Candlestick patterns are tools used in technical analysis to visually represent information about daily price movement and the scope of price fluctuations.
A price chart is made up of individual candlesticks, which can be either positive (the price is going up) or negative (the price is going down). Each candle represents price action over a specific period.
The wide part of the candlestick is called the real body. It’s the most important part of the candlestick, as it reflects the difference between the open and close trades during the candle's trading period.
The High Price is indicated at the top of the shadow, which is displayed above the candlestick's real body. If the open or close price was the highest price during a given time period, there will be no Upper Shadow.
Similarly, the Low Price is indicated at the bottom of the shadow, which is displayed below the candlestick's real body. If the open or close price was the lowest price during a given time period, there won't be a Lower Shadow.
The opening price of an asset is represented by the top or bottom of a candlestick.
If the opening price is higher than the closing price, the opening will be at the top of the candlestick's body. This indicates a downtrend direction, and the candlestick's color will be either black or red, depending on the platform.
Conversely, if the opening price is lower than the closing price, the open price will be placed at the bottom. This indicates an uptrend at a given time, and the candlestick's color will be either green or white, depending on the exchange.
The closing price of an asset can also be placed on the top or bottom of a candlestick. If the closing price is higher than the opening price, the closing price will be at the top of the candlestick, indicating an uptrend.
If the closing price is lower than the opening price, it will be at the bottom of the candlestick, indicating a downtrend.
A candlestick with a short real body and a long lower shadow (at least two times the height of the real body).
This pattern resembles a “T” and implies that the prices are temporarily pushed down, but traders have stepped in to push them back up – indicating a potential reversal of a downward trend.
This pattern indicates a potential bullish reversal and is distinguished by the following:
Traders may interpret this pattern as a sign that the bears have taken control of the market but could not maintain their grip, and the bulls have stepped in to push prices up.
This pattern indicates a potential reversal in a downtrend. It typically occurs during a price decline and is characterized by two candlesticks.
The first one is a bearish candlestick with a small real body.
The second candlestick is a bullish candlestick with a long real body, meaning that the closing price was significantly higher than the opening price of the first. The second candlestick "engulfs" the first candlestick, completely covering its body.
Bullish Engulfing Pattern is crucial as it suggests that the bulls have taken control of the market after a period of selling pressure. The longer the real bodies of the two candlesticks – the stronger the signal that a reversal is likely to occur.
This two-candlestick pattern occurs during a downtrend and indicates a potential shift in market sentiment from bearish to bullish.
The Piercing Line Pattern is characterized by the following:
The second candlestick "pierces" the low of the first, indicating that buyers have gained strength and are pushing prices higher.
It’s a strong signal when the second candlestick's real body is significantly larger than the first’s, indicating that there is a higher potential for a trend reversal.
It consists of three candlesticks and is typically a sign that the market may be about to reverse course.
The Morning Star Pattern is characterized by the following:
The Morning Star Pattern is considered a strong signal when the third candlestick's real body is significantly larger than the first candlestick's real body, suggesting that there is a greater potential for a trend reversal.
This pattern usually occurs during a downtrend and is a sign that the market may be about to reverse course, and is characterized by the following:
The Three White Soldiers Pattern is considered a strong signal when all three candlesticks have long real bodies and small or nonexistent shadows, along with confirmation by other technical indicators like relative strength index (RSI). This indicates a strong bullish trend and a high probability of a trend reversal.
Hanging Man Pattern occurs after a price advance and is characterized by the following:
Traders interpret this pattern as a sign that buyers pushed prices up during the trading day but were unable to maintain control, and sellers pushed prices down to close near the low of the day. This indicates a shift in market sentiment from bullish to bearish.
This bearish reversal pattern occurs at the top of an uptrend, which is characterized by the following:
This pattern is a bearish reversal that occurs at the top of an uptrend. It is considered a strong bearish reversal signal as it suggests that the sellers are taking control of the market, reversing the previous bullish trend.
The Bearish Engulfing Pattern is characterized by the following:
Evening Star Pattern is characterized by the following:
Three Black Crows Pattern is a bearish reversal pattern consisting of three consecutive long bearish candlesticks, each opening above the previous day's close.
Candlestick patterns are helpful technical tools as they visually illustrate daily price movement, which helps traders to predict price direction. Since they track the most crucial price information, they are most commonly used in day trading.