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Reading candlestick charts and patterns

Reading candlestick charts and patterns is one of the most important skills a trader can learn. There are many candlestick patterns. There are single candle patterns, two candle patterns, three, and more candle patterns.

Candlestick patterns have been around for hundreds of years. The popular names for the well-known and lesser-known forms come from Japan and were famously used by rice traders in the 18th century.

Candlestick patterns

1)All charts and candle patterns created by https://badinvestmentsadvice.com/

Rather than learning all the multitude of candlestick names and types, it is more important to understand what the candlesticks mean in terms of price movements and what that reveals about the psychology of buyers and sellers in the market.

The parts of the candlestick

Candlestick charts display the prices of a stock or another financial instrument and each candle shows a discrete time period. The easiest period to grasp is a daily period for a stock that trades from the time the market opens to the time the market closes.

Each candle in the chart displays four price points in that daily period:

  • the opening price
  • the highest price in the day
  • the lowest price in the day
  • the closing price.

Candlestick charts can be set up to show price movements over different periods, for example, weekly, monthly or shorter periods of hours or minutes during a trading day. But it is easiest to talk here about daily price candles.

A candle is either an up-candle when the closing price is higher than the opening price, or a down-candle when the closing price is lower than the opening price. Different charting sources, websites, or software packages display up-candles and down-candles differently. Some show up-candles as green and down-candles as red.

The standard here is up-candles are shown in white and down-candles are shown as black. Here is what a typical up-candle and a down-candle look like.

Candlestick price points

In this example the up-candle opened at $320, during the day the lowest price was $315, the highest price was $330 and the price closed at $325 at the end of trading.

Important price points

When we look at a price candle for a particular day, for example, it is good to remember that the closing price is always the most important price. Many orders are executed at the closing price.

If the price closed substantially higher than it opened, then that is a big up day. If it closed substantially lower than it opened, that is a big down day.

If the upper shadow is large, that tells us there was buying pressure in the market for higher prices but some indecision and selling pressure pushed the price to close lower at the end of the day.

Similarly, if the lower shadow is large, that shows some selling pressure pushing prices lower but then buying pressure resumed and pushed the price to close higher at the end of the day.

Let’s dive in and take a look at some major candlestick patterns.

The doji

A doji is formed when a trading period closes at or very near the opening price. The sizes of the upper and lower shadows indicate the degree of uncertainty on the upside and on the downside respectively.

Dojis

Dojis are potentially powerful price trend reversal indicators.

A dragonfly doji at the bottom of a trend is a powerful indicator of a trend reversal to the upside.

A gravestone doji at the top of an uptrend is a powerful indicator of a trend reversal to the downside.

A spinning top doji has large upper and lower shadows and indicates uncertainty in the upward and downward directions and is, therefore, less powerful than another type of doji anywhere in a chart.

Abandoned baby

Among the strongest trend reversal patterns is the abandoned baby. These can occur either at the top of an uptrend or at the bottom of a downtrend.

Abandoned baby top

For a doji to be an abandoned baby at the top of an uptrend there must be a gap between the previous candle high price and the low price of the baby. When the next candle is a large down candle that opens below the low of the doji and the high of that down candle stays below the doji then the downtrend is confirmed.

Abandoned baby bottom

Similarly, for a doji to be an abandoned baby at the bottom of a downtrend, there must be a gap between the last price low of the previous candle and the high price of the doji. The trend reversal to the upside is confirmed when the next candle is an up candle that opens and stays above the high price of the doji.

The bullish hammer and the bearish hanging man

The bullish hammer and the bearish hanging man look very similar. Each has a small body with a large lower shadow and either a very small or no upper shadow. The close can either be above the open, so using the display format here, the body can be either white or black.

Bullish hammer

The bullish hammer comes at the bottom of a price downtrend. It is an indicator of a trend reversal in the bullish direction. If the hammer is not at the bottom of a downtrend then it is not a bullish hammer.

Bearish hanging man

The bearish hanging man comes at the top of a price uptrend and indicates a bearish trend reversal. If this pattern happens anywhere else, it is not a bearish hanging man.

