Understanding candlestick patterns helps traders trade expertly and mitigate potential risks. They can predict price movements based on previous patterns and optimize for profit. We’ve given a breakdown of some top patterns, their uses, and their pros and cons.
Key Facts Candlestick Patterns
- Candlestick patterns help traders predict market movements and manage risks by identifying potential price trends and reversals.
- Common patterns like Hammer, Shooting Star, and Engulfing Patterns signal shifts in market sentiment and trading opportunities.
- Their accuracy depends on factors like timeframe, market context, and requires supplementary analysis for precision.
- Learning these patterns involves recognizing their formations, context interpretation, and risk management practices.
- While valuable, candlestick patterns have limitations, including potential false signals, highlighting the need for additional confirmation through technical indicators.
List of the Best Candlestick Patterns
- Hammer
- Shooting Star
- Engulfing Patterns
- Morning Star
- Harami
- Hanging Man
- Doji
- Pin Bar
- Three White Shoulders
- The Mat Hold
- Gap Up Gap Down
- Tri Star
- Tweezer Top and Bottom
- Belt Hold
What Are Candlestick Patterns?
Candlestick patterns graphically display daily price movement information on a chart. They display the details of an asset’s price movement and predict the future price direction.
Candlestick patterns generally represent one full day of price movement, so there are often approximately 20 trading days with 20 candlestick patterns in one month.
Candlestick charts are a major component of a candlestick pattern. They present the price movements of derivatives, securities, and currencies as patterns. It is a crucial aspect of technical analysis and is used to interpret price information quickly from just a few price bars.
The candlestick details a single trading on a daily chart. Below are its three basic features:
- The body represents the open-to-close-range.
- The wick (the shadow) shows the intra-day, high or low.
- The color shows the direction of the price movement- a green (or white body) shows a price increase, while a red (or black body) shows that the price has reduced.
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.
Relevance and Accuracy of Candlestick Patterns
Different market factors, including the circumstances surrounding a trade, influence the relevance and accuracy of candlestick patterns. 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.
Below are specific factors that could influence the accuracy of candlesticks:
- Timeframe: The more prolonged the period is, the better the accuracy.
- Pattern and signal size: Large patterns often provide better signal accuracy.
- Security: Candlesticks work differently for various types of securities. For example, some candlesticks work better for large-cap liquid stocks.
- Overall pattern: The environment surrounding perceived signals can influence the accuracy. Traders can study the environment to identify why a signal occurred or did not occur.
- Number of candles: The number of candles involved in a pattern can determine its accuracy. Usually, the more candles, the higher the accuracy.
Candlestick charts consist of various information based on the high, low, open, and close for the timeframe a trader selects. Taking time to review the market context carefully can help increase the accuracy of candlesticks.
The 14 Best Candlestick Patterns
Here are some of our best candlestick patterns:
#1 Hammer
A hammer is a price pattern in a candlestick chart that occurs when the security is lower than its opening but rallies within those periods to close near the opening price.
Hammer candlesticks are found at the bottom of a downtrend and indicate a potential reversal in the market. It comes with a small real-body close to the top of the trading range when a long lower shadow tag is about twice the length of the closing body. It is associated with a certain structure traders look for to pinpoint potential trend reversals.
A hammer candlestick’s real body can be either white (or green) or black (or red). The white (or green) body is the bullish version and is more desirable. However, this does not mean the black (or red) is not valid.
| Pros | Cons |
|---|---|
| ✅ Indicates potential bullish reversal after a downtrend | ❌ It is sometimes challenging for traders to interpret a hammer candlestick because it does not always lead to an uptrend |
| ✅ Provides a clear visual representation with a small body and long lower shadow | ❌ No price targets or exit positions |
| ✅ Can signal strength in bullish momentum |
While the hammer candlestick pattern offers a valuable indication of potential bullish reversals, traders must make necessary confirmations to navigate through market uncertainties effectively.
#2 Shooting Star
The shooting star candlestick forms after an uptrend and signals a potential bearish reversal. It consists of a small body with a long upper shadow and little to no lower shadow.
The long upper shadow shows the market rejecting higher prices, indicating that buyers tried to push the price but failed. Hence, it resulted in a reversal and potential selling pressure.
