12 Common Candlestick Patterns Used in Technical Analysis

Candlestick Patterns are one of the most common technical tools used to analyze price patterns. Traders and investors have been using candlestick Patterns for centuries to discover patterns that can tell you how prices change. This article will cover some of the best-known candlestick patterns along with illustrated examples.

Before that, if you want to know how to read a candlestick chart, take a look at our Candlestick Patterns Explained for Beginners.

How to use candlestick

There are countless candlestick patterns that traders can use to identify areas of interest on a chart. It can be used for daily trading, swing trading, or even long-term trading. Some candlestick patterns can provide insight into buying and selling pressures, while others may indicate a reversal, continuation, or undecided trend.

It is important to note that the candlestick pattern by itself does not represent a buy or sell signal. The candlestick pattern is a way to look at the market structure and is a potential indicator of upcoming opportunities. It’s always good to see patterns in context. This context could be a technical pattern on the chart, the larger market environment, or other factors.

In summary, like other market analysis tools, candlestick patterns are most useful when combined with other techniques. These may include the Wyckoff method, the Elliott Wave Theory, and the Dow Theory. It can also be a descriptive analysis (TA) indicator such as trend lines, moving averages, relative strength index (RSI), stochastic RSI, Bollinger Bands, Ichimoku, parabolic SAR, and moving average convergence diffusion (MACD).

Bullish Reversal Pattern

Hammer

A candlestick with a long lower tail [wick] that emerges from the bottom of a downtrend, with the lower tail at least twice the size of the body.

The hammer shows that even if the selling pressure is strong, the buying force can push the price up to the opening price. Hammers can be red or green, and green hammers can indicate the reaction of strong buying forces.

Inverted Hammer

Also called an inverse hammer, it is similar to a hammer, but with the tail running above the body rather than below it. Similar to the hammer, the upper tail should be at least twice the size of the body.

A reversal hammer occurs at the bottom of a downtrend and may mean that the trend may reverse in the future. The upper tail shows that the downward movement has stopped, nevertheless that sellers managed to bring the price down near the opening price. A reversal hammer like this could mean that sooner or later buyers will dominate the market.

Three White Soldiers

The Three White Soldiers pattern consists of three consecutive green candlesticks. They all form opening prices within the body range of the previous candlestick and close above the previous candle’s highs.

Ideally, these candlesticks should not have a long lower tail, which means that a sustained buying force is driving the price up. The size of the candle and the length of the tail can be used to determine the likelihood of a trend continuation or retracement.

Bullish Harami

A bullish harami is a long red candle followed by a small green candle, which is entirely contained within the body of the previous candle.

A bullish harami can develop over two days or more, which means that the sell-off has slowed and the downtrend can end.

Downtrend Reversal Pattern

Hanging Man

The Hanging Man is like a downtrend hammer. It usually forms at the end of an uptrend and has a small body and a long lower tail.

The lower tail means there was a massive sell-off, but buyers managed to regain control and push up the price. Given this, that sell action in the ensuing uptrend could be a warning that the market’s buyers may soon lose control.

Shooting Star

Shooting stars consist of candlesticks with a long upper tail, short or no lower tail, and a small body, ideally close to closing. The shooting star has a similar shape to the reversal hammer but is formed at the end of an uptrend.

This suggests that the market has peaked and that sellers will take the initiative and lead the price down. Some traders prefer to wait for a few more candlesticks for the pattern to be confirmed.

Three black crows

Three Black Crows consists of three consecutive red candlesticks. They all form opening prices within the body range of the previous candlestick and close below the low of the previous candlestick.

This is like a downtrend in Three White Soldiers. Ideally, these candlesticks should not have a long upper tail, meaning that a sustained sell-off is driving the price down. The size of the candle and the length of the tail can be used to judge the sustainability of the trend.

Bearish Harami

A bearish harami is a long green candle followed by a small red candle, which is entirely contained within the body of the previous candle.

A bearish harami can develop over two days or more, appearing at the end of an uptrend, indicating that the buying power is declining.

Dark Cloud Cover

The dark cloud cover pattern consists of red candles forming an opening price above the previous green candle’s close, but closing at the midpoint of that candle.

This can usually be accompanied by high volume , which means momentum can change from an uptrend to a downtrend. Traders can also wait for the third red candle to confirm the pattern.

Lasting Patterns

Rising three methods

The pattern occurs in an uptrend, followed by three consecutive red candles with a small body followed by a continuation of the uptrend. Ideally, the red candle should not go beyond the previous candlestick range.

A continuation pattern is confirmed by the large-bodied green candle, which means that buying forces are regaining control of the trend.

Falling three methods

This is the opposite of the uptrend, meaning that the downtrend continues.

Doji

A Doji is created when the opening and closing prices are the same (or very close). The price may move up or down, but it will eventually close at or near the opening price. Doji can refer to a point where the buying and selling tax is not determined. Also, the interpretation of toji is highly context-dependent.

Depending on where the opening/closing price line falls, the doge can be described as:

Gravestone Doji – A bearish reversal candle with a long upper tail and close to opening/closing lows.

Long-legged Doji – An undetermined candle with both an upper and a lower tail, with a starting/closing price close to the midpoint.

Dragonfly Doji – an uptrend or bearish candle with a long lower tail and an opening/closing price close to a high (context-dependent)

The original definition of Doji is that the starting price and closing price are exactly the same. But what if the opening and closing prices are not exactly the same, but very close? This is called a spinning top. However, the cryptocurrency market is highly volatile, and complete dominance is rare. Therefore, a regular spinning saw can be used as a substitute for doji.

Candlestick pattern based on the price difference

There are many candlesticks that take advantage of the price difference. A price differential occurs when one financial asset makes its opening price above or below its previous closing price, creating the difference between the two candlesticks. As the cryptocurrency market goes on and on, there are no tangible patterns based on price differentials. Of course, price differences can still occur in illiquid markets. However, this is unlikely to be a valid pattern, as this is mainly due to high bid-ask spreads combined with low liquidity.

Conclusion

The candlestick pattern is something every trader should at least get used to, if not part of his trading strategy.

While it is clear that candlestick patterns are useful for analyzing markets, it is important to remember that they are not based on any scientific principles or laws. The candlestick pattern is a visual representation of the buying and selling forces that ultimately lead the market.