If you want to be successful at price chart analysis, then you need to learn how to read candlestick charts. Sure, you may still be stuck with the old line chart. But the candlesticks are more easy on the eyes. They make it easier to make trading decisions and the information is a lot more clear cut.
So you there is no way you can memorize all 103 candlesticks patterns News flash! You don’t need to learn all of them! That’d be totally insane. But you do need to know ten of these candlestick patterns.
Doji
As you can see the Doji shaped like a cross with similar opening and closing prices.
What’s Going on Here?
Price remains the same. It also represents market indecision on the part of the buyers and sellers.
How Do I Trade Doji?
Two ways. First you can trade the doji like a reverse signal. Second, you can trade it as an uptrend signal. But make sure the trends are evident before you trade the doji.. Let’s watch below how the doji trade plays out.
Marabozu
The Marabozu pattern is the complete opposite of a doji. It’s a visual block whose opening and closing prices are at opposite ends of the candlestick.
What’s Happening Here?
A higher closing price(green candlestick) suggests strong bullish strength, while a lower closing price(red candlestick) suggests a bearish pattern.
How Do I Trade Marabuzu?
Look out for the following:
1.Continuation a in a break out
- Partial candlestick pattern.
See how the Marabuzu trade plays out below
Harami
The harami is a mother and child situation. The first candlestick is the mother and the second candlestick is the child. The body of the baby bar is usually within the body of the bar.
If it’s not obvious to you by now, bullish candlesticks like the harami are colored green or white. The bearish harami the first bar, closes lower than it opens, while the bullish harami(second)closes higher..
What’s Going on Here?
The market has created a weak reversal. The bigger candle stands for the actual price while the small candle reflects reduced volatility. It also explains why harami patterns are also termed inside bars.
How Do I Trade Harami?
In a bullish trend, the harami signifies the end of the bearish retracement. Then the bulls take over…When this scenario takes shape, you enter your buy trade. While in a bearish trend, the harami signifies end of bullish retracement with the bears taken over. In such a scenario, you enter your buy trade.
The chart below explains this point nicely.
Engulfing Candle
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The engulfing candle is the horizontal opposite of a harami. An engulfing candle forms when the body of the second candle overshadows the first candle.
What’s Going on Here?
a reversal is taking place. When you see the second body engulfing the first body, that suggests a strong reversal signal.
How Do I Trade Engulfing Candle?
Place a trade to buy when you see a straight bullish continuation. On the opposite side, place a trade to sell when you see a straight bearish continuation.
Here is an illustration below of the Engulfing candle trade
Piercing Line and Dark Cloud
The piercing line and dark cloud represent the bullish and bearish and bearish variants of the two bar pattern. The first candlestick of the Piercing is bearish(Red on most charts) . The white candlestick(green most charts) on the other hand, opens below the low of the first candle. It then closes above the mid-point of the first candlestick.
What’s Going on Here??
The second bar of the piercing line pattern created the impression that a bearish pattern. is about to happen.Unfortunately the bearish pattern fails to come off, causing all the gains from the bearish pattern were wiped away. Eventually the bulls(green bar) take over. This creates the opportunity to enter a buy trade.
The same situation replicates in the Dark Cloud Pattern. The first gap triggered hopes of a bullish offensive. Unfortunately the lower close doused such hopes So the bears(red candlestick).
How Do I Trade Piercing Line / Dark Cloud?
With the Piercing Line, look for bullish reversals only after the break of a bearish trend line. IF you want to trade the Dark Cloud Cover, only trade spot bearish reversals after a bullish trend line has been broken.
Let’s see an example of Piercing Line/ Dark Cloud Cover in action below.
Hammer/Hanging Man Pattern
People have been wondering whether the Hammer/Hanging man are two different entities..Well, as you can clearly see from this graphic, they’re one and the same-regardless of color.They both have a body near the top of the candlestick, and a long lower shadow. The difference is that the Hammer acts as a bullish signal after the market declines. While the Hanging man bearish signal found at the end of a bullish pattern.
What’s Going On Here?
The Hammer pattern tends to set up sellers who buy in the lower region of the bullish candle., forcing them to run for cover. This creates buying opportunities for traders. If you’re to look for a bar equivalent look no further than the pin bar pattern.
The Hanging man is a bullish candlestick topping an upward trend.Just like the bearish Hanging man, it upward posture draws traders to buy with gusto. But when the market falls, it knocks traders out of their long positions. That is why it pays to wait for bearish confirmation before going short on the Hang Man pattern.
How Do I Trade Hammer/Hanging Man?