For instance, suppose a stock has been experiencing a prolonged upward trend. Suddenly, a shooting star candlestick forms, suggesting that despite attempts to increase the price, sellers overwhelm the buyers, leading to a potential reversal in the trend.
However, the pattern of the shooting star candlesticks has limitations. So, it’s essential to consider other factors like volume, trend strength, and market sentiment before making trading decisions based solely on the pattern.
Moreover, they are not always 100% accurate. Therefore, traders should use additional confirmation signals or combine shooting star patterns with other technical indicators to increase reliability.
| Pros | Cons |
|---|---|
| ✅ Easy to spot on the chart | ❌ Requires confirmation by other patterns or technical analysis indicators |
| ✅ Suitable for beginner traders | ❌ Accuracy depends on market conditions and timeframes |
| ✅ Can indicate a weakness in bullish momentum |
The shooting star candlestick pattern offers traders a useful indication of potential bearish reversals. Yet, proper analysis is essential to mitigate market uncertainties.
#3 Engulfing Patterns
Engulfing patterns signals potential reversals in market trends. They consist of two candles that suggest a reversal in sentiment from bullish to bearish or vice versa. Traders widely use engulfing patterns to make decisions about entering or exiting positions. There are two types of engulfing patterns: bullish and bearish.
The bullish engulfing pattern forms during a downtrend and is characterized by a small bearish candlestick followed by a larger bullish candlestick. The bullish candle completely engulfs the previous bearish candle’s body.
This pattern suggests that the buyers have overwhelmed the sellers, indicating a potential reversal from a downtrend to an uptrend. It also implies that buying pressure has increased significantly.
The bearish engulfing pattern forms during an uptrend and is characterized by a small bullish candlestick followed by a larger bearish candlestick.
The bearish candle completely engulfs the previous bullish candle’s body. This pattern suggests that the sellers have overwhelmed the buyers, indicating a potential reversal from an uptrend to a downtrend. It also signals that selling pressure has increased significantly.
| Pros | Cons |
|---|---|
| ✅ Provides a strong reversal signal, indicating a shift in market sentiment | ❌ Traders may interpret the pattern differently, leading to subjective analysis |
| ✅ Easy to find and interpret | ❌ Isolated patterns may not give enough context for accurate predictions |
| ✅ Indicates the potential for early trend changes |
The engulfing pattern candlestick offers traders a straightforward signal for potential trend reversals. However, we recommend careful analysis to manage market uncertainties.
#4 Morning Star
The Morning Star candlestick pattern consists of three candles and is considered a reliable signal for a potential shift in market sentiment from bearish to bullish. The pattern begins with a long, bearish candle, indicating a period of downward price movement.
The second candle is smaller and characterized by a gap down from the previous candle, suggesting a continuation of the bearish trend. However, this candle closes near its opening, signifying a potential loss of momentum among sellers.
The third candle is a bullish candle that opens higher than the close of the second candle and closes near the midpoint or higher of the first candle’s body. This candle indicates a reversal of the prior downtrend and the emergence of bullish momentum.
Morning Star pattern signifies a shift in market sentiment from bearish to bullish, which can lead to significant price reversals. Secondly, the pattern often forms at key support levels or after extended downtrends, making it a significant reversal signal.
In addition, the pattern’s three-candle structure provides traders with clear entry and exit points, making it relatively easy to identify and act upon.
However, traders must confirm the pattern with additional technical indicators or analysis before making trading decisions based solely on the Morning Star pattern.
| Pros | Cons |
|---|---|
| ✅ Signals potential bullish reversal in a downtrend | ❌ Can be easily mistaken as Doji pattern, leading to misinterpretation of market trends |
| ✅ Comprises three distinct candlesticks, providing a strong visual indication | ❌ Very rare in the bullish run |
| ✅ Helps identify potential buying opportunities at the bottom of a downtrend | |
| ✅ Can be used across all types of assets including stocks, currencies, etc. |
While indicating potential bullish reversals, the Morning Star candlestick pattern requires confirmation to navigate through market fluctuations effectively.
#5 Harami
The Harami candlestick pattern is a two-candlestick pattern that signifies a potential reversal in the market trend. It is derived from a Japanese name, and it means “pregnant” or “expecting,” suggesting that the smaller candlestick within the pattern is “inside” the larger one, resembling a pregnant woman’s shape.
