Candlesticks are the only real time indicators. It means, they accurately tell you what is going on in the markets. They are not delayed, whereas other indicators like MACD, RSI, Stochastic are lagging indicators. Economic news are leading indicators, but you cannot trade with them every day because you won’t have strong news that moves the market and gives you the chance to trade every day.
Candlesticks patterns are the fluent language of bulls (buyers) and bears (sellers), and they clearly tell you which one has taken the control of the market and is stronger, and so the price will move toward their favorite direction. I personally don’t have anything but candlesticks on my charts. They are enough to show you the right way.
Therefore, spend some time and read this article entirely to learn what candlesticks patterns are and mean. It makes a big difference in your trading success, no matter what you trade.
What Are Candlesticks?
Candlesticks are the price blocks or units that each of them show four prices within a special time-frame. For example, if you set the price chart’s time-frame to one hour, each candlestick shows four prices within each hour. Or, if you set the time-frame to daily, each candlestick will show four prices during the past 24 hours. These four prices are:
As you are here because you googled for candlesticks patterns, I assume that you already know what candlesticks are. This article is focused on candlesticks patterns. However, I give you a short description of the Japanese candlesticks, in case you are new and you don’t know what candlesticks are exactly:
A candlestick is bullish when its close price is above the open price. Bullish candlesticks are usually plotted on the price charts in white or green.
A candlestick is bearish when its close price is below the open price. Bearish candlesticks are usually plotted on the price charts in black or red.
Candlesticks’ Different Parts
– Candlestick Body
It is the distance between open and close prices. It can be bullish or bearish, as I explained above. Sometimes, when open and close prices are too close to each other, or are the same, the candlestick’s body becomes so small or it becomes like a dash. In this case, the candlestick is called Doji.
– Candlestick Shadows
Each candlestick can have an upper and lower shadow. Upper shadow shows the high price, and lower shadow shows the low price. When the high price is the same as the open price, and low price is the same as close price, the candlestick will have no upper and lower shadows and will be called Bearish Marubozu. Similarly, when open price is the same as low price, and the high price is the same as close price, the candlestick will be a Bullish Marubozu.
This is how candlesticks look on a candlestick chart:
Different Kinds of Single Candlesticks
Candlesticks patterns form at least by two single candlesticks. Therefore, single candlesticks are the building blocks of candlesticks patterns. Shape of these single candlesticks sometimes makes a big difference. Therefore, first we must learn about the single candlesticks shapes, before we learn about the candlesticks patterns.
Typical candlesticks have reasonable and visible body and shadows, and unlike other candlesticks, their bodies are not too small, they have upper and lower shadows that are reasonably long enough, not too long or absent:
Marubozu is a kind of candlestick that has no shadows. It means it only has a body. Marubozu doesn’t have any special meaning or signal, unless it becomes too long and strong. When Marubozu is too long, it means the related party has taken the market’s full control. For example, when Marubozu has a long bullish body, it means bulls or buyers have taken the market’s control, and it is more probable that the price goes higher. It is the other way round when a big bearish Marubozu forms on a chart. Therefore, there are two kinds of bullish and bearish Marubozu candlesticks.
A big and strong Marubozu candlestick in a candlestick pattern makes a big difference and makes the pattern much stronger. We can see this candlestick in different kinds of candlesticks patterns like bullish and bearish engulfing patterns, including Dark Cloud Cover and Piercing Line. I will explain about these candlesticks patterns in more detail here in this article.
Doji is one of the most important and famous candlesticks that participates in strong and important candlesticks patterns. It has a very strong rule in different candlesticks patterns that are strong reversal trade setups. Doji is a reversal signal by itself. However, it has to be confirmed by the next or a few of the next candlesticks.
Doji is a candlestick that has no body. It forms when open and close prices are the same or so close to each other. When open and close prices are the same, the Doji’s body becomes like a dash (-). When open and close prices are not the same, but they are so close, then Doji will have a small body, but it will still be known as Doji. The longer the Doji shadows, the stronger reversal signal it will have.
There are different kinds of Doji candlesticks that all of them are known as reversal signals, but they must be confirmed by the next candlestick, and so we need to see a candlestick pattern that one of them is a Doji. The confirmation candlestick has to be against the direction of the market.
For example, when a Doji candlestick forms at the top of a bull market, and then the confirmation candlestick forms as a strong bearish candlestick with a strong body, then this candlestick pattern is known as a short trade setup, and so the price will most probably go down. And, when a Doji candlestick forms at the bottom of a bear market, and then the confirmation candlestick forms as a strong bullish candlestick with a strong body, then such a candlestick pattern is a long trade setup, and so the price will most probably reverse and go up. Therefore, Doji and the confirmation candlestick form important candlesticks patterns that we will talk about more in this article.