When faced with a downtrend, buy above the Hammer pattern in case in case of a reversal. Keep in mind that you can also trade the hammer pattern like a bullish pin bar. But when faced with an uptrend, sell below the hanging man after the bears confirm.
Watch the Hanging Man in action below.
Inverted Hammer/Shooting Star
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Just like the Hammer /Hanging Man Pattern, the Inverted Hammer/Shooting System are one of the same. The difference being that an Inverted Hammer is found a the end of a downtrend, while the Shooting Star is found at the end of an uptrend.
What’s Happening Here?
The Inverted Hammer is a bullish pattern. And in a downtrend, the bears try to bully the sellers to sell. Unfortunately, when the sellers fail push the market down, the bulls react with a bang.
The bearish Shooting Star sets up traps for buyers. The Shooting Star tricks traders who buy in its higher range.Hence, they’re forced to sell off their long positions.
How Do I Trade Inverted Hammer/Shooting Star?
If you spot a downtrend, buy above the Inverted Hammer pattern after bullish confirmation.Similarly, if you spot an uptrend, sell above the Shooting Star for a possible reversal.
Below is the Inverted Hammer trade in action.
Morning Star/Evening Star
The Morning Star/Evening Star are described as three bar patterns. They both have small bodied stars that do not interfere with the preceding candlesticks. This non-interference stance by both pattern’s small bodies create a gap between the candlesticks. No wonder the Morning Star and Evening Star Patterns are rarely seen in daily charts.
Let’s take the a look at the makeup of both Morning Star and Evening Star. Starting with:
Morning Star
- A long bearish(red) candlestick
- A star below the candlestick(bullish or bearish)
- A bullish(green) candlestick closing within the body of the bearish candlestick.
Now we move on to:
Evening Star
- A long bullish(green) candlestick.
- A star above the bullish candlestick
- A bearish candlestick closing within the body of the bullish candlestick.
The closest pattern to the Evening Star is the three bar reversal.
What’s Going on Here?
The first candlesticks of both patterns establish some kind of dominance only to wilt in the latter stages. First the bears come out strong in the Morning Star pattern. Then the little star drops a hint of a takeover by the Bulls. Eventually, the brute force of the bulls is a bit too much for the bears.
A similar scenario is evident in the Evening Star pattern. The bulls establish a foothold through he green candlestick. The little star drops little hints of a bearish takeover, until the bears eventually take over the show.
How Do I trade Morning Star/Evening Star?
Use both patterns to spot reversals and continuations
- If you want to buy, enter your buy order above the last bar of the Morning Star formation
- If you plan on cashing in, enter your sell order above the last bar of the Evening Star formation.
Let’s see the two formations at work below:
Three White Soldiers/Three Black Crows
No, Three White Soldiers/Three Black Crows are not rock bands. As you can see above, they’re candlestick patterns just like the other candlestick patterns we discussed earlier. With The Three White soldiers, each of the candles opens tucked within the previous candle.They all eventually close on a high.
The same logic is evident with the Three Black Crows pattern. Each candlestick is tucked within the previous candlestick. Except that instead of finishing on a high, they rather finish on a low.
What’s Going On Here?
In the White Horses pattern, there seems to be a cat and mouse game going on here. All three candlesticks open with the impression of an imminent bear takeover. But they close on a strong high. Eventually the brute force of the bulls is too much for the bears.
A similar cat and mouse game is going on in the The Black Crows pattern.The Black Crows putting on a bullish façade. However, the the bullishness turns bearish as each bar closes on a low.
How Do I Trade Three White Soldiers/Black Crows
You trade these two patterns as reversals
- Place your buy order above the three White Horses when the market declines
- Place your sell order below the Black Crows when the market rises.
Let’s take a look Black Crow/White Horse trade illustration
The Hikake may be Japanese, but a classic candlestick pattern it’s not. Why? Because it lays traps for traders.If you’re looking for a Hikake pattern, look out for the inside bar.
A bullish Hikake usually features a lower low and a lower higher. This tells us of an imminent bearish breakout of the inside bar. However, when the bearish breakout fails, a long Hikake unfolds.
What’s Going On Here?
When the break out breaks down, the price soars in the opposite direction
How Do I trade Hikake?
- Place a buy order if the downtrend break out of an inside bar fails within three bars
- Place a sell order if the uptrend breakout of an inside bar breaks down within three bars
Here is the Hikake in action?
Well, that’s a wrap for “Know Ten Of These Candlestick Patterns” Candlestick patterns are an absolute must know in order to be successful with price action analysis. You don’t need to know all 100 plus candlesticks. But you need to know these 10 candlestick patterns like the back of your hand.
Til next time take care.
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