There are two types of Harami patterns: bullish and bearish. In a bullish Harami, the first candle is bearish (indicating a downtrend), followed by a smaller bullish candle. Conversely, in a bearish Harami, the first candle is bullish (indicating an uptrend), followed by a smaller bearish candle.
The Harami pattern indicates market indecision and a potential reversal of the prevailing trend. It reflects a shift in sentiment among traders, often occurring after a significant move in one direction. Harami is simple and accessible to traders across all levels. Traders can also apply it across various timeframes and markets.
However, despite its benefits, the Harami pattern comes with its limitations. False signals can occur, so traders must exercise caution and employ risk management strategies when introducing the Harami pattern into their trading decisions.
| Pros | Cons |
|---|---|
| ✅ Provides a potential reversal signal in a trend | ❌ Needs other indicators and analysis |
| ✅ Has clear pattern with straightforward rules | ❌ Accuracy depends on various market conditions |
| ✅ Can help identify areas of potential support or resistance |
While the harami candlestick pattern offers valuable insights into potential trend reversals and market sentiment shifts, traders should exercise caution to reduce the risk of false signals.
#6 Hanging Man
The Hangman candlestick pattern comprises a small real body positioned at the top of the candlestick, accompanied by a lengthy lower shadow and minimal to no upper shadow. It’s called “Hangman” because the pattern resembles a person with raised hands.
The small real body signifies minimal price movement between the opening and closing prices. The extended lower shadow illustrates a significant decline from the session’s peak. In contrast, the absence or slight presence of an upper shadow indicates the period’s high is close to the opening price.
The Hangman pattern warns of a possible reversal, particularly when it shows at the culmination of an uptrend. This suggests waning buying pressure and a potential shift to a downtrend.
Traders typically seek confirmation from subsequent price actions or technical indicators to confirm the reversal signal the Hangman pattern provides.
| Pros | Cons |
|---|---|
| ✅ Indicates potential trend reversal | ❌ Confirmation from other indicators may be needed |
| ✅ Easy to identify on price charts | ❌ Not always present in every market condition |
| ✅ Provides clear sell signals in an uptrend | ❌ Requires careful consideration of market context |
| ✅ Can be used with other indicators |
The Hanging Man candlestick pattern offers traders a straightforward signal of a potential trend reversal, particularly in uptrends. However, we advise confirming from other indicators for greater reliability.
#7 Doji
The Doji candlestick pattern indicates indecision in the market. It forms when a stock or asset’s opening and closing prices are very close or even the same, resulting in a small bar on the chart with lines extending above and below.
Doji suggests a temporary balance between buyers and sellers, where neither side can gain control. Traders often interpret the appearance of a doji as a signal to be cautious and watch for potential changes in market direction.
If it appears after a prolonged uptrend or downtrend, it may signal a potential reversal in price direction. However, if it occurs during a period of sideways movement, it could indicate continued uncertainty and the need for further confirmation before making trading decisions.
Additionally, the length of the upper and lower lines relative to the small bar provides additional insight into the strength of buyer and seller activity during that period. While doji patterns can help identify potential market turning points, we recommend using them with other technical analysis tools and market indicators for confirmation.
| Pros | Cons |
|---|---|
| ✅ Signifies a period of indecision in the market | ❌ To avoid acting on false signals, traders often need confirmation from other technical indicators or price action before making trading decisions based on doji patterns |
| ✅ Traders can easily identify and interpret Doji on candlestick charts | ❌ Not efficient in short time frames because it’s very responsive to market noise |
| ✅ Provides early warning signals |
Primarily, the Doji pattern can be valuable in helping traders identify market indecision and potential trend reversals or continuations.
#8 Pin Bar
The pin bar candlestick pattern consists of a single candlestick with a small body and a long wick above or below it. The body represents the opening and closing prices, while the wick, or “pin,” indicates the price range where the market traded during the period.
Traders interpret the pin bar pattern as a signal of market sentiment reversal. A bullish pin bar forms when the lower wick is longer than the body, suggesting that sellers initially pushed the price lower but were ultimately overwhelmed by buyers, resulting in a potential upward reversal.