Engulfing patterns

Engulfing patterns are two candle patterns. The bullish engulfing pattern occurs at the bottom of a downtrend.

Bullish engulfing

The body of the first candle is completely engulfed by the body of the second candle. It does not matter whether the upper or lower shadows of the first candle are engulfed by the second.

The bearish engulfing pattern occurs at the top of an uptrend.

Bearish engulfing

Bullish piercing and dark cloud cover

There are two piercing patterns, both are two candle patterns. The bullish piercing pattern occurs at the bottom of a downtrend. The first candle is a large down day. The second candle body must open below the closing price of the previous day and then close at least half-way into the body of the previous candle.

Bullish piercing

Dark cloud cover is the bearish piercing pattern that occurs at the top of a price uptrend.

Dark cloud cover

Like the bullish piercing pattern, the first candle is a large up candle. The body of the second candle has to open above the close of the first candle and close down piercing at least halfway into the body of the previous candle.

Neither of these candle patterns is particularly strong. If the body of the second candle does not pierce halfway, then it is more likely to indicate a trend continuation rather than a reversal.

Morning star and evening star

A morning star occurs at the bottom of a price downtrend.

Morning star

The star has a small body. There needs to be a gap between the closing price of the previous candle and the opening price of the star. If the body of the next candle is completely above the body of the star then the pattern is a more powerful indicator of a price trend reversal in the bullish direction.

An evening star occurs at the top of a price uptrend.

Evening star

Like with the morning star, if the body of the next candle after an evening star gaps down from the body of the star then it is a more powerful indicator of a price trend reversal in the downward, i.e. bearish direction.

Shooting star and the bullish inverted hammer

A shooting star occurs at the top of a price uptrend.

Shooting star

The long upper shadow of a shooting star indicates uncertainty in higher prices. It is an indicator that price is likely to trend downwards.

The inverted hammer also has a large upper shadow.

Inverted hammer

The inverted hammer occurs at the bottom of a downtrend and is not as powerful an indicator of a reversal to price uptrend as a regular bullish hammer.

Harami – mother and child

The harami pattern is a two candle pattern. The body of the first candle, the mother, complete encompasses the body of the second candle, the child. The sizes of the upper and lower shadows do not matter. This pattern is basically a big day followed by a small day.

It is more meaningful in a price uptrend if the mother candle is an up candle, the child candle can be either up or down.

Harami in an uptrend

The harami is not a very powerful indicator of the likelihood of a price trend reversal. More usually it tends to stall price. In the example above the harami has the effect of stalling a price uptrend.

Harami in a downtrend

In the above example, the harami stalls the price downtrend. Again, whether the child candle is an up candle or a down candle doesn’t matter that much.

Harami cross

When the child is a doji, then the harami pattern becomes more powerful and is more likely to indicate a price trend reversal.

Harami cross in a downtrend

The example above is a harami cross at the bottom of a downtrend.

Harami cross in an uptrend

The harami cross at the top of an uptrend is shown above. That the child candle is a doji makes the pattern a more powerful bearish indicator.

Rising three methods and falling three methods

Rising three methods and falling three methods are examples of three candle patterns. No surprise there.

The main characteristic of rising three methods is that there is one large body up candle followed by the smaller body candles all of which are contained within the price high and low of the first candle. The next candle that breaks the pattern in the upwards direction should open at least halfway up the first candle, and close above all the previous candles of the pattern. Here is what it looks like

Rising three methods

Rising three methods is either the start of a price uptrend after a period of sideways movement, or it is a continuation of a price uptrend.

Falling three methods has the same pattern as rising three methods but in the opposite direction.

Falling three methods

Both rising three methods and falling three methods can have more than three candles which fall inside the high to low range of the long body candle.

Three white soldiers and three black crows

The three white solider pattern can happen at the bottom of a price downtrend or at the end of a period of sideways price movement.

The body of each white candle should open inside the body of the previous candle, close above the body of the previous candle and at or near its high price. So the candles should not have long upper shadows.

Three white soldiers

If the closing prices of the candles are not progressively higher than the previous candles, then the bullishness of the indicator is not as strong. If the upper shadows are long then it is also not as strong and indicator.

