Candlestick patterns are an essential tool in the arsenal of any trader, whether they are trading stocks, forex, or cryptocurrencies. These patterns provide valuable insights into market sentiment, trends, and potential reversals. By understanding and recognizing these patterns, traders can make more informed decisions and increase their chances of success in the markets.
In this guide, we will explore must-know candlestick patterns that can significantly improve your trading performance. By mastering these patterns, you will be better equipped to identify potential trading opportunities and make well-informed decisions.
What Is a Candlestick?
Candlesticks are a type of bar chart that shows the opening and closing price, as well as the high and low for a security over time. They’re used in technical analysis to help predict future movements in the price of a security or index.
It refers to a graphical representation of an asset’s price activity during a specified period, which helps traders predict short-term and long-term price movements of the asset.
These patterns are formed by the opening prices, highs, lows, and closing prices of financial instruments on an exchange. Candlestick patterns can be bullish or bearish, indicating potential trend reversals or continuations, and they are an essential tool for traders in the cryptocurrency market.
When used in conjunction with a trading bot, these patterns can help automate your trading decisions and improve overall performance.
How Do Candlesticks Work in Trading?
Candlesticks work in trading by providing a visual representation of an asset’s price movement within a specified time frame. They display four key price points: open, close, high, and low, which help traders to quickly interpret price information and make informed decisions.
The candlestick chart consists of three main parts: the upper shadow, the real body, and the lower shadow. These charts are widely used in technical analysis, enabling traders to identify patterns and anticipate future price movements.
Candlestick patterns can be bullish or bearish and can represent trend reversals or continuations. A month is made up of 20 trading days and 20 candlestick patterns, with one candlestick pattern frequently denoting a full day’s worth of price movement. By recognizing and understanding these patterns, traders can make better-informed decisions and improve their trading performance.
By incorporating these patterns into your trading strategy, you can make more informed decisions and increase your chances of success when trading various trading pairs such as BTC to USDT.
Top 10 – Best Candlestick Patterns
Candlesticks are a type of chart used in technical analysis that show the relationship between the opening price, high, low and closing price. They can be represented as follows:
Hammer
The Hammer candlestick pattern, a bullish trading pattern, may indicate that a stock or cryptocurrency has reached its bottom and is poised for a trend reversal. It typically forms at the end of a downtrend and signals that the sellers entered the market but were unable to push the price lower, resulting in a long lower shadow and a small real body.
The opening price, close, and top are approximately at the same price, while there is a long wick at the bottom. When the high and the close are the same, a bullish Hammer candlestick is formed, while a bearish Hammer formation occurs when the open and high are the same
Inverted Hammer
This is a reversal candlestick pattern that can be formed at the bottom of a downtrend or top of an uptrend. It consists of a small real body (i.e., small white or black), long lower shadow, and short upper shadow. The length of both shadows should be around twice as long as the real body’s height.
This pattern indicates that there was indecision among traders before they reversed their positions and pushed prices back up or down respectively. However, unlike other patterns where traders’ emotions are being displayed through their actions (e.g., engulfing patterns), inverted hammers show no emotion at all–they simply indicate a brief pause before action resumes in one direction or another.
Bullish Engulfing
Bullish Engulfing is a single candlestick pattern that has a body that engulfs the previous candlestick’s body. It is a bullish signal and indicates that the downtrend is over. If you are bullish on an asset, you should buy when this pattern forms on your chart.
The Bullish Engulfing pattern consists of two consecutive candles:
- The first candle (Bearish or Dark Cloud) has a small real body and tails/wicks extending from its left side towards right side of chart;
- The second candle (Bullish or Piercing Line) has large real body which completely engulfs first one’s real body, leaving no space between them at all.
Piercing Line
The Piercing Line is a bullish reversal pattern that occurs when a small white candle opens above the previous day’s high and closes below the previous day’s low. This indicates that buyers have gained control of the market, which in turn signals an upcoming upturn in price action.
The piercing line must be long enough to show a significant change in market sentiment and should be at least 1.5 times the length of its body for confirmation purposes; however, some traders consider it valid if it has an open/close ratio greater than 1:1 (i.e., more than 50% of all closes occur above opening levels).
Morning Star
A morning star is a bullish reversal pattern that consists of three candlesticks: a large bearish body followed by a small body, which is followed by a large body.
The first two days of this pattern are bearish and indicate that the price has been in an uptrend for some time but has been slowing down over the last few days.
On day 3 however, there is an upward movement in price indicating that there might be an impending change from downtrend to uptrend.
Three White Soldiers
Three White Soldiers is a bullish pattern that is a reversal pattern. If it forms after a downtrend, then it indicates that the trend is reversing and the bears are losing control of the market. This means that prices will most likely rise from here and continue to do so until they reach their maximum target price or previous resistance level before reversing again.
The three soldiers represent:
- A general who leads his army against an enemy with great courage
- Two soldiers who follow him into battle
- The last soldier who stays behind and guards their base
Hanging Man
Hanging Man is a bearish candlestick pattern, characterized by a long lower shadow and a small body. The body of the hanging man must be black or red while its shadow must be at least twice as long as its body. If you have ever seen someone hanging from one hand, then it would not be hard for you to imagine how this pattern got its name!
The most important thing about this pattern is that it occurs at market bottoms and represents indecision among sellers (who want to sell) and buyers (who want to buy). Thus, it indicates that bears are gaining strength in their efforts against bulls who are trying hard not only to defend but also recover their position in rising markets.
Shooting Star
The shooting star is a bearish reversal pattern that can be found in all time frames. It’s made up of two candlesticks: one long white real body and one short black real body. The first candle must open above the previous close, but it’s close must be below that of its opening price.
This signals that buyers failed to maintain market momentum and were forced to sell at lower prices than what they originally paid for their shares. Additionally, it indicates that bulls have lost control over the market as bears now have an advantage over them (and vice versa).
Bearish Engulfing
The bearish engulfing pattern is a two-candlestick pattern that can be used as a reversal signal. It occurs when the second day of a trend (the second candle) completely engulfs the entire body of the first day’s open, close and low.
This means that the opening price of this second day will be higher than its previous high by at least 10%. If you see this happen on your chart, it means that bears have taken control and are ready to push prices lower again. A trader can use this signal as an early warning sign for future market movements so they know when to sell their long positions or buy back short ones in order to protect themselves from losses later down the road when this trend continues off into new territory (i..e., further down).
Evening Star
A bearish reversal pattern known as the evening star appears at the peak of an uptrend. The open, high, low and close are the same for each day. The middle candle is the opposite color to the previous one. For example, if you have two red candles then on your third day there will be a black or green candle which closes below its opening price (as shown above).
Conclusion
Read about how to trade with stocks online as it is one of the convenience way of trading in today’s world. In conclusion, understanding and mastering these 16 essential candlestick patterns can significantly improve your trading performance. These patterns provide valuable insights into market psychology, trends, and potential reversals. By incorporating these patterns into your trading strategy, you can make more informed decisions and increase your chances of success.