When no confirmation candlestick forms, then you should ignore the Doji candlestick as a reversal signal.
Different Kinds of Doji
- Typical Doji
- Inverted Dragonfly
- Inverted Gravestone
Hammer, Hanging Man and Shooting Star
Hammer has a small body, with no a very small upper shadow and relatively long lower shadow that forms at the bottom of a bear market. When the same candlestick forms at the top of a bull market, it is called Hanging Man. Like Doji, these candlesticks are reversal signals, but they must form in candlesticks patterns to be distinguished as trade setups.
When the Inverted form of a Hanging Man forms at the top of an uptrend, it is called Shooting Star, which has the same reversal impact and is not different from the typical form of the Hanging Man candlestick. However, they form a reversal candlestick pattern only when a confirmation candlestick forms. Therefore, when a Hammer forms at the bottom of a bear market and then a bullish candlestick forms, the reversal signal of Hammer will be known as a reversal pattern and long trade setup. Similarly, when a Hanging Man forms at the top of a bull market and then the next candlestick forms a strong bearish body, then such a candlestick pattern will be known as a short trade setup.
What Are the Candlesticks Patterns?
Candlesticks patterns form the trade setups. They tell you to buy or sell. They form by more than one candlestick. An individual candlestick can be a signal as well. However, they need confirmation, which is usually the next candlestick or the next a few candlesticks. For example, a Doji candlestick that has too long upper and lower shadows is a strong warning and reversal signal, but it is not a trade setup. It becomes a trade setup when it is confirmed by the next candlestick(s).
Learning and recognizing the candlesticks patterns are the essence of trading based on the Japanese candlesticks. Single candlesticks usually have no meaning and traders don’t take positions based on one candlestick, even when it is too strong. On the other hand, not all candlesticks patterns are reliable enough to make you get in the markets and risk your money. Many of them are money-suckers, although the so-called trading and candlestick gurus talk about them excitedly. Therefore, let’s learn the strongest and most reliable candlesticks patterns that enable you to take strong and profitable positions:
Engulfing Candlestick Patterns
Engulfing candlesticks patterns are my most favorite patterns because they are so strong and reliable. Of course, you must learn how they become reliable and strong and what the factors that determine the strength of these patterns are. Spend lots of attention to these candlesticks patterns because they are game changers.
There are two kinds of engulfing candlesticks patterns:
Two candlesticks are involved in an engulfing candlestick pattern. In Bullish Engulfing Candlestick Patterns, the first candlestick is bearish, which means its close price is lower than open price. The second candlestick is bullish, while it goes all the way up and covers (engulfs) all or most parts of the first candlestick.
Bullish Engulfing Candlesticks Patterns
Bullish Engulfing Candlesticks Patterns that form at the bottom of a bear market are reversal signals, and they are known as strong long trade setups if both of the candlesticks that form the pattern are long and strong enough. Therefore, the length of the candlesticks that form this pattern is the most important factor in determining the strength of the pattern.
In the chart below, you can see several Bullish Engulfing Candlesticks Patterns. In one of them, the second candlestick is too long and strong, and so the price really reverses after the pattern and goes up strongly, whereas it was going down before the pattern forms:
Bearish Engulfing Candlesticks Patterns
This pattern forms at the top of a bull market. When it is strong enough, it can reverse the bull market and the price will usually go down after the pattern. This pattern also forms by two candlesticks. However, the first one is bullish and the second one is bearish. The length of the second candlestick is the most important factor of the strength of these candlesticks patterns. The longer the second candlestick and the more it covers (engulfs) the previous candlestick(s), the stronger the reversal power of the pattern. It is the same with both of the bullish and bearish patterns.
How to Trade the Engulfing Candlesticks Patterns
Once an Engulfing Candlesticks Pattern forms, and it is strong enough, you can take a position and set the stop loss several pips above the high or low price of the second candlestick, with Bearish and Bullish Engulfing Patterns respectively.
The strength of the Engulfing Patterns depends on the length of the second candlestick. The longer the second candlestick and the more it engulfs (covers) the previous candlestick(s), the stronger the reversal power of the engulfing patterns:
Dark Cloud Cover
Indeed, Dark Cloud Cover is a kind of Bearish Engulfing Candlestick Pattern. In this pattern, the open price of the second candlestick is higher than the close price of the first one. Additionally, the close price of the second candlestick is a little higher than the open price of the first candlestick. Everything else, including the strength of the pattern and the stop loss level are the same as Bearish Engulfing Pattern:
Piercing Line is a kind of Bullish Engulfing Candlestick Pattern. It is exactly like Dark Cloud Cover, but from the opposite direction. In Piercing Line, the second candlestick opens lower than the close price, and closes below the open price of the first candlestick. Everything else, including the stop loss level and strength of the pattern is like the Bullish Engulfing Pattern:
The patterns I described above are the most reliable candlesticks patterns. They are the strongest when the candlesticks that form these patterns are relatively longer than other candlesticks on the same chart. These are the only candlesticks patterns that I trade. There are some other patterns that I will describe below, while I tell you that they are not that strong and you will have a higher chance to have your stop loss triggered and lose if you trade those patterns:
Harami is very famous among stock traders. Forex traders also know this pattern, but it is not that popular among them because it is not among the strong reversal candlesticks patterns.
