Candlestick Patterns Cheat Sheet | LiteFinance
Candlestick patterns are among the most popular tools utilized in technical analysis of the markets. Developed by Japanese rice merchants in the 18th century, these patterns have proven their worth and still remain widely favored in today’s trading strategies.
There are many types of candlestick patterns, each offering unique signals regarding the potential direction of the Forex market. Some patterns indicate an upcoming trend reversal, while others confirm a trend continuation.
This article offers an in-depth guide to trading with candlestick patterns. Explore this review and discover a handy cheat sheet for using candlestick patterns effectively.
The article covers the following subjects:
Major Takeaways
- A candlestick pattern in trading is a pattern that consists of one or more Japanese candlesticks. Traders use these formations to predict potential price changes.
- In trading, there is a wide array of candlestick patterns, which can be grouped into two primary categories: reversal patterns and continuation patterns. Depending on the market conditions, these patterns can be either bullish or bearish.
- A bullish reversal pattern signals a potential shift to an uptrend. A classic example is a Hammer candlestick, which typically appears at the end of a downtrend. This pattern features one small-bodied candlestick with a long lower shadow, indicating strong buying pressure and signaling a possible reversal.
- A bullish continuation pattern suggests the ongoing uptrend will likely persist. One notable example of this type of pattern is the Rising Three Methods.
- A bearish reversal pattern suggests a potential shift in trend towards a downtrend. A prime example of this type of pattern is the Evening Star triple candlestick pattern.
- A bearish continuation pattern signals that the downtrend will likely extend. A Bearish Marubozu pattern is a key example.
- An effective trading strategy involving candlestick patterns should also integrate other technical tools such as support and resistance levels, the MACD, RSI, Stochastic, Bollinger Bands indicators, Fibonacci retracement levels, and trading volumes.
- Generally, higher time frames, such as daily or weekly candlestick charts, provide more reliable pattern signals because they filter out much of the market noise. However, lower time frames can be valuable for intraday trading.
Candlestick Patterns Cheat Sheet
To master the technical analysis of candlestick patterns, you need to follow simple rules.
- Basic concepts. Before studying candlestick patterns, it is important to grasp the basics. A candlestick comprises a body and two shadows, where the body represents the difference between the opening and closing prices, and the shadows indicate the high and low of a trading session.
- Key candlestick patterns. Start exploring essential candlestick patterns such as the Hammer, Doji, Engulfing, and Dark Cloud Cover. These formations are crucial for spotting potential trend reversals or confirming the ongoing trend’s strength.
- Contextual analysis. Each candlestick and pattern should be analyzed in light of the current market situation. The same pattern can convey different interpretations in varying market conditions.
- Practice and testing. Regular practice is essential to improve your trading skills. Analyze historical price data and test different scenarios to understand how patterns work.
- Combining with other technical analysis tools. Candlestick patterns work best when combined with other tools, such as moving averages, oscillators, and other patterns.
What Is a Candlestick Pattern?
Candlestick patterns are visual formations on price charts. They reflect changes in market sentiment and can be important indicators of future changes in the asset’s price movement.
Each candlestick shows four key parameters: opening and closing prices and the highest and lowest prices for a certain period. Candlestick patterns help traders identify trends and potential reversals, allowing them to determine the best moments for entering the market.
Bullish Candlestick Patterns
Bullish candlestick patterns signal a potential upward reversal or continuation of a bullish trend.
- A Hammer is a candlestick with a long lower shadow and a small body at the top. It indicates that the price may start growing soon.
- An Inverted Hammer is characterized by a long upper shadow and a small body at the bottom. This candlestick is often found at the bottom of a downtrend and signals potential price appreciation.
- A Dragonfly Doji is a candlestick pattern with a small or nonexistent body and a long lower shadow.
- A Bullish Engulfing consists of a small bearish candlestick that is completely overlapped by a subsequent larger bullish candlestick. This pattern indicates a probable upward reversal.
- A Piercing Line occurs when a bearish candlestick is followed by a green candlestick that closes above the midpoint of the previous candlestick’s body.
- A Three White Soldiers pattern consists of three consecutive long bullish candlesticks, each opening within the previous candlestick’s body and closing higher. This pattern indicates a solid uptrend.
