A Candlestick Pattern: What Is It?

A Candlestick Pattern: A technical tool known as a candlestick chart condenses data from various time frames into a single price bar. They are therefore more valuable than conventional open-high, low-close bars or straight lines that connect closing prices. Candlesticks create patterns that, once finished, forecast price movement. This colorful technical tool, which dates back to Japanese rice traders in the 18th century, is enhanced by proper color coding.

In his well-known 1991 book, Japanese Candlestick Charting Techniques, Steve Nison introduced candlestick patterns to the West. Many traders can now recognize dozens of these formations thanks to their distinctive names, which include Bearish Dark Cloud Cover, Evening Star, and Three Black Crows. Additionally, numerous long- and short-side trading strategies have adopted single-bar patterns, such as the Doji and Hammer.

Understanding Candlestick Patterns

The open, close, high, and low prices of a market are represented by a daily candlestick. It is common practice to color the rectangular body red (or black) to indicate a price decrease and green (or an empty box) to indicate a price increase. The close price on a green stick and the open price on a red stick is shown at the top of the body. The bottom of the body on a red stick denotes the close price, whereas, on a green stick, it denotes the open price.

Two smaller sticks, one on top and one on the bottom, sprout from each larger stick. The bottom stick is the day’s low price, and the top smaller stick represents the day’s high price.

Following are five candlestick patterns that excel at predicting price direction and momentum. Each one functions to forecast higher or lower prices in the context of neighboring price bars. They also have two time-sensitive aspects:

• Whether it is an intraday, daily, weekly, or monthly chart being examined, it can only operate within its parameters.
• Three to five bars after the pattern is finished, their potency rapidly declines.

1.Three Line Strike

Three black candles within a downtrend form the bullish Three Line Strike reversal pattern. The intrabar low is reached by each bar, which also posts a lower low. Although the fourth bar reverses in a wide-range outside bar that closes above the high of the series’ first candle, it opens even lower. The low of the fourth bar is also indicated by the opening print. This reversal, according to Bulkowski, has an 83% accuracy rate in predicting higher prices.

2.Two Black Gapping

Following a significant uptrend top, the bearish Two Black Gapping continuation pattern manifests as a gap down with two black bars making lower lows. According to this pattern, the decline will likely continue to even lower lows before beginning to decline on a larger scale. Bulkowski estimates that this pattern has a 68% accuracy rate in predicting lower prices.

3.Three crows in black

Three black bars with lower lows that are close to inter-bar lows form the bearish Three Black Crows reversal pattern, which begins at or near the peak of an uptrend. According to this pattern, the decline will likely continue to even lower lows before beginning to decline on a larger scale. In order to prevent buyers from entering momentum plays, the most bearish version begins at a new high (point A on the chart). Bulkowski estimates that this pattern has a 78% accuracy rate in predicting lower prices.

4.Evening Star

The negative An uptrend is carried to a new high by a tall white bar to begin the Evening Star reversal pattern. The following bar sees the market gap higher, but no new buyers show up, resulting in a candlestick with a narrow range. The pattern is finished by a gap down on the third bar, which foretells that the decline will go on to lower lows and possibly start a larger-scale downtrend. Bulkowski estimates that this pattern has a 72% accuracy rate in predicting lower prices.

5.Abandoned Baby

the positive When a downtrend reaches its low, a series of black candles that have printed lower lows are followed by the Abandoned Baby reversal pattern. The market gaps lower on the subsequent bar, but no new sellers materialize, resulting in a narrow range candlestick with identical opening and closing price prints. The pattern is finished by a bullish gap on the third bar, which foretells that the recovery will carry on to even higher highs, possibly igniting a larger-scale uptrend. Bulkowski claims that this pattern has a 49.73% accuracy rate in predicting rising prices.

Reliable Candlestick Patterns

Not every candlestick pattern performs as well as others. Due to analysis and exploitation by hedge funds and their algorithms, their enormous popularity has reduced reliability. These well-funded players compete with retail investors and traditional fund managers who use technical analysis strategies by executing trades at lightning speeds. In other words, hedge fund managers employ software to lure in traders seeking outcomes with high probabilities of being bullish or bearish. However, consistent patterns continue to emerge, providing opportunities for both short- and long-term profit.

Thomas Bulkowski’s 2008 book, “Encyclopedia of Candlestick Charts,” which created performance rankings for candlestick patterns, is the foundation for measuring reliability.
He provides data for two categories of anticipated pattern outcomes:

• Candlestick reversal patterns foretell a shift in price movement.
• Continuation patterns indicate that the current price trend will continue.

Which Candlestick Pattern Has the Best Accuracy?

Different traders favor various patterns and consider them to be the most trustworthy. Three White Soldiers, Deliberation, and Morning Star (bullish patterns) are among the most well-known, though not necessarily the most reliable, as are Three Black Crows, Identical Three Crows, and Evening Star (bearish patterns).

How Many Different Candlestick Patterns Exist?

Depending on who you ask, there are different answers to this question. For instance, cautious traders who only trade on the most well-known patterns may claim that there are around 25 candlestick patterns, while others who enjoy using more esoteric patterns might claim that there are over 50.

FAQ

What purpose does a candlestick pattern serve?

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.

How can a candlestick pattern be recognized?

These candlestick patterns are the simplest to recognize because of how closely their opening and closing prices are spaced. As a result, the candle resembles a plus sign and there is a possibility that the candle’s wicks for its high and low points are different lengths. These patterns are impartial.

There are how many different candlestick patterns?

“Doji candlestick pattern” refers to candlestick patterns that have the same opening and closing prices. Doji candles come in four different basic varieties: Four-Price DojiLong-legged DojiDragonfly Gravestone for Doji A 1-bar neutral candlestick is the Doji.

How are candlesticks read?

The “shadows” or “wicks” are immediately above and below the actual body. The shadows represent the high and low trading prices for that day. Short upper shadows on down candles indicate that the opening for that day was close to the day’s high. On an up day, a short upper shadow indicates that the close was close to the high.

Are candlestick patterns reliable?

At least three times as many strong candlestick patterns will resolve in the desired direction. At least two times as likely to be reliable patterns. Weak patterns have an (only) 1.5 times greater likelihood of resolving in the desired direction. Therefore, it is likely that 2 out of 5 patterns will fail.

Editor’s choice: The Top 11 Stock Chart Patterns