Three black crows is a bearish version of three white soldiers.

Three black crows

All the same considerations apply to the three black crows as the white soldiers but in the opposite sense. Three black crows is an indicator of a price downtrend either after a period of sideways price movement or can be an indicator of a continuing price downtrend.

Differences on the upside and on the downside

Generally, bull markets take longer to form and are slower to happen than bear markets. This is largely because of the psychology of traders. It takes longer for enthusiasm and belief in a bull market to form, than it does for fear to take hold and trigger a bear market.

This is also reflected in how we should read and interpret candlestick patterns. Reversal patterns at the top of a bull market will tend to require less confirmation from other indicators, such as volume, the MACD, the RSI, or the Stochastic oscillator, than will reversal patterns at the bottom of a downtrend.

This means as well that candlestick patterns at the top of an upward price trend do not have to be as strong in themselves to indicate a reversal to a bear market. Conversely, when we see a candlestick pattern at the bottom of a trend and we are looking for an indication of a price reversal in a bullish direction, then we will want to see a strong candlestick pattern for it to start to have validity.

To learn more about candlestick patterns, check here.


Answers to questions

Q. How do you read a stock candlestick chart?

A. A candlestick chart shows the opening price, the highest price the lowest price, and the closing price of a stock in a specific time period when the price changes in a market.

The highest price is shown by the top of the upper shadow or wick, the lowest price is the bottom of the lower shadow or wick, the top and bottom of the body show the opening and closing price depending on whether the price opened higher or lower than it closed.

When the closing price is higher than the opening price that is considered an up period and the candle will have a specific color either white or green.

When the closing price is lower than the opening price that is considered a down period and the candle will have a different color, either black or red.


Q. Which candlestick patterns are most reliable?

A. Dojis are the most powerful candlestick patterns. Bearish candlestick indicators tend to more readily follow through with price action than do bullish indicators. A gravestone doji at the top of an upward price trend is probably one of the most reliable indicators that a price reversal in the downward direction is likely.


Q. Which candlestick patterns are most bullish?

A. An abandoned baby doji is probably the most bullish candlestick pattern.


Q. Which candlestick patterns are most bearish?

A. A gravestone doji is the most bearish candlestick pattern.


Here is a single-page summary of the main candlestick patterns. You can download a copy here.

Candlestick patterns summary


I hope you found this article interesting and useful. Do leave me a comment, a question, an opinion, or a suggestion and I will reply soonest. And if you are inclined to do me a favor, scroll down a bit and click on one of the social media buttons and share it with your friends. They may just thank you for it.


Disclaimer: I am not a financial professional. All the information on this website and in this article is for information purposes only and should not be taken as investment advice, good or bad.


Affiliate Disclosure: This article contains affiliate links. If you click on a link and buy something, I may receive a commission. You will pay no more so please go ahead and feel free to make a purchase. Thank you!

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1. All charts and candle patterns created by https://badinvestmentsadvice.com/

Andy

16 Comments

  1. Hello there, thanks a lot for sharing this wonderful piece of information here with us. I must say i really did enjoyed going through your review on candlestick charts and pattern. I recently started learning forex trading and this truly come in handy for me. I am going to bookmark this for reference purposes, thanks for sharing.

    • Hi and thanks for your positive feedback. I am glad you found it useful and informative. Best regards, Andy

  2. Hello there! Thank you for sharing this wonderful article on reading Anslem tick charts and pattern. I’ve gone through it and I must really commend the effort you put in writing This article as it contains valuable information. I was going to ask which candlestick pattern is more reliable but scrolling down, I saw you already answered the question. I have friends that wants to learn forex so I’ll share with them. Thanks 

    • Hi and thanks for your positive comments and the question. I must admit I felt a little bit guilty saying that the abandoned baby doji is the most reliable candlestick pattern quite simply because they are extremely rare. Maybe a better answer would be which frequently seen candlestick pattern is the most reliable. I think the answer there is that Three Black Crows is likely to reliably mean a continuation of a downward price trend. And that is largely because price continuation is often the line of least resistance, especially after a well-formed pattern of three Black Crows. Thanks for the great question and best regards, Andy

  3. Wow, I don’t even know where to begin but it seems to me like you have done your research. Would you say this is the candlestick charts and patterns are more for short-term or even day traders rather than for long term investors? I also do stocks as well, but wonder if this is something that short term/day traders tend to focus on. Still, thank you for your information. I’ve learned a lot!

