To forecast the direction of price movement in the future, candlestick patterns are used. Learn how to use 16 of the most popular candlestick patterns to spot trading opportunities.
A candlestick is what?
Candlestick Patterns are a visual representation of data about the price movement of an asset. One of the most well-liked elements of technical analysis is candlestick charts, which allow traders to quickly and accurately interpret price information from a small number of price bars.
In the daily chart that is the subject of this article, each candlestick represents a single trading day. It has three essential attributes:
- The open-to-close range is represented by the body.
- The wick, or shadow, represents the high and low of the day
- The color indicates the market’s movement direction. A red (or black) body denotes a price decrease, while a green (or white) body denotes an increase in price.
Individual Candlestick Patterns develop patterns over time that traders can use to identify key levels of support and resistance. Numerous candlestick patterns can be used to identify opportunities in a market; some show how the buying and selling pressures are balanced, while others show continuation patterns or market indecision.
Read candlestick patterns more often.
Practicing entering and exiting trades based on candlestick pattern signals is the best way to learn how to read them. By opening an IG demo account, you can practice your skills in a risk-free setting. If you’re ready to start trading, you can also open a live account right away.
Any candlestick pattern should be used in conjunction with other types of technical analysis to confirm the general trend even though they are excellent for quickly predicting trends. With the help of IG Academy’s online courses, you can learn more about candlesticks and technical analysis.
There are six bullish Candlestick Patterns
After a market downtrend, bullish patterns may appear and indicate a change in the direction of price movement. Using them as a guide, traders can decide whether to start a long position in order to benefit from any upward trend.
At the bottom of a downward trend, the hammer candlestick pattern is formed by a short body and a long lower wick. A hammer indicates that even though there were selling pressures throughout the day, the price was ultimately driven back up by strong buying pressure. Red hammers signal a weaker bull market than green hammers, though the body color can vary.
The inverted hammer pattern is also bullish. The upper wick’s length compared to the lower wick’s shortness is the only distinction. It denotes a buying pressure that was followed by a weak selling pressure that failed to lower the market price. The inverse hammer predicts that buyers will take over the market shortly.
Two candlesticks come together to form a bullish engulfing pattern. A taller green candle completely engulfs the shorter red body of the first candle. Even though the price opens lower than the first day, the bullish market drives it up, resulting in a clear victory for buyers.
In another two-stick pattern, the piercing line is composed of a long red candle and a long green candle. The closing price of the first candlestick and the opening price of the green candlestick typically have a sizable downward gap. As the price is raised to or above the mid-price from the previous day, it indicates that there is significant buying pressure.
In a depressing market downtrend, the morning star candlestick pattern is regarded as a sign of optimism. A short-bodied candle is sandwiched between a long red and a long green in a three-stick pattern. Since the market gaps are both on open and close, the “star” won’t typically overlap with the longer bodies. It indicates that a bull market is approaching and that the selling pressure from the first day has subsided.
Three white soldiers
Over the course of three days, there are three white soldiers. It consists of a series of long, green (or white), wickless candles that open and close higher than the day before. It is an extremely potent bullish signal that follows a downward trend and demonstrates a steady increase in buying pressure.
6 candlestick patterns that are bearish
After an uptrend, bearish candlestick patterns typically appear and indicate a point of resistance. When traders are overly pessimistic about the market price, they frequently close their long positions and open short positions to profit from the declining price.
The hanging man, which has the same shape as a hammer but only appears at the end of an uptrend, is the bearish equivalent. It shows that there was a sizable sell-off during the day but that buyers were successful in driving the price back up. The significant sell-off is frequently interpreted as a sign that the market is losing ground to the bulls.
Similar to the inverted hammer in shape, the shooting star is formed during an uptrend and has a short lower body and a long upper wick. The market will typically open slightly higher, surging to an intraday high, and close at a price just above the open, like a star falling to earth.
An uptrend comes to an end when a bearish engulfing pattern forms. A subsequent long red candle surrounds the smaller green body of the initial candle. It denotes a price peak or slowdown and is an indication of a coming market downturn. The trend is more likely to be significant the lower the second candle goes.
The bullish morning star’s counterpart, the evening star is a three-candlestick pattern. It is made up of a big red candlestick, a long green candle, and a short candle sandwiched between them. When the third candlestick reverses the gains of the first candle, it strongly suggests the reversal of an uptrend.
Three black crows
Three consecutive long red candles with short or no wicks make up the three black crows’ candlestick pattern. Each session begins at a price that is similar to the previous one, but as each session comes to a close, selling pressures drive the price even lower. Due to the fact that sellers have surpassed buyers during the last three trading days, traders interpret this pattern as the beginning of a bearish downtrend.
Dark cloud cover
The dark cloud cover candlestick pattern denotes a bearish reversal, casting a gloomy pall over the optimism of the day before. It consists of two candlesticks: one red and one green. The red candlestick opens above the green body’s midpoint and closes below it. It indicates that the bears are in control of the session and have driven the price significantly lower. The short wicks of the candles indicate that the downtrend was very strong.
Four candlestick patterns that continue
A candlestick pattern is referred to as a continuation pattern if it doesn’t signal a change in the market’s direction. These can aid traders in spotting a market lull during which there is price indecision or neutral movement.
The candlestick looks like a cross or plus sign when a market’s open and close are nearly the same price point. Traders should watch out for a short to nonexistent body and wicks of varying lengths. The shape of this Doji represents a struggle between buyers and sellers where neither side gains anything in the end. A Doji by itself is a neutral signal, but reversal patterns like the bullish morning star and bearish evening star can contain one.
The short body of the spinning top candlestick pattern is positioned in the middle of two wicks of equal length. The pattern shows market indecision, which prevented a meaningful change in price: the bulls drove up the price while the bears drove it down once more. Spinning tops are frequently seen as a consolidation or resting period that comes after a significant uptrend or downtrend.
The spinning top is a generally benign signal on its own, but because it indicates that the current market pressure is waning, it can be read as a portent of future events.
Falling three methods
Any trend, whether bullish or bearish, can be predicted using three-method formation patterns. The “falling three methods” is the name of the bearish pattern. The green candles are all contained within the bearish bodies’ range and are made up of a long red body, three short green bodies, and another red body. It demonstrates to traders that the bulls lack sufficient power to change the trend.
Advancing three ways
The ‘rising three methods’ candlestick pattern, a bullish pattern, is the exact opposite. Three short reds are sandwiched between two long greens in this arrangement. The pattern demonstrates to traders that buyers are still in charge of the market despite some selling pressure.
What candlestick pattern has had the most success?
One of the most potent candlestick patterns is the engulfing pattern, which consists of two candles. It happens when the second candle, or the most recent candle, completely engulfs or overshadows the first candle. Symbolically, it denotes either a victory of buyers over sellers or the opposite.
What does the three candle forex rule mean?
A large down candle, a smaller up candle contained within the previous candle, and a third up candle that closes above the close of the second candle make up the three inside up patterns, a bullish reversal pattern.
What is the most dependable candlestick pattern for day trading?
One of the most dependable and effective candlestick patterns for intraday trading is the shooting star candlestick. Instead of a hammer candle, which indicates a bottom trend, you will typically see a bearish reversal candlestick in this type of intra-day chart, which suggests a peak.
The ideal timeframe for candlestick patterns is
Daily bars and relatively short holding periods of one to ten days work best for candlestick charts. Candlesticks are therefore most effective for short-term trading.
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