16 Candlestick Chart Patterns in the Stock Market
Candlestick Chart Patterns: Technical analysts set up their trades by using candlesticks to recognize trading patterns. The future direction of price movements is forecast using these candlestick patterns. By arranging two or more candlesticks in specific groups, the candlestick patterns are created.
One candlestick alone can occasionally send out strong signals. The 16 effective candlestick patterns will all be covered in this blog post, but first, let’s talk about how to read candlestick charts.
How Are Candlestick Charts Read?
Over a century before the West created bar charts and point-and-figure charts, candlestick charts were invented in Japan. A Japanese man by the name of Homma realized in the 1700s that, in addition to a correlation between rice price and supply and demand, trader emotions had a significant impact on the markets. The open, high, low, and close prices for the security are displayed on a daily candlestick chart. The “real body” of the candlestick, which is its wide or rectangle-shaped portion, displays the relationship between opening and closing prices.
This actual body displays the price range between the trading day’s opening and closing prices. A bearish candle is one that has a real body that is filled, black, or red because it indicates that the close was lower than the open. It demonstrates that the prices opened lower than the opening price before being pushed lower by the bears.
If the real body of the candle is empty, white, or green, this denotes a bullish candle, in which the close was higher than the open. It demonstrates that the prices opened, the bulls drove them higher, and they closed above the opening price.
There are a few candlestick chart-specific presumptions that need to be kept in mind before we dive into learning about various candlestick charts. A bullish or green candle denotes strength, and a bearish or red candle denotes weakness. When buying, one should make sure the day is a green candle day, and when selling, one should make sure the day is a red candle day.
The definition of a pattern in a textbook lists specific requirements, but it should be noted that the pattern may vary slightly depending on the state of the market. One ought to search for a previous trend. An indication of a bullish reversal pattern would be: If you’re looking for a bullish reversal pattern, the prior trend should be bullish; if you’re looking for a bearish one, the prior trend should be bearish.
16 Different Candlestick Pattern Types
There are several categories of candlestick patterns:
- Transitional Patterns
- Patterns of Bullish Reversals
- Patterns of Bearish Reversals
Bullish Reversal Candlestick Patterns: These patterns show that the current downward trend is about to change to an upward trend. Therefore, when the bullish reversal candlestick chart patterns are formed, traders should exercise caution when taking short positions.
The various kinds of bullish reversal candlestick patterns are listed below:
1. Candlestick Chart Patterns: Hammer
At the end of a downtrend, the single candlestick pattern known as a hammer is formed, which denotes a bullish turn. This candle’s real body, which is small and at the top, has a lower shadow that ought to be twice as large. There is little to no upper shadow in this candlestick chart pattern.
The psychological explanation for this candle formation is that as soon as prices opened, sellers pushed them lower. As soon as buyers entered the market, prices shot up and the trading session ended with prices higher than they had started.
This led to the formation of a bullish pattern, which indicates that buyers have returned to the market and the downtrend may be coming to an end. If a bullish candle forms the following day, traders can open a long position and set a stop loss at the Hammer low.
Here is an illustration of a Hammer candlestick pattern:
2. Candlestick Chart Patterns: Piercing Pattern
A multiple candlestick chart pattern called a “piercing pattern” is created after a downtrend and signals a bullish reversal. It consists of two candles, the first of which is a bearish candle that signals the uptrend will keep going down. A bullish reversal is about to occur because the second candle, which is bullish, closes more than 50% of the real body of the previous candle while opening the gap down. This action indicates that bulls have returned to the market.
If a bullish candle forms the following day, traders can open a long position and set a stop loss at the second candle’s low.
An illustration of a piercing candlestick pattern is given below:
3. Candlestick Chart Patterns: Bullish Engulfing
After a downtrend, the multiple candlestick chart pattern known as “Bullish Engulfing” forms, signaling a bullish reversal. Two candlesticks are used to form it, with the second candlestick engulfing the first. The downtrend is expected to continue as the first candle is bearish.
The first candle is completely engulfed by the second candlestick, which indicates that the bulls have returned to the market.
If a bullish candle forms the following day, traders can open a long position and set a stop loss at the second candle’s low. An illustration of a bullish engulfing candlestick pattern is shown below:
4. Candlestick Chart Patterns: The Morning Star
After a downtrend, the Morning Star multiple candlestick chart pattern forms, signaling a bullish reversal.
It consists of three candlesticks: a bearish candle in the first, a Doji in the second, and a bullish candle in the third. The first candle indicates that the downward trend is still in effect. A doji on the second candle indicates market uncertainty. The market’s bulls are back, and a reversal will occur, according to the third bullish candle.
The real bodies of the first and third candles should be completely clear of the second candle.
If a bullish candle forms the following day, traders can open a long position and set a stop loss at the second candle’s low.
An illustration of a Morning Star Candlestick Charts Pattern is shown below.
5. Candlestick Chart Patterns: Three White Soldiers
A downtrend is followed by the formation of the Three White Soldiers, a multiple candlestick patterns that denotes a bullish reversal.
These candlestick charts are made of three long bullish bodies that are open within the previous candle’s real body and do not have long shadows.
6. Candlestick Chart Patterns: White Marubozu
After a downtrend, the White Marubozu is a single candlestick pattern that denotes a bullish reversal.
The markets may turn bullish because this candlestick has a long bullish body and no upper or lower shadows, which indicates that the bulls are applying buying pressure.