In contrast, a bearish pin bar forms when the upper wick is longer than the body. This indicates that buyers attempted to push the price higher but were overtaken by sellers, potentially signaling a downward reversal.
Traders often look for them at key support or resistance levels or after significant market moves to use pin bars for trading effectively. Additionally, confirmation from other technical indicators or patterns can enhance the reliability of pin bar signals.
| Pros | Cons |
|---|---|
| ✅ Provides clear visual signals for potential price reversals | ❌ May not work well in certain market conditions or timeframes |
| ✅ Can be used with other technical analysis tools | ❌ Can be overused, decreasing its effectiveness |
| ✅ Act as early warning signs of rejection, opening up possible reversals or trend assumptions |
It’s best to apply Pin Bar with other forms of analysis to make well-informed trading decisions.
#9 Three White Shoulders
Traders use the Three White Soldiers candlestick pattern to identify potential upward trends in financial markets. It consists of three consecutive long-bodied candlesticks, each opening within the previous candle’s body and closing near its high.
This pattern suggests a strong buying pressure as prices consistently close higher with each candlestick.
Traders interpret the Three White Soldiers pattern as a sign of increasing bullish momentum and potential upward trend continuation.
Each candlestick’s long body signifies significant upward movement in the market, indicating that buyers are in control and pushing prices higher.
The fact that each candle opens within the previous one’s body demonstrates sustained buying pressure throughout the pattern, reinforcing the bullish sentiment.
To effectively utilize the Three White Soldiers pattern, traders often look for it to occur after a downtrend or consolidation phase, which signifies a potential reversal in market sentiment. Confirmation from other technical indicators or patterns can make its signal more reliable.
| Pros | Cons |
|---|---|
| ✅ Has a strong bullish reversal signal | ❌ Confirmations with other indicators are needed |
| ✅ Indicates significant buying pressure | ❌ May not always lead to a sustained uptrend |
| ✅ Acts as a strong confirmation of an existing uptrend and provides potential early entry opportunities |
While the Three White Soldiers pattern is a powerful bullish signal in candlestick charting, we recommend seeking additional confirmation before making trading decisions based solely on this pattern.
#10 The Mat Hold
The Mat Hold pattern consists of five candles, the first being a long white candle in an uptrend. The following three small-bodied candles typically form a descending pattern, resembling steps down.
However, the final candle (fifth candle) is another long white candle, closing near the highs of the initial candle. This final candle confirms the continuation of the uptrend.
Traders often interpret the Mat Hold pattern as a sign of strong bullish sentiment in the market.
The brief consolidation period represented by the small-bodied candles suggests a temporary pause or profit-taking after the initial uptrend. However, the subsequent strong bullish candle indicates that buyers remain in control and will likely continue increasing prices.
When identified accurately, the Mat Hold pattern can provide traders with valuable insights into potential opportunities to enter or add to bullish positions in the market.
| Pros | Cons |
|---|---|
| ✅ Helps traders to identify potential trend reversals | ❌ Does not provide exact price levels for entry, stop-loss, and profit targets |
| ✅ Easy to understand exit and entry points | ❌ Requires confirmation from other indicators or analysis |
| ✅ Can be applied across various timeframes |
The mat hold pattern offers a straightforward signal for traders. However, it comes with limitations, such as the need for confirmation from other sources. Therefore, we suggest using it with other analytical tools for more reliable trading decisions.
#11 Gap Up and Down
A gap-up occurs when the opening price of a trading period is significantly higher than the previous period’s closing price, resulting in a visible gap between the two candlesticks. This indicates strong buying pressure and often signifies bullish sentiment among investors.
Conversely, a gap down appears when the opening price of a trading period is notably lower than the previous period’s closing price, forming a gap between the two candlesticks. This pattern suggests substantial selling pressure and typically indicates bearish sentiment in the market.
| Pros | Cons |
|---|---|
| ✅ Provides clear visual cues about shifts in market sentiment | ❌ Gaps can sometimes occur due to non-market-related events, leading to false signals |
| ✅ Can help traders identify potential breakout or breakdown points | ❌ Trading gaps can be risky as they may result in significant price reversals |
| ✅ Offers opportunities for quick profits through gap trading strategies |
Gap-up and gap-down candlestick patterns help traders gauge market sentiment and identify potential trading opportunities. However, they come with risks, requiring careful analysis and confirmation from other indicators for strategic trading decisions.