Harami means pregnant. The reason is that this candlestick pattern forms by two candlesticks, while the second one is smaller and is placed in a way that looks like a baby, compared to the first candlestick that is much bigger and is known as a pregnant woman.
As a candlestick pattern, Harami also has bullish and bearish forms. The bullish one forms at the bottom of a bear market, while the second candlestick or baby is bullish and the first candlestick or mother is bearish. The bearish form of Harami forms at the top of a bull market while the first candlestick is bullish and the second one is bearish.
Like the other candlesticks patterns, Harami’s strength as a reversal signal or trade setup depends on the size of the two candlesticks. However, as I already explained, Harami is not among the strong candlesticks patterns. I personally don’t consider it to get in the markets. In spite of this, you can know them and wait for more confirmation. In the screenshot below, you can see three Harami patterns that only one of them (marked by a yellow rectangle) that is formed by two big candlesticks has worked and the price has reversed after the pattern:
Inside Day Candlestick
It is a good time to talk about the Inside Day Candlestick pattern which is also known as “Inside Day Candle” among stock traders. This candlestick pattern is famous among stock traders, but Forex traders usually don’t care about it. This candlestick pattern is so similar to Harami. But the difference is that it must specifically form on the daily chart. The Inside Day Candlestick pattern must form by daily candlesticks, and is for traders who trade the daily time-frame and hold their positions for several days or even weeks and months. Therefore, the Inside Day Candlestick pattern is for swing traders, not day traders.
Inside Day Candlestick pattern forms by two daily candlesticks. The first candlestick is bigger than the second, in a way that the second candle is covered by the first one and is inside of the first candlestick’s length. When such a pattern forms at the top of an uptrend or bull market, it will be known as a reversal signal or trade setup. However, stock traders add something more to their charts which is Bollinger Bands with the default settings. The Inside Day Candlestick pattern will be considered as a strong short trade setup, while at least the first candlestick breaks out of the Bollinger Upper Band. Only in this case, stock traders consider the trade setup as a short trade setup. They sell at the close of the second candlestick and place the stop loss several pips above the high price of the first candlestick:
High-Wave candlestick pattern forms by a group of consecutive candlesticks that have long upper shadows. This pattern forms at the top of a bull market. High-Wave is a strong short trade setup when the candlesticks that form this candlesticks pattern have really long upper shadows.
If you want to have more confirmation about the strength of this pattern, you can use Bollinger Bands with the default settings, and if the upper shadows of the candlesticks that form this pattern break out of the Bollinger Upper Band, then the pattern can be known as a strong short trade setup. You can take a short position after the pattern, and set the stop loss several pips above the shadows of the High-Wave candlesticks:
Tweezers candlestick pattern forms with two candlestick that have long upper shadows with the same or almost the same high prices. This pattern forms at the top of a bull market and is a reversal signal. It becomes a strong short trade setup when the upper shadows of the two candlesticks are too long and they break out of the Bollinger Upper Band strongly.
When this candlestick pattern is strong enough, you can take a short position and set the stop loss several pips above the high price of the two candlesticks that have formed Tweezers:
Morning Star, Evening Star and Abandoned Baby
Each of these three candlesticks patterns form by three candlesticks. You can learn about these patterns in the books and courses. However, in the real world and real trading, you cannot see them at all. Maybe they were related to the time that markets haven’t been liquid enough, and so these patterns could form. Not anymore…
Therefore, I cannot show you a screenshot for these candlesticks patterns here because I don’t want to make them with Photoshop, just to have something as an example in this article. I don’t see them on the real markets and real charts at all. So, we skip them because they have no place in the real world and real trading anymore. You won’t see them on the charts, and so you don’t have to care about learning them. The candlesticks patterns I have explained above, and the ones that I have introduced as the most reliable patterns are the ones that you must follow to make money. The rest is nothing but a waste of time. You learn the candlesticks patterns to trade and make money. Therefore, you’d better learn the ones that really make money, not the ones that don’t exist on the charts, or a waste of time and money.