Candlestick pattern analysis is particularly useful because candlestick charts contain more information for a single trading period than any other type of chart.
At a glance, you can see how markets performed that day based on the body of the candlestick, the size of the wick, and the relationship between the upper and lower wick and the body.
Learning to read candlestick charts can be one of your best skills to develop as a trader.
A hammer candlestick pattern forms after a session of declining prices.
The session closed near the top with no upper shadow and a lower shadow twice as long as the body.
The hammer pattern indicates that buyers are starting to push back.
It’s a bullish pattern regardless of the color of the body.
The only requirement here is that the candlestick needs to close higher in green to validate the pattern.
A shooting star is identical in appearance to an inverted hammer, but it forms in an uptrend instead of a downtrend, making it a bearish signal.
Although the shooting star candlestick indicates further continuation of the uptrend (as shown by the long upper shadow or wick), the session ultimately closed near the bottom of its range, which indicates weakening upward momentum.
An upside down or inverted hammer after a downtrend is considered a bullish reversal pattern but only if the next candlestick closes higher.
This candlestick tells us the session ultimately closed near its opening price, although the upper shadow is an early indication that buyers are challenging sellers for the market.
The hanging man candlestick pattern is identical to the hammer pattern at first glance.
However, the hammer pattern becomes the hanging man pattern when it’s observed after a series of advancing prices.
Just like the hammer, the hanging man can be either green or read.
During an uptrend, the hanging man is seen as a warning: there was downward activity but buyers pushed the price up towards the end of the session.
If the next candlestick closes lower, than the hanging man candlestick can signal a bearish reversal.
The morning star is the first three-period pattern on our list. it’s a bullish reversal pattern that is similar to the piercing line, but with a middle candlestick with a short body.
A morning star pattern forms when we have a long red body followed by an uneventful red or green body and then a third candlestick that closes above the midpoint of the first candlestick.
The evening star is the inverse of the morning star pattern.
It’s a three-period bearish reversal pattern that, like the morning star, is distinguished by the presence of a middle candlestick that has a short body.
The evening star forms with a long green body followed by a short green or red body and a third candlestick in red that closes below the midpoint of the first candlestick.
An evening star candlestick indicates a bearish reversal.
A bullish engulfing signals a bullish reversal pattern in an uptrend.
It’s a two-period candlestick with a short red body first and a second, green candlestick that engulfs the first.
Overall, engulfing patterns are some of the strongest indicators that we’re about to see a reversal.
They not only indicate a shift in the movement of markets, but they also indicate a significant change in momentum.
A bearish engulfing pattern is a two-period pattern that signals a bearish reversal when seen during an uptrend.
The pattern starts with a short green body followed by a longer candlestick with a red body.
It’s called an ‘engulfing’ pattern because the body of the second candlestick fully engulfs the first candlestick (although the shadows do not necessarily have to engulf).
Piercing line is a two-period bullish reversal pattern in a downtrend.
It’s the opposite of the dark cloud cover pattern.
For a piercing line to form, the long-bodied bearish candlestick must be followed by a bullish candlestick that closes above the midpoint of the first candlestick’s body.
Dark cloud cover and piercing line patterns are similar to bearish and bullish engulfing patterns, although the momentum behind the reversal is less significant.
Dark cloud cover is a two-period bearish reversal pattern in an uptrend.
For this pattern to form, a long-bodied bullish candlestick is followed by a bearish candlestick that closes below the midpoint of the first candlestick’s body.
The first candlestick must also close near the session’s low without a much lower shadow.
Three white soldiers is a three-period bullish reversal pattern indicated by three long green candlesticks after a period of declining prices.
For the three white soldiers pattern to form, each candlestick in the pattern must close near the session’s high, with only a short or shaved upper shadow.
Each candlestick in the pattern must also be bigger than or at least the same size as the first candlestick.
The three black crows candlestick pattern is a three period reversal pattern in an uptrend.
The pattern includes three long red candlesticks, with each candlestick closing near the session’s low, with a small lower shadow.
The second and third candlesticks must be the same size or larger than the first candlestick.