#12 Tri Star
The Tri Star candlestick pattern includes three consecutive doji candles, each opening, and closing at the same price or very close to it. The three doji candles are sandwiched between larger candles, indicating a period of indecision and a potential reversal in market sentiment.
This pattern suggests a strong standoff between bulls and bears, often occurring at major market turning points. Traders interpret the Tri Star pattern as a sign of potential trend reversal. After a prolonged uptrend or downtrend, three consecutive doji candles indicate uncertainty and a possible shift in market direction.
When this pattern forms, traders often anticipate a reversal in the prevailing trend, prompting them to adjust their trading strategies accordingly. However, traders must confirm the pattern with additional technical analysis tools and indicators to validate its significance.
However, it’s best to consider factors such as volume, support and resistance levels, and momentum indicators to confirm the pattern’s accuracy before making trading decisions.
| Pros | Cons |
|---|---|
| ✅ Shows clear reversal signals | ❌ Accuracy depends on market conditions |
| ✅ Easy to see on price charts | |
| ✅ Simple to understand |
Although Tri Stars are excellent candlesticks for traders, we recommend careful analysis to reduce risks.
#13 Tweezer Top and Bottom
A Tweezer Top occurs when two consecutive candles have almost identical highs, indicating a possible reversal from an uptrend to a downtrend. Conversely, a Tweezer Bottom forms when two candles have nearly identical lows, suggesting a potential shift from a downtrend to an uptrend.
These patterns are among the best because they provide clear market sentiment signals. When a Tweezer Top forms, it suggests that buyers are losing momentum and sellers may be taking control.
On the other hand, a Tweezer Bottom indicates that sellers are losing strength and buyers might be gaining control. Traders often use these patterns with other technical indicators to confirm their trading decisions.
What makes Tweezer Top and Bottom stand out is their simplicity and reliability. Unlike some complex indicators, these candlestick patterns are easily identified on price charts, making them accessible to traders of all levels.
In addition, their effectiveness lies in their ability to signal potential trend reversals accurately. By paying attention to these patterns, traders can anticipate market movements and make informed trading decisions.
| Pros | Cons |
|---|---|
| ✅ Provides clear reversal signals | ❌ May not provide precise entry and exit points |
| ✅ Easy to identify on charts | |
| ✅ Can be used for various time frames |
The Tweezer Top and Bottom candlestick patterns offer traders valuable insights into potential trend reversals with clear signals and ease of identification. However, the need for confirmation from other indicators can affect how accurate they may be.
#14 Belt Hold
The Belt Hold candlestick pattern is a single candlestick pattern that indicates a potential trend reversal. It occurs when the opening price is either the high (for a bullish belt hold) or the low (for a bearish belt hold) of the trading session, and the candle closes near the opposite extreme.
This pattern suggests a strong shift in market sentiment, with buyers or sellers dominating the session from the start to the end. One reason the Belt Hold is among the best candlesticks is its simplicity and effectiveness. Unlike some complex patterns, the Belt Hold is easy to identify on price charts, making it accessible to traders of all levels.
Its clear indication of a significant shift in market sentiment makes it a valuable tool for traders looking to catch early signs of trend reversals. Traders often include the Belt Hold in their technical analysis strategies to capitalize on its potential for identifying profitable trading opportunities.
| Pros | Cons |
|---|---|
| ✅ Indicates strong trend reversals | ❌ Confirmation from other indicators may be needed for higher accuracy |
| ✅ Provides clear signals when used alone | ❌ For optimal use, careful consideration of the market context is required |
| ✅ Can be incorporated into various trading strategies |
The Belt Hold candlestick pattern offers traders a straightforward and effective method for identifying strong trend reversals. While it provides clear signals and is easy to identify, we recommend considering confirmation from other indicators for enhanced accuracy.
Difference Between Candlestick Patterns and Chart Formations
Candlestick patterns and chart formations are used in technical analysis to interpret market behavior. Yet, they differ in their scope and application. Candlestick patterns focus on individual price bars, typically representing one trading session, and provide insights into market sentiment within that period, such as potential reversals or continuations.