    • Hi and thanks for the comment. Candlestick patterns are equally useful for long-term, intermediate-term, and short-term trading. I would say that the important thing to remember is that you will always need to adjust settings for the period you are looking at. As is the case with all of these indicators, it is best to use a number of them to confirm what you are seeing before taking action. Each of those tools you use may need to be adjusted to the period you are looking at. For day trading you would want to look at the trend likely to prevail in that day, so look where the day sits in relation to price trends in the week. Then within the day itself, I would look at hourly and as short as 5-minute charts. So, yes, I would say they are equally as valid for short-term and day trading. Thanks again and best regards, Andy

  4. Hi,

    From my research candlestick is a way of displaying information about an asset’s price movement, candlestick charts are one of the most popular components of technical analysis, enabling traders to interpret price information quickly and from just a few price bars, the best way to learn to read candlestick patterns is to practise entering and exiting trades from the signals they give you can develop your skills in a risk free environment, if you feel confident enough to start trading, you can open a live account today.

    Thank you.

    Aluko.

    • Hi Aluko and thanks for your comment. Indeed I agree with you. The best way to learn how to use candlestick patterns is to study and practice and to start doing that with no money until you have the confidence to trade with real money. Thanks again and best regards, Andy

  5. During this pandemic, I’ve been learning many different things. I have turned my attention towards trading. I have started to enjoy my time learning about it. 

    Recently I have been seeing this pattern that you have described as bullish hammer and the bearish hanging man. I was so excited when I discovered it by myself. And now confirming it through articles makes my discovery even more exciting.

    • Hi and thanks for your comment. I have had similar experiences. It really builds your confidence when you are able to spot the textbook patterns in real live charts and then observe price action that confirms your observations. Thanks again for your comment. Best regards, Andy

  6. Wow, there is loads of information to take in here. I’m a beginner in forex trading and I’ve been learning lots of things like understanding candlesticks, creating a strategy, money risk management, and so. But your article contains an in depth and comprehensive explanation of various candlestick patterns. I’ve bookmarked it already for reference because I would love to add some of it to my trading plan. But does this candle stick pattern and structure apply to all types of markets?

    • Hi and thanks for your comments and question. Yes, looking for patterns in candlesticks is valid in all kinds of markets including, stocks, ETFs, and forex just to name a few. You will need to adjust the settings of the display depending on what financial instrument you are trading and your trading time horizon but you will be able to see many of the candlestick patterns mentioned here in any price chart of whatever it is as long as it is actively traded. Thanks again and best regards, Andy

  7. Hello Andy, 

    There is a complete honesty and great knowledge in this article and I feel happy about it. As a forex trader I have been really keen on clearing my path to know more about reading candle stick charts but its not been easy as I always misplace some details along the line. It’s of great delight that I have found this article. Thank you.

    • Hi and thanks for your comment. Of course, reading and interpreting candlestick patterns is only part of the story of understanding price movement. I am glad that you found this helpful. Best regards, Andy

  8. Well explained Andy,

    My friends have been trying to entice me to join him in his trading business but I always reject as I don’t really understand it, he mentioned a lot about the candlestick readings which made me even more clueless, until I read your article. With the open, body, close, man it’s a actually more detailed than I thought, interesting! How long did it take you to fully grasp the trading knowledge if you don’t mind me asking?

    • Hi Riaz and thanks for the comment and question. I’ve been seriously studying charts for a few years now since I recently shifted my investing approach to more active intermediate-term trading. As many people will tell you it’s a bit like looking for faces in clouds. Very often you can see all kinds of patterns all at the same time. That is why I think it is important to understand the interplay between supply and demand and trading volume that is going on. It is seeing what the strongest indicators in patterns mean that is important. More often than not the information is conflicting and jumbled and not telling a clear story. That is when it is best not to force things and to sit on the sidelines. Good luck with your trading. Best regards, Andy

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