34 Candlestick Patterns Explained in Detail

These patterns help traders identify potential entry and exit points. Learn how to recognize them on charts, combine them with technical indicators, and apply them to strategies on 5-minute and higher time frames. Confluence has the capability of making a set up more reliable. When a pattern coincides with other technical indicators such as a trendline, VWAP, RSI or support, it makes the signal stronger.

• To overcome pattern isolation, traders can develop a systematic approach that combines multiple analysis techniques.
• Next, I’ll explain common misinterpretations that many traders face daily.
• The rally held for a few more days, but remained inside the range of the engulfing candle, before starting a selloff that would turn into a months-long downtrend.
• This pattern suggests that bullish momentum is weakening and sellers are ready to push prices lower.
• So, if you’re ready to excel in candlestick pattern trading, sign up on Morpher.

Chart Indicators

The Bullish Counterattack candlestick pattern forms when a bearish session is immediately followed by a bullish candle closing near the previous day’s close. This candlestick pattern indicates that buyers are regaining control, especially when accompanied by higher trading volume and strong closing momentum. The larger the engulfing body, the more powerful the reversal signal, making this candlestick pattern one of the most reliable indicators of an impending uptrend. The appearance of this candlestick pattern suggests buyers are testing strength, and confirmation from the next bullish candle often validates the reversal. A candlestick pattern visually represents price movement within a set period, illustrating how buyers and sellers shaped the market.

• This formation is typically a bullish continuation pattern that appears in an uptrend, although its inverted version can signal a bearish reversal.
• A bullish candle indicates the price closed higher than it opened, signalling buyer dominance and an upward trend.
• Observe how the market resumed the uptrend after breaking the high of an inside bar.
• Prices, market execution can be different from real market situations.

A black or filled candlestick means the closing price for the period was less than the opening price; hence, it is bearish and indicates selling pressure. Meanwhile, a white or hollow candlestick means that the closing price was greater than the opening price. Some traders rely on technical analysis and prefer to combine multiple time frames to confirm trading signals. This strategy, known as multi-time frame analysis, helps to increase the reliability of trade entries. For example, a trader may use a 1-minute chart to find precise entry points and a 15-minute or 1-hour chart to confirm the trade’s trend direction.

The Bearish Abandoned Baby appears after an uptrend with a strong green candle, followed by a Doji that gaps upward, and then a large red candle gapping downward. The Bullish Abandoned Baby is a rare three-candle bullish reversal pattern. The Bullish Abandoned Baby occurs after a downtrend with a long red candle, followed by a Doji gapping below, and then a strong green candle gapping upward.

For newer traders, even reading candlestick charts can seem like an insurmountable learning curve. There appears no rhyme or reason, and no end to the amount of price and volume data being thrown your way. We believe the best way to do this is by understanding candlestick patterns. Customers find the book provides a comprehensive overview of essential candlestick patterns, helping them understand and memorize them effectively. These candlestick patterns are most reliable and lethal around support and resistance zones. Also, note that candlestick patterns are only valid in the timeframe they appear in.

However, instead of three consecutive bull candles, they are three consecutive bear candles in a row, signalling a strong possible reversal. The wicks should be levelled with each other; that is what forms the tweezer tops. In this pattern, the buyers tried to push the market to new highs twice but failed.

The sellers eventually become exhausted and price breaks out and continues the uptrend. In the above bullish pennant you can see once again we have an initial uptrend followed by a period of consolidation. Again, it’s not necessary to remember the names, they’re all simply consolidation patterns. Once an imbalance does form, the force of the breakout will be determined by the number of stops that get triggered, as well as the number of traders looking to enter on the breakout. I’m going to teach you several different types of patterns including Consolidation Patterns, Structural Patterns, and Candlestick Patterns. Learn all the basics of trading, and step-by-step guidance to make your first trade!

Classic Chart Patterns Every Trader Should Know

A bullish head and shoulders pattern is nothing more than a price rejection on a retest of lows. Recognizing when price is trading in a channel can be very useful to find setups with a high potential R. Structural trading patterns are defined by their shape, not as a result of consolidation. You can use these patterns on longer time frames to build context, or on your trigger charts to actually find entries.

Proper context and analysis improve outcomes, especially in trending markets. It’s about acting quickly but wisely in volatile markets like forex or crypto trading. Next, I’ll explain common misinterpretations that many traders face daily. For example, if Bitcoin’s price drops but forms this pattern, it hints the bulls may take control. Each pattern helps spot selling behavior early in crypto trading decisions!

Bearish Hanging Man Pattern

The Shooting Star appears near the top of an uptrend and has a small body with a long upper wick. It shows that buyers pushed the price higher, but sellers quickly stepped in to drive it back down. This failed rally often signals the start of a bearish reversal, especially when confirmed at resistance.

Understanding Market Momentum

They are particularly good at identifying micro reversals, breakouts or stalling points in a trading session because they are formed over only one or two candles. The most common ones include engulfing candles, doji candles, hammers and shooting stars. The Morning Star is a classic three-candle bullish reversal pattern, highly regarded by traders for its reliability in signaling the end of a downtrend. The Doji forms when the opening and closing prices are almost the same, leaving the candle looking like a simple cross. It’s a classic sign of indecision; the market moved up and down but ended right where it started. Trading with the Doji candlestick pattern requires patience and context.

Join The Chart Guys!

Traders holding long positions here might have taken the engulfing candlestick and the bearish RSI divergence as a strong signal to take profits. These setups are more effective near important support or resistance levels, particularly when confirmed with candlestick patterns, volume and other indicators. While best candlestick patterns for day trading not every momentum divergence results in a trend reversal, it usually serves as an early warning that is worth heeding.

Bulls were clearly in control during each session with very little energy from the bears. When a candle closes above its opening price, we can assume that the bears won in some form or fashion. How much it closes above the open tells us with what intensity the bulls were in control during that session. Armed with that knowledge, let’s dig in and see what picture those little candles are trying to paint for us. By default, most platforms will show a red or black candle as bearish.

Bullish and Bearish Engulfing Patterns

A bearish rectangle bottom chart pattern with a downward breakout indicates the continuation of an existing downtrend, with a 76% probability and an average gain of -16% when shorting. Testing shows that a Rising Wedge chart pattern suggests an average success rate of 81% during a resistance breakout during a bull market, with an average 38% price increase. It is important to note that ascending triangles can be either continuation or reversal patterns, depending on the direction of the prior trend. To identify a rectangle top chart pattern, investors should look for two parallel and horizontal lines forming a rectangle. Once these two lines have been identified, investors can look for a breakout either above the upper resistance line or below the lower support line.

The three green or white bull candles form inside the range of the two red or black bear candles. The wicks on either side must also be small, although the lengths could vary. The most important part of the candle is the small to non-existent body. The doji is easy to identify because it resembles a plus sign with a small to non-existent body. Let’s look at four of the most common continuation patterns below. This is when the market is indecisive, which could indicate that the market might continue on the current trend.

In most cases, candlestick patterns need to be more accurate for many traders to depend on. Therefore, they combine candlestick patterns with other risk management techniques to increase accuracy. Candlesticks create patterns that help traders identify significant support or resistance levels over some time. Many candlestick patterns show opportunities within the market. For example, while some give insights into the balance between buying and selling pressures, others pinpoint continuation patterns.