Conversely, chart formations consist of broader patterns formed by multiple price bars over an extended period, offering insights into the trend and potential future price movements.
These formations often require a longer-term perspective and provide signals related to trend continuation or reversal on a larger scale. Hence, while candlestick patterns and chart formations contribute to comprehensive technical analysis, they operate differently.
Pros and Cons of Candlestick Trading Patterns
Below are the advantages and downsides of candlestick trading patterns:
| Pros | Cons |
|---|---|
| ✅ Candlesticks provide a quick insight into market direction and actions | ❌ The abundance of information in candlestick charts may overwhelm some traders, affecting decision-making |
| ✅ Each candlestick displays four crucial points: opening, closing, high, and low, offering traders a comprehensive view. | ❌ Determining the sequence of high and low points may be challenging without real-time market observation |
| ✅ Color-coded candlesticks swiftly indicate market momentum direction | |
| ✅ Unique candlestick combinations form patterns not visible on other charting systems, offering unique insights | |
| ✅ Candlesticks are adaptable to various time frames, reflecting different trends accurately |
Candlestick patterns give traders a quick and clear picture of how the market is moving. They show traders important points like when prices opened, closed, went high, and went low.
However, although they are valuable for understanding market trends and momentum, we recommend not getting overwhelmed by too many details.
How to Trade Candlestick Patterns
Here’s a quick guide on how to trade candlestick patterns effectively:
#1 Learn the Basics
Before diving into trading candlestick patterns, ensure you understand the basics of candlestick analysis. Learn how to interpret individual candlesticks, their components (open, high, low, close), and how they form patterns.
#2 Identify Patterns
Numerous candlestick patterns exist, from simple ones like doji and hammer to complex ones like engulfing patterns. Study these patterns and learn to recognize them on price charts.
#3 Understand Market Context
Context is crucial in candlestick trading. Consider the overall market trend, support and resistance levels, and other technical indicators to validate your candlestick signals.
#4 Make Confirmations
Don’t rely solely on candlestick patterns for trading decisions. Before executing a trade, look for confirmation from other technical indicators or fundamental analysis. This helps reduce the risk of false signals.
#5 Control Risks
Implement proper risk management techniques to protect your capital. Set stop-loss orders to limit potential losses and consider your risk-to-reward ratio before entering a trade.
There’s always a potential to win or the risk of loss in financial markets. Hence, traders should be prepared to accept losses and wins while building their trading skills.
Mastering Candlestick Trading with Witzel Trading Mentoring
At Witzel Trading Mentoring Academy, many new traders have enjoyed the expertise of professional traders since 2012. They gain access to comprehensive resources tailored to candlestick trading. The academy offers tutorials covering market techniques, analysis methods, and risk management strategies.
It also emphasizes practical application and community support. So, by mastering candlestick trading with Witzel Trading Mentoring Academy, traders become equipped with the knowledge and tools they need to succeed.
Conclusion
Understanding the 14 best candlestick patterns discussed in this article is essential for traders seeking to navigate the complexities of the financial markets effectively. By mastering these patterns, traders can gain valuable insights into market sentiment and potential price movements, enabling them to make strategic trading decisions.
Frequently asked questions on Candlestick Patterns:
What Is the Most Accurate Candlestick Pattern?
The most accurate candlestick pattern varies depending on market conditions, but some widely recognized patterns include the bullish engulfing and bearish engulfing patterns.
Do Candlestick Patterns Really Work?
Yes, candlestick patterns have been observed to work effectively in predicting price movements. However, they have limitations and should be used with other technical analysis tools.
Do Professional Traders Use Candlestick Patterns?
Yes, many professional traders incorporate candlestick patterns into their trading strategies as part of their technical analysis.
How Do You Master Candlestick Patterns?
To master candlestick patterns, traders should study and practice recognizing different patterns and understanding their interpretations. They should also continuously refine their skills.
How Do You Predict the Next Candlestick?
Predicting the next candlestick involves analyzing the current market context, identifying patterns, considering support and resistance levels, and assessing other technical indicators for confirmation.
Can I Trade Without Candlestick?
Yes, traders can use alternative methods of technical analysis or rely solely on fundamental analysis to make trading decisions without using candlestick patterns.