Candlestick formations and patterns for beginners and advanced traders alike are one of the major factors in making a decision to either buy or sell a position in a particular stock, security, coin or currency pair.
Just like they say “the trend is your friend”, well we’ll say that you need to “get a handle on the candle” before making any type of entry into a trade.
In this guide, we’ll share with you our top 10 essential candlestick patterns EVERY trader should know. These are the ultimate patterns that will help you identify and make clear decisions on:
- A potential signal when to ENTER a trade
- A potential signal when to EXIT a trade
Before we continue we must add that although the trading candlestick patterns are a great way to indicate a potential trend, they are always best used in conjunction with other indicators, as well as any pieces of fundamental news that may positively, or negatively affect price action at any given time.
Now to the good stuff…
Why Candlestick Patterns Can Pay.. Big
IMG1 – Candlestick Types – Bearish (Red) / Bullish (Green)
Candlestick patterns are an incredibly powerful trading concept that is easy to understand, simple to identify with a little bit of know-how (and most importantly) potentially very profitable. In fact, many traders base their whole trading strategy on just a couple of simple indicators and candlestick formations with great accuracy. That’s because they help us to identify potential incoming trends and reversals, helping us traders to adjust our strategies accordingly.
Like all strategies, however, candlestick formations are not the “holy grail” of trading success, you will always encounter losses to a degree with any trading method and in fact, we encourage you to lose some trades here and there!
“Why the hell would you encourage me to LOSE sometimes” we can hear you saying. Well, that’s because from our losses we LEARN. We learn to adjust our expectations, we learn to configure our strategies with higher accuracy and we learn how to take a good old fashion beating every once and a while to bring us back down to earth after a few successful trades.
The good news is though, no matter what market you are trading, candlestick formations will give you the same signals across any market. Meaning if you’re a fan of trading cryptocurrency (like many of our students), you’ll also be able to bring these skills and knowledge across to other markets… winning!
Alright, let’s dive in..
#1 – Bearish Engulfing Bar
The bearish engulfing and it’s opposite the “bullish engulfing” are some of the most important candlestick formations for predicting price trends. As you can see in the image above, it consists of two bodies, with the left-hand candle being the previous bullish candle, which is now “Engulfed” by the bearish candle, which has now closed.
The above image is how a bearish engulfing will look on your screen and this pattern gives us valuable information about the fight between the bulls and the bears in the market.
What Does This Pattern Tell Us?
- Tell us that the sellers or the “bears” are now in control of the market
- If it occurs at the end of an uptrend, it indicates that the buyers are being outdone by the bears.
- Signifies a trend reversal to the downside
- It also gives us an indication to potentially what? You guessed it…sell
#2 – Bullish Engulfing Bar
As the name suggests, this is the opposite of the bearish engulfing explained above and gives us a potential indication that the market is no longer controlled by the bears and that the bulls are regaining their share of the market.
When a bullish engulfing forms during an uptrend, it indicates to us traders that a continuation is likely. However, when it forms during a downtrend, it gives us an even stronger indication that the sellers have become exhausted. woo!
What Does This Pattern Tell Us?
- Tell us that the buyers or the “bulls” are now in control of the market
- If it occurs in an uptrend, it indicates that the buyers are definitely in control
- Signifies a trend reversal to the upside if it forms at the end of a downtrend
- It also gives us an indication to potentially what? Yup, to buy! (Pending other indicators)
#3 – Doji Candlestick Pattern
In terms of Japanese candlestick patterns, many would consider the doji to be one of the most important. It marks its importance by telling us that the market opened and closed at the same price, which means that there is an even fight going between the bulls and the bears, with neither having the control they want over the market direction.
When this pattern happens during an uptrend or a downtrend, it indicates that the market is likely to reverse in one way or another.
What Does This Pattern Tell Us?
- Tell us that neither the buyers or sellers are in control of then market
- If it occurs in an uptrend, there is a possibility that the market may reverse to the downside
- If it occurs in a downtrend, there is a possibility that the market may reverse to the upside.
- That there is a time of rest after big moves higher or lower
- NOTE: Doji’s always indicate equality and indecision in the market, so keep a close on it!
#4 – Dragonfly Candlestick Pattern
Nope, not that type of dragonfly, but the dragonfly candlestick of course!
The dragonfly doji is a bullish pattern which forms when the high and the close of the candle are the same, or similar to the same price. The major feature of the dragonfly doji is the long tail that occurs when there is a resistance of buyers and their attempt to push the market back up.
This distinguishing long tail indicates that the forces of supply and demand are nearing a balance and the direction of the trend could be coming to a major turning point. potentially to the upside.
What Does This Pattern Tell Us?
- There is a high buying pressure in that area.
- Where the areas of support and demand are located
- If it occurs in a downtrend, it gives us a bullish signal.