7. Candlestick Chart Patterns: Three Inside Up
A multiple candlestick pattern called the Three Inside Up is formed after a downtrend and indicates a bullish reversal. Three candlesticks make up the formation; the first is a long bearish candle, and the second is a small bullish candle that should fall within the first candlestick’s range.
The third candlestick, which will confirm the bullish reversal, should be a long bullish candlestick.
The first and second candlesticks should have a bullish harami candlestick pattern relationship. After this candlestick pattern is finished, traders can open a long position.
8. Candlestick Chart Patterns: Bullish Harami
The multiple candlestick patterns known as the Bullish Harami is formed after a downtrend and indicates a bullish reversal. Two candlestick charts make up the structure; the first candlestick is a large bearish candle and the second is a small bullish candle that should be within the first candlestick’s range.
The first bearish candle indicates that the bearish trend will continue, and the second candle indicates that the bulls have returned to the market.
9. Candlestick Chart Patterns: Tweezer Bottom
The bullish reversal candlestick pattern known as the Tweezer Bottom forms at the bottom of a downtrend. It is made up of two candlesticks, the first of which is bearish and the second of which is bullish. The lows made by both candlesticks are nearly identical.
The prior trend is a downtrend when the Tweezer Bottom candlestick pattern is formed.
A bearish tweezer candlestick appears to be forming, suggesting that the current downtrend will continue. The low of the bullish candle from the second day on the following day serves as a support level.
The bottom-most candles that nearly share the same low point out the strength of the support as well as the possibility that the downward trend may turn upward. As a result, the bulls take over and drive the price up.
The formation of the bullish candle the following day confirms this bullish reversal.
10. Candlestick Chart Patterns: Inverted Hammer
At the bottom of the downtrend, an Inverted Hammer forms, signaling a bullish reversal. The actual body of this candlestick is at the very end, and its upper shadow is quite long. The Hammer Candlestick pattern is the opposite of this pattern.
When the opening and closing prices are close to one another and the upper shadow is greater than twice the real body, this pattern is formed.
11. Candlestick Chart Patterns: Three Outside Up
A downtrend is followed by the formation of the multiple candlestick patterns known as the Three Outside Up, which denotes a bullish reversal. It consists of three candlesticks, the first of which is a brief bearish candle and the second of which is a sizable bullish candle that ought to engulf the first.
The third candlestick, which will confirm the bullish reversal, should be a long bullish candlestick.
The Bullish Engulfing candlestick pattern should be present in the relationship between the first and second candlestick charts.
After this candlestick pattern is finished, traders can open a long position.
12. Candlestick Chart Patterns: On-Neck Pattern
A long real-bodied bearish candle is followed by a shorter real-bodied bullish candle that gaps down on the open but closes close to the prior candle’s close to form the on-neck pattern after a downtrend. The pattern is known as a neckline because it forms a horizontal neckline when the two closing prices are equal or nearly equal across the two candles.
13. Candlestick Chart Patterns: Bullish Counterattack
A bullish reversal pattern called the bullish counterattack pattern foretells an impending reversal of the market’s current downward trend. This candlestick pattern is a two-bar pattern that shows up when the market is in a downtrend. The following criteria must be satisfied for a pattern to qualify as a bullish counterattack pattern. The market must be in a significant downtrend for the bullish counterattack pattern to form.
The first candle must be a lengthy, real-body, black candle.
The second candle needs to be long as well (ideally, it should be the same size as the first candle), but it must be white and have a real body. The second candle needs to go out around the same time as the first candle. A downtrend is expected to replace the current uptrend, according to the bearish reversal candlestick pattern.
In light of this, traders should exercise caution when taking on long positions when bearish reversal candlestick patterns appear. The various bearish reversal candlestick chart patterns are listed below:
14. Candlestick Chart Patterns: Hanging man
A single candlestick pattern called a “Hanging Man” forms at the peak of an uptrend and indicates a bearish turn. This candle’s actual body is small and at the top, with a lower shadow that should be twice as large as the actual body. There is little to no upper shadow in this candlestick pattern.
The psychological explanation for this candle formation is that as soon as prices opened, sellers pushed them lower. When buyers suddenly entered the market, they attempted to drive up prices, but they were unsuccessful because the prices closed below the opening price.
This led to the formation of a bearish pattern, which indicates 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 can open a short position and set a stop loss at the Hanging Man high.
Here is an illustration of a candlestick pattern with a hanging man:
15. Candlestick Chart Patterns: Dark cloud cover
Multiple candlestick patterns called “Dark Cloud Cover” are formed after an uptrend and indicate a bearish reversal.
It is made up of two candles, the first of which is a bullish candle that signifies the uptrend will continue.
The second candle, which is bearish, has an opening gap but closes with more than 50% of the previous candle’s real body, indicating that the bears have returned to the market and that a bearish reversal is about to occur.
If a bearish candle forms the following day, traders can open a short position and set a stop-loss order at the second candle’s high.
An illustration of a Dark Cloud candlestick pattern is provided below:
16. Candlestick Chart Patterns: Bearish Engulfing
Multiple candlestick patterns called a “bearish engulfing” form after an uptrend and denote a bearish reversal. Two candlesticks are used to form it, with the second candlestick engulfing the first. The fact that the first candle is bullish suggests that the uptrend will continue.
The long bearish candle on the second candlestick chart completely engulfs the first candle, signaling the return of the bears to the market.
If a bearish candle forms the following day, traders can open a short position and set a stop-loss order at the second candle’s high.