- A Morning Star pattern includes a long bearish candlestick followed by a small and then a large bullish candlestick.
Bearish Candlestick Patterns
Bearish patterns indicate the possibility of a downward trend reversal or the continuation of a downtrend. Let’s review some common bearish candlestick patterns:
- A Hanging Man pattern comprises a small candlestick with a long lower shadow. It occurs at the top of an ascending market, signaling the beginning of a decline.
- A Shooting Star pattern consists of a long upper shadow and a small body at the top of the trend, warning of a bearish correction.
- A Gravestone Dojiis a candlestick with a long upper shadow and an almost invisible body. It points to the waning bullish momentum in the Forex market.
- A Bearish Engulfingpattern includes two candlesticks, with a large bearish candlestick overlapping the previous bullish one.
- A Dark Cloud Cover is formed by two candlesticks. The bearish candlestick closes below the middle of the previous bullish one, signaling a bearish pressure.
- A Bearish Harami is a double candlestick pattern. A small bearish candlestick appears within the range of a large bullish one.
- An Evening Star pattern consists of three candlesticks, with the small one located between a bullish and a bearish candlestick. The pattern signals a price drop after a prolonged uptrend.
- A Falling Three Methods pattern comprises a bearish candlestick, followed by three small bullish ones, and ends with another bearish candlestick.
- A Three Black Crows pattern represents three consecutive long bearish candlesticks closing below the previous candlestick’s opening price.
Continuation Candlestick Patterns
Let’s look at the most popular trend continuation patterns.
- A Three White Soldiers pattern features three long white or green candlesticks with almost no shadows. Each new candlestick opens within the body of the preceding one and closes higher. This pattern indicates a strong uptrend and suggests the potential for continued growth.
- A Three Black Crows pattern includes three long red candles, each one opening within the body of the previous candlestick and closing lower, confirming a solid downtrend.
- A Marubozu candlestick has very short or almost no shadows. A Bullish Marubozu shows that the price opened at the low and closed at the high, meaning the bullish trend continues. Conversely, a Bearish Marubozu indicates that the price opened at the high and closed at the low, signifying that a bearish sentiment prevails.
- A Rising Three Methods pattern includes three short red candlesticks between two long green ones. This pattern shows that bulls are reinforcing their positions in the market, and the uptrend will probably continue.
- A Falling Three Methods pattern is a sequence of three short bullish candlesticks that follow a long bearish one, ending with another strong bearish candlestick. This formation indicates a weakening of bullish momentum and a possible downtrend continuation.
Reversal Candlestick Patterns
Let’s explore the most popular patterns that signal a trend reversal.
- Hammer and Hanging Man candlestick patterns look similar, but their meaning varies depending on the market situation. A Hammer appears at the bottom of a downtrend and often signals an upward reversal. A Hanging Man pattern forms at the top of an uptrend and warns of a possible downward reversal.
- Inverted Hammer and Shooting Star patterns. An Inverted Hammer occurs at the bottom of a downtrend and may indicate an upward reversal. A Shooting Star, on the contrary, emerges at the top of an uptrend and indicates a probable decrease.
- Bearish and Bullish Engulfing patterns. A Bullish Engulfing occurs when a large bullish candlestick completely overlaps the previous bearish one, signaling an upward reversal. A Bearish Engulfing pattern works the same way, foreshadowing a decline.
- Piercing Line and Dark Cloud Cover patterns. A Piercing Line pattern occurs when a bullish candlestick opens with an upward gap after a bearish candlestick and closes above its midpoint. A Dark Cloud Cover is the opposite pattern, where a bearish candlestick opens with an upward gap after a bullish candlestick and closes below its midpoint.
- Morning and Evening Star patterns. A Morning Star pattern appears at the bottom of a trend. It is made up of a long bearish candlestick, a smaller candlestick that gaps down at the open, and a third long bullish candlestick. The pattern signals a potential upward reversal. An Evening Star pattern forms at the top of the trend and warns of a potential downturn.
Conclusion
Understanding various candlestick patterns allows traders to make more confident decisions based on accurate technical signals.
Remember: you can significantly increase the efficiency of your trading strategies by combining candlestick patterns with other indicators. Try Forex trading with the help of various candlestick patterns on the LiteFinance demo account.
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Candlestick Patterns FAQs
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