlestick doesn’t provide you with all the information you need to make a choice.
Before acting on any signals, including the Doji candlestick chart pattern, additional patterns and indicators should always be considered.
The spinning top candlestick pattern, like the Doji, indicates market indecision. The sole difference between a spinning top and a Doji is that the spinning top has a bigger real body than a Doji.
The upper shadow indicates that the bulls attempted, but failed, to drive the stock price higher. If the bulls had won, the real body would have looked like a long green candle. As a result, this might be seen as an effort by the bulls to push the markets higher, but they were unsuccessful.
The lower shadow indicates that the bears made an effort to drive down stock prices but were unsuccessful. If the bears had been successful, the real body would have turned into a long red candle. Thus, this might be seen as an effort by the bears to drive down stock prices, but they were unsuccessful.
The “falling three methods” is a bearish, five-candle continuation pattern that signals an interruption, but not a reversal, of the ongoing downtrend.
The candlestick pattern consists of two long charts in the trend’s direction, i.e., a downtrend at the beginning and end and three shorter counter-trend candlesticks in the middle. The candlestick pattern is important because it shows traders that the bulls still lack the necessary power to reverse the trend.
The pattern is the falling three-method candlestick pattern, but it has five consecutive candles. The falling three methods indicate that a trend is continuing rather than reversing. It’s a bearish pattern that indicates a brief break in the larger trend, which in this case, is downward.
Many red candlesticks will appear before forming a falling three methods candlestick pattern, indicating a bearish price trend.
One tall red candle is the first of three falling candlesticks. Following the first candle are three short green candles. In a flawless falling three candlestick arrangement, the three short candles should be enclosed in the body of the first red candle.
The real bodies of the three green candles cannot be higher or lower than the first candle’s real body. Following the three candles, a long red candle is formed. The closing candle should be lower than the opening candle, indicating a stronger bearish trend.
The “rising three methods” pattern is a bullish five-candle continuation pattern that indicates an interruption, but not a reversal, of the current uptrend. The candlestick pattern consists of two long candlesticks in the direction of the trend, which in this case, is up. At the beginning and end, three shorter counter-trend candlesticks are in the middle.
The candlestick pattern is important because it shows traders that the bears still lack the necessary power to reverse the trend.
It is a bullish continuation candlestick pattern that forms during an uptrend. This candlestick pattern is made up of three candles: the first is a long-bodied bullish candlestick, and the second is a bullish candlestick chart formed following a gap up. The third candlestick is a bearish candle that closes the gap formed by the previous two bullish candles.
Traders’ sentiment is positive about the ongoing uptrend, and they believe it will continue. And, as expected, the first candle of this Gap forms a long-bodied bullish candle. The bulls’ positive sentiment continues in the next trading session, causing the candle to gap higher and the second candle to become a long positive one.
Because of the two long bullish candles with a gap up in between, traders are concerned that the market will get overbought and a bearish reversal will come. As a result of this fear, the third candle is bearish and closes below the opening of the second candle.
However, traders believe that the third candle is merely a temporary pullback and that buying pressure will increase, pushing prices higher, and the uptrend will continue.
It is a bearish continuation candlestick pattern that forms during a downtrend. The first candlestick in this candlestick pattern is a long-bodied bearish candlestick, and the second candlestick is similarly a bearish candlestick formed following a gap down. The third candlestick is a bullish candle that fills the space left by the previous two bearish candles.
Traders’ sentiment is positive about the ongoing uptrend, and they believe it will continue. And, as expected, the first candle of this Gap forms a long-bodied bullish candle. The bulls’ positive sentiment continues in the next trading session, causing the candle to gap higher and the second candle to become a long positive one.
Because of the two long bullish candles with a gap up in between, traders are concerned that the market will get overbought and a bearish reversal will come. As a result of this fear, the third candle is bearish and closes below the opening of the second candle.
However, traders believe that the third candle is merely a temporary pullback and that buying pressure will increase, pushing prices higher, and the uptrend will continue.
A mat hold pattern is a candlestick formation indicating the continuation of a prior trend. There may be either bearish or bullish mat hold patterns. A bullish pattern starts with a giant bullish candle followed by a gap higher and three smaller candles which move lower.
These candles must remain above the low of the first candle. The fifth candle is a huge candle that travels to the upside again. The pattern occurs inside an overall uptrend.
When a bullish mat hold pattern appears in an uptrend, it indicates that the trend will most likely resume to rise. Traders can buy near the closure of the fifth candle (big up candle) or start a long trade on the next candle. A stop loss is typically placed below the low of the fifth candle.
When a bearish mat hold pattern appears within a downtrend, the downtrend will likely resume, and prices will fall further. Traders may sell or short near the close of the fifth candle or on the next candle. Short positions have a stop loss above the high of the fifth candle.
Both variations of the pattern are extremely rare. They show that the price is firmly moving in the trending direction (candle one), with only minor pressure in the opposite direction (candles two through four) before returning to the trending direction (candle five).
The rising window is a candlestick pattern that consists of two bullish candlesticks separated by a gap. The gap is a space between the high and low of two candlesticks resulting from high trading volatility. It is a trend continuation candlestick pattern that indicates strong market buyers.
The falling window is a candlestick pattern that consists of two bearish candlesticks separated by a gap. The space between the high and low of two candlesticks is known as the gap. It occurs as a result of high trading volatility. It is a trend continuation candlestick pattern that indicates the market’s strong seller strength.
The high wave candlestick pattern is an indecision pattern that shows that the market is neither bullish nor bearish. It generally occurs at the levels of support and resistance. This is where bears and bulls clash in an attempt to drive the price in a specific direction.
Long lower shadows and long upper wicks on candlesticks depict the pattern. They, too, have small bodies. Long wicks indicate that there was a lot of price movement during the specified signal period. However, the price ended up closing close to the opening price.
In other words, hedge fund managers employ software to lure participants who are looking for a high probability of a bullish or bearish result. However, reliable patterns continue to appear, giving for both short-term and long-term profit opportunities.
Not all candlestick patterns function equally effectively. Because hedge funds and their algorithms have analysed and exploited them, their popularity has reduced their credibility. To compete with retail investors and traditional fund managers that use technical analysis strategies, these well-funded companies depend on lightning-fast execution.
The work of Thomas Bulkowski, who created performance scores for candlestick patterns in his 2008 book “Encyclopedia of Candlestick Charts,” is used to measure reliability.
Do candlestick patterns really work?
Many traders employ candlestick patterns effectively. However, electronic trading is eating away at manual traders’ returns since computers do it much faster. Nevertheless, a few specific patterns have been proved to be unusually accurate.
Forex candlestick patterns are not the only way to do trading. However, it is one of the most famous ways to analyse a certain currency pair’s market behaviour and price action. Having in-depth knowledge of forex candlestick patterns does not guarantee you a successful trading career. You must gain a lot of knowledge to be a successful forex trader. Risk management and psychological handling always remain on top.
Have you heard about Harmonic patterns? We wrote a detailed article on this topic.
Forex price movements are more readily noticed on candlestick charts than on others. On candlestick charts, price patterns and price action are easy to identify. Candlestick charts provide more price information (open, close, high, and low) than line charts.
