Introduction to candlestick patterns

Intermediate
March 29, 2023
Read time:
11m

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.


How to analyze candlestick patterns?

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.

High Price

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.

Low Price

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.

Open price

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.

Close price

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.

Bullish Patterns

Hammer Pattern

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.

Inverse Hammer Pattern

This pattern indicates a potential bullish reversal and is distinguished by the following:

  • A small real body of the candlestick.
  • A long upper shadow at least two times the length of the real body.
  • Little to no lower shadow.

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.

Bullish Engulfing Pattern

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.

Piercing Line Pattern

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 first candlestick is a bearish candlestick with a long real body.
  • The second candlestick is a bullish candlestick with a real body that opens below the low of the first candlestick but closes above the midpoint of the first candlestick's real body.


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.

Morning Star Pattern

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:

  1. The first candlestick is a long bearish candlestick, indicating that the sellers control the market.
  2. The second candlestick has a smaller real body and can be bullish or bearish. This candlestick represents a period of indecision in the market.
  3. The third candlestick is a long bullish candlestick that opens above the previous candlestick's close and closes above the midpoint of the first candlestick's real body. This candlestick indicates that the buyers have taken control of the market.


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.


Three White Soldiers Pattern

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:

  1. The first candlestick is a long bullish candlestick, indicating that the bulls are taking control of the market.
  2. The second candlestick is also a long bullish candlestick that opens above the previous candlestick's close, indicating that the bullish momentum is continuing.
  3. The third candlestick is another long bullish candlestick that opens above the previous candlestick's close and closes near its high, indicating that the bulls are in complete control of the market.


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.

Bearish Candlesticks Patterns

Hanging Man Pattern

Hanging Man Pattern occurs after a price advance and is characterized by the following:

  1. The candlestick has a small real body near the top of the trading range.
  2. The lower shadow is at least twice the length of the real body.
  3. There is little to no upper shadow.

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.

Shooting Star Pattern

This bearish reversal pattern occurs at the top of an uptrend, which is characterized by the following:

  1. The candlestick has a small real body near the top of the trading range.
  2. The upper shadow is at least twice the length of the real body.
  3. There is little to no lower shadow.


Bearish Engulfing Pattern


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:

  1. The first candlestick is a bullish candlestick.
  2. The second candlestick is a bearish candlestick that opens above the previous candlestick's close and closes below the previous candlestick's open.
  3. The second candlestick's real body completely engulfs the first candlestick's real body.

Evening Star Pattern


Evening Star Pattern is characterized by the following:

  1. The first candlestick is a long bullish candlestick, indicating that the bulls are in control of the market.
  2. The second candlestick is a small real body candlestick that may be bullish or bearish that opens and closes within the real body of the first candlestick.
  3. The third candlestick is a long bearish candlestick that opens below the previous candlestick's close.

Three Black Crows Pattern

Three Black Crows Pattern is a bearish reversal pattern consisting of three consecutive long bearish candlesticks, each opening above the previous day's close.

Summary

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.

Complete quiz
Introduction to candlestick patterns
Share this article
Explore other articles
Beginner

ERC-721 (Ethereum Request for Comments-721)

The ERC-721 standard employs smart contracts to define token creation, storage, and transfer rules. NFTs have gained popularity in recent years, and ERC-721 is one of the most critical standards that has contributed to the growth of the digital asset market.
Intermediate

Algorithmic Trading

Algorithmic trading uses mathematical and statistical algorithms to make investment decisions, analyze various indicators and react rapidly to market changes. To start trading, one must acquire the necessary knowledge, choose a trading platform, test algorithms on historical data, and optimize performance.
Intermediate

What is token burning and why is it important?

Token burning can be beneficial for long-term investors but may negatively impact traders in the short term by reducing liquidity and causing price fluctuations.