What Are Candlestick Patterns?
A candlestick pattern is formed when one or more candlesticks create a shape that signals potential future price movements. Each candlestick displays four key points: open, high, low, and close. The pattern’s structure and color give clues about whether buyers or sellers are dominating the market at that moment.
Candlestick patterns fall into two broad categories: reversal patterns (indicating a possible trend change) and continuation patterns (indicating the trend is likely to continue).
Anatomy of a Candlestick
To read candlestick patterns effectively, it’s important to understand their anatomy:
- Body: Represents the difference between the opening and closing prices. A longer body indicates stronger buying or selling pressure.
- Wicks (Shadows): The thin lines above and below the body show the highest and lowest prices during that period.
- Color: Usually green/white for bullish candles (price closed higher than it opened) and red/black for bearish candles (price closed lower).
Common Candlestick Patterns
While there are many patterns, these are some of the most commonly observed and reliable:
- Doji: A candle where the open and close are almost equal. It shows market indecision and often appears before a reversal, signaling that neither buyers nor sellers are in control.
- Hammer & Inverted Hammer: Hammer Forms after a downtrend with a small body and long lower wick, hinting at a bullish reversal. Inverted Hammer, Appears with a long upper wick; suggests buyers are testing the market, potentially leading to a reversal.
- Shooting Star: This bearish pattern shows a small body at the bottom and a long upper wick. It usually appears after an uptrend and signals that sellers may be gaining control.
- Engulfing Patterns: Bullish Engulfing, a green candle fully engulfs the previous red candle, showing buyers taking charge.
- Bearish Engulfing: A Red candle overtakes the previous green candle, signaling sellers stepping in.
- Morning Star & Evening Star: Three-candle formations:
- Morning Star: Appears after a downtrend, suggesting a bullish reversal.
- Evening Star: Appears after an uptrend, signaling a bearish reversal.
- Three White Soldiers: Three consecutive green candles, indicating strong bullish momentum.
- Three Black Crows: Three consecutive red candles, suggesting strong bearish pressure.
Why Candlestick Patterns Matter
Candlestick patterns help traders anticipate market moves, manage risk, and time entries or exits more effectively. But in my experience, the best results come when you combine them with support/resistance levels, trendlines, and volume analysis. Patterns alone can be misleading, especially in volatile markets.
Final Thoughts
Candlestick patterns are more than just shapes on a chart, they’re visual stories of the battle between buyers and sellers. By learning to read them, traders gain insight into market sentiment and can make more informed trading decisions. The key is patience: watch the patterns form, understand the context, and confirm with other tools before acting.