- That there is a time of rest after big moves higher or lower
- NOTE: Best used together with other indicators.
#5 – Gravestone Doji Pattern
The gravestone
This formation indicates that the buyers are no longer in control of the market and for this patterns for
What Does This Pattern Tell Us?
- Bulls are losing
- The bears are in control of the market.
- NOTE: Must occur near a resistance level.
#6 – Morning Star Candle Pattern
The morning star pattern is definitely a pattern you want to familiarize yourself with for one main reason… it’s considered a bullish reversal if it occurs at the end of a downtrend, Yes!
As we can see, the first candlestick is definitely bearish, which is an indication that the bears are (at that time) controlling the market.
The second candle is much smaller, which still tells us that the bears are in control of the market direction, but don’t have the strength to push the market lower, which is our first sign of a potential bullish reversal.
The third candle is a resounding bull signal that gapped up on the open and closed above the midpoint of the first candle, indicating to us buyers that a significant trend reversal could be taking place.
What Does This Pattern Tell Us?
- That the bears
WERE in control, but now the bulls are taking over. - A powerful trend reversal signal has just taken place
- NOTE: Often occurs at the end of a DOWNTREND.
#7 – Evening Star Candle Pattern
Uh oh, this doesn’t look too good, does it? Like the morning star is bullish, the evening star us unfortunately bearish. Also made up of three individual candles, the first candle we can see is resoundingly bullish, meaning that the bulls are still attempting to push the market higher.
The second, smaller candle shows that the buyers are still somewhat in control, but not commanding as much control as they were with the previous large candle.
The third candle indicates that the bulls have lost steam and their control of the direction is over. This tells us that a possible bearish trend reversal is on its way and likely to occur very shortly.
What Does This Pattern Tell Us?
- That the bulls
WERE in control, but now the bears are taking over. - A powerful trend reversal signal has just taken place
- NOTE: Often occurs at the end of an uptrend
#8 – The Hammer (Pin Bar)
The hammer forms when the sellers are pushing the market lower after the open, but unfortunately for the bears, they get rejected by the buyers so the market will close higher than the lowest price.
This means the hammer is a reversal pattern that occurs at the bottom of a downtrend. At the bottom of the downtrend, you will see that the market will be trending down where the formation of the hammer signified the reversal pattern.
The long shadow represents the high buying pressure from that point onwards.
Sellers were trying to push the market lower, but the buying power from the bulls was too much, which resulted in the trend reversal.
#9 – Shooting Star Candle
Another bearish signal comes in the form of this shooting star pattern, which is made up of a small body and an upper long shadow.
When this occurs it tells us that the buyers are attempting to push the market higher, but the bulls rejected the move and the selling pressure became too much.
When this formation occurs near a resistance level, the likelihood of this one playing out is particularly strong. The formation indicates the end of the uptrend and the start of a new downtrend.
This particular candle can be used together with levels of support and resistance, supply and demand as well as with other technical indicators.
The shooting start pattern is one of the easier ones to identify and can make for a very profitable trade, making it one of the more powerful signals traders can use when looking at the market.
#10 – Harami Candle Pattern
IMG – Bullish Harami Signal
The harami candle pattern is considered as a reversal and continuation pattern and is formed by two candlesticks, as can be seen above.
The first candle is the largest candle and is often called the “mother candle”, followed by a smaller candle, which is called the “baby” (cute.. right?). However, for this pattern to be valid, the second or “baby” candle should close outside of the previous candle (the mother).
It is considered a bearish reversal if occurring at the top of an uptrend and it is considered bullish if it occurs at the bottom of a downtrend.
To identify it you will notice that the smaller (baby) candle is totally engulfed by the previous mother candle. With this formation, the candle types don’t matter, only that the smaller body closes inside of the preceding larger candle.
This type of pattern tells us that the market is currently undecided, in other words, the market is consolidating. This means that the buyers AND the sellers are unsure of what to do and there isn’t currently any side in control of the market at that time.
When this pattern happens during an uptrend or a downtrend, it can be interpreted as a continuation pattern, which tells us that there is a good opportunity to jump on the trend. If it occured at the top of an uptrend or at the bottom of a downtrend, it is considered as a trend reversal signal.
IMG – Bearish Harami Signal
With the bearish harami pattern, you can see that the baby candle is completed covered by the mother candle, just like the former bullish harami pattern. From this, you will see how the market trend changes direction with the bears pushing the market down, where price will start to consolidate indicating that the bulls are no longer in control of the market.
The bearish harami is simply the opposite of the bullish, where it occurs at the top of an uptrend and vice versa for the bullish equivalent.
So, there we have it, your introduction to the top 10 essential candlestick patterns that every beginner should know. Now that you have the core patterns down pat, get out there, get trading and start earning!
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