Candlestick patterns allow traders to gain insight into how the price acted during a certain time. In every candle there are four important prices: the opening price, the highest price, the lowest price, and the closing price. Such candlestick chart patterns may provide valuable insights into buying, selling, indecision, and the change in momentum.
For a beginner trader, identifying a candle is just the first step in this process. The interpretation of the charting pattern may vary depending on many factors, existing trends, supports and resistances, timeframes, and the surrounding price action.
Instead of memorizing dozens of formations, traders can begin with twelve widely recognized patterns and learn how to interpret them in context.
What Are Candlestick Patterns?
The candlestick is made up of the body and wicks or shadows. The body is the difference between the opening price and the closing price, whereas the wicks represent the high and low prices during the same period.
Important elements considered by traders include:
- Body: Shows the opening and closing prices.
- Upper wick: Indicates the highest price reached during the period.
- Lower wick: Indicates the lowest price reached during the period.
- Candle direction: Helps show whether buyers or sellers had greater control by the close.
A bullish candlestick pattern closes above its opening price, whereas a bearish candlestick pattern closes below its opening price.
The relationship between body and wicks may indicate certain behavior in the market. For instance:
- Long lower wick: May indicate that sellers pushed price lower before buyers recovered much of the decline.
- Long upper wick: May suggest that buyers pushed price higher before sellers rejected those levels.
- Small body: Can indicate hesitation or limited movement between the open and close.
The pattern itself is useful, but where it appears on the chart often matters just as much.
12 Candlestick Patterns Every Trader Should Know
Every candle pattern signifies a distinct price action scenario, ranging from indecision in the market to possible change in buyers or sellers’ strength. Understanding these patterns will allow traders to analyze price action in a systematic manner.
The following list comprises twelve such patterns that can serve as a practical guide for beginners.
1. Doji
Doji is created when the opening and closing prices are nearly identical. This could indicate indecision since none of the buyers or sellers were in control of the price at the end of trading.
Doji can occur either during a trend or during a range. If this pattern comes after a significant move, then it could mean that there is a decrease in strength of momentum. But it does not automatically imply a reversal signal.
2. Hammer
The Hammer is characterized by a small body with an extended lower wick. This formation tends to appear after a down trend.
The appearance of the extended lower wick indicates that sellers drove the price downwards, but buyers intervened to reclaim most of the move.
A Hammer formation appearing close to the support region may require extra caution. Traders will need confirmation before considering it as a potential signal of reversal.
3. Inverted Hammer
The Inverted Hammer also commonly appears after a decline. It has a small body with a relatively long upper wick.
The formation shows that buyers attempted to push prices higher, although sellers forced the price back toward its opening area.
By itself, the pattern does not confirm a bullish reversal. A stronger move in the following period can provide additional evidence.
4. Shooting Star
The Shooting Star resembles an Inverted Hammer but generally appears after an upward move.
It has a small body near the lower part of the candle and a long upper wick. This indicates that buyers initially pushed price higher, but sellers later rejected much of that advance.
A Shooting Star near resistance can be particularly interesting because the surrounding price structure supports the possibility of selling pressure.
5. Bullish Engulfing
A Bullish Engulfing pattern consists of two candles. A smaller bearish candle is followed by a larger bullish candle whose body covers the previous candle's body.
The formation indicates a strong shift in short-term buying pressure.
Traders often look for this pattern after a decline or near support. Confirmation from later price action can help determine whether the apparent shift develops into a broader move.
6. Bearish Engulfing
The Bearish Engulfing pattern is the opposite. A smaller bullish candle is followed by a larger bearish candle that covers the previous candle's body.
It can indicate that selling pressure has increased significantly.
A Bearish Engulfing formation after an extended advance or near resistance may provide stronger context than the same pattern appearing randomly within a sideways market.
7. Morning Star
The Morning Star is a three-candle formation generally associated with a potential bullish reversal.
It typically contains:
- A strong bearish candle
- A smaller candle showing hesitation
- A stronger bullish candle
The structure suggests that sellers may be losing control while buyers begin to regain momentum.
Traders often look for additional confirmation before treating the pattern as a complete reversal setup.
8. Evening Star
The Evening Star is a bearish variation of the Morning Star pattern.
This candlestick pattern typically forms after an uptrend and consists of a large bullish candle, followed by a small middle candle, and then another large bearish candle.
This candlestick formation might show that buying pressure is diminishing and that sellers are slowly taking control.
The placement of the pattern is crucial, especially when it occurs at the resistance level and not just anywhere else.
9. Three White Soldiers
Three White Soldiers pattern comprises three successive and very bullish candlesticks, normally forming after a period of falling or weak prices.
Normally, each candle tends to close above the previous one, indicating continued bullishness in the market.
It is a pattern that might indicate the beginning of bullish movement. Nevertheless, it is important to take into consideration the distance the price has traveled and the possibility of taking long after a rally.
10. Three Black Crows
Three Black Crows are the bearish counterpart to Three White Soldiers.
The formation contains three consecutive bearish candles that generally close progressively lower.
It can indicate sustained selling pressure after an upward move or period of bullish price action.
As with other patterns, traders should distinguish between a genuine change in direction and a temporary correction.
11. Piercing Line
The Piercing Line is a two-candle bullish formation that typically occurs after a decline.
The first candle is bearish. The second opens lower but closes significantly into the previous candle's body.
This recovery shows that buyers were able to regain a substantial portion of the earlier decline.
The pattern can become more informative when it develops near support or after an extended downward movement.
12. Dark Cloud Cover
Dark Cloud Cover is a two-candle bearish pattern that usually occurs following a rise.
The first candle is bullish; however, the second candle starts high and ends deep inside the body of the previous candle.
The pattern implies that the sellers managed to reverse a lot of the preceding buying force.
Dark Cloud Cover around resistance may indicate that momentum to the upside is starting to lose strength.
Final Thoughts
A candlestick pattern analysis gives us an easy method for the analysis of buyer and seller interactions. The twelve patterns discussed in this article are a good basis for any beginner who wishes to analyze market dynamics without overcrowding his/her chart.
The most important thing is not just to remember candle names, but to learn what each pattern means, in which situation it appears, and whether the market environment allows interpreting it this way.
Work with candlesticks according to your trading plan and risk management, with testing and analysis.