In the article on what are candlesticks, we explained the basic concept of candlesticks and their individual shapes. The next step is to familiarize yourself with a variety of candlestick patterns. Candlestick patterns consist of just a few candlesticks, as opposed to chart patterns, which are made up of dozens to even hundreds of candlesticks.
Successfully identifying these patterns helps traders predict the future of market movement and therefore trade more intelligently. Patterns can be bullish or bearish, and signify a trend reversal or a trend continuation. Still, interpretations should always be made with caution, as patterns do not always play out as predicted.
Candlestick patterns formed over large time frames tend to be more reliable than patterns formed within shorter ones. Frequently, a pattern will appear within another pattern. When this happens, the pattern over the larger time frame holds more value. It is also wise to remember that bullish patterns have a better chance to play out in a bullish trend and bearish patterns have a better chance to play out in a bearish trend.
Candlestick patterns can be categorized into three distinctive groups: bullish candlestick patterns, bearish candlestick patterns, and dual-meaning candlestick patterns.
Bullish candlestick patterns predict rising prices, while bearish candlestick patterns predict falling prices. Dual-meaning candlestick patterns don’t have a clear price prediction.
Candlestick essentials
- Candlesticks are the most popular way to present data from technical analysis.
- The body of a candlestick represents the opening and closing prices.
- The top wick, or shadow, of a candlestick represents the highest price. The bottom one represents the lowest price.
- In line with market trends, candlesticks can be either bullish or bearish.
- Bullish candlesticks are commonly green or white. Their opening price is lower than their closing price.
- Bearish candlesticks are commonly red or black. Their opening price is higher than their closing price.
- Candlesticks can take one of several frequently-encountered shapes, referred to as the doji, hammer, hanging man, inverted hammer and shooting star.
Bullish candlestick patterns
The bullish engulfing candlestick pattern is a two-candle pattern which appears in a downtrend and it signifies a trend reversal. It starts with a bearish candle and ends with a significantly bigger bullish candle.
The three inside up pattern consists of three candlesticks. It starts with a long bearish candle, followed by two bullish candles, with the second one typically being bigger. The first bullish candle is within the body of the bearish candle, while the second bullish candle closes above the body of the bearish candle. The last candle closes above the initial bearish candle. The pattern signifies that a downtrend may end, as buyers gain in strength.
The bullish harami consists of two candlesticks. First, a long bearish candle is formed, followed by a doji candle or a small bullish candle roughly 25% the size of the bearish candle. Reduced selling pressure from the bears might lead to a trend reversal.
“Harami” derives from the Japanese word for “pregnant”, with the big candle representing a mother and the small one her child.
The morning star starts with a long bearish candle, followed by a short candle – either bullish or bearish – and ends with a long bullish candle. The final candle has to be at least half the size of the initial bearish candle, although it can also be significantly bigger.
- If this pattern’s middle candle forms as a doji candle, the pattern is called the morning doji star.
The three white soldiers pattern consists of three consecutive bullish candlesticks. It is a very strong bullish pattern, especially if it appears after a reversal of a downtrend, as it signifies fresh, strong buying pressure.
Bearish candlestick patterns
The bearish engulfing pattern consists of two candlesticks. It starts with a bullish candle and concludes with a bigger bearish candle, signifying that bears have overpowered bulls, which might lead to a trend reversal.
The three inside down is a bearish reversal pattern formed by three candlesticks. It starts with a long bullish candle, followed by two bearish candles. The first bearish candle is within the body of the bullish candle, while the second bearish candle closes below the body of the bullish candle.
The bearish harami consists of two candlesticks. It starts with a long bullish candle, followed by a very small bullish candle or even a doji candle. It indicates that the bullish momentum has weakened.
The evening star pattern consists of three candlesticks. It starts with a long bullish candle, followed by a small candle – either bullish or bearish – and ends with a long bearish candle. As the buying pressure is reduced, and the bears have stepped in, the price starts to decline.
- If the middle candle on this pattern forms as a doji candle, the pattern is deemed an evening doji star.
The three black crows pattern is formed from three red candles with long bodies and almost no wicks. The pattern is clearly bearish and it carries the most value if it forms right after the trend reversal, as it signifies that sellers have overtaken the buyers completely.
Dual meaning candlestick patterns
The three line strike pattern can prove tricky to trade. It has two different formations and various meanings. To successfully identify its meaning, one must take into account the strength of the current market trend and other technical indicators.
The bullish three line strike pattern contains four candles. The first three are strong bullish candles (like the three white soldiers pattern), followed by a long bearish candle, which closes around the opening price of the first candle. In a bullish market, this is a continuation pattern, although it might not seem obvious at first glance. The bearish candle at the end of the pattern only signifies profit-taking from the bulls, meaning that the bulls are willing to rebuy after the bearish candle, which results in the continuation of a bull trend.
Sometimes in a bear market, or if a bullish market is generally weakening, this pattern can also play out as a reversal pattern, meaning that the fourth – bearish candle – is actually a reversal candle that puts the bullish price uprise to an end. In this case, it could therefore be treated as a bearish engulfing pattern.
The bearish three line strike pattern is an upside-down mirror image of the bullish three line strike pattern. Three persuasive bearish candles (as in the three black crows pattern) are followed by a long bullish candle. This pattern usually signifies a bearish continuation, meaning that after the last candle the bears step in again and continue to push the price lower.
In a bull market, this pattern could signal a trend reversal, meaning that there is no continuation of a bearish sell-off after the fourth candle.
Understanding candlesticks patterns is a good way to read market trends, in cryptocurrency and beyond. If you feel that you are ready to start trading in cryptocurrency, consider doing so through an established, reliable exchange.