35 Powerful Candlestick Patterns Guideline ( PDF )
Candlestick patterns form powerful visual representations of price movements in a financial market during a specific timeframe. They are formed by the price action of an asset, such as a stock, currency, crypto, or index. Candle patterns are created by a series of up and down, or bullish and bearish, price movements that occur over a specified time frame. These formations are named after their shape or the behavior they represent. Candlestick patterns can provide valuable insights into forex market sentiment and crypto trend direction, as they indicate the balance of power between buyers and sellers. As such, it is crucial to have a deep knowledge of these patterns to become a successful trader. This PDF course will discuss the 35 most powerful candlestick patterns as the most practical trading tools employed by chartists to analyze charts and schedule their trades successfully.
Candlesticks Pattern Guideline
What are Candlestick Patterns ?
A candlestick in trading is a type of chart used to represent the movement of an asset, such as a stock or currency, over a specific period of time. To explain, other chart types include bar and line representations. Each candlestick provides information about the open, high, low, and close prices for the period it represents. The body of the candlestick represents the price range between the open and close prices, while the “wicks” or “shadows” at the top and bottom of the body represent the highest and lowest prices reached during the period respectively.
Candlestick charts are commonly used by investors to identify patterns and make trading decisions based on price movements. Hence, candlesticks are widely used by traders to analyze price activity over time.
How to read candlestick charts ?
Reading candlestick charts involves analyzing the various components of each candlestick to gain insight into the price movements of an asset over a specific period of time. Here are the steps to read candlestick charts:
- Understand the basic anatomy of a candlestick chart
Candlesticks consist of a body (rectangular shape) and two wicks or shadows (thin lines). The top of the candle’s body denotes its closing price, while the bottom of the same candle’s body denotes its opening price. The wicks or shadows above and below the body represent the high and low prices during the period represented by the candlestick.
- Determine the time frame
Candlestick charts can be set to show different time periods, such as hourly, daily, or weekly periods. The longer the time frame, the more significance the chart has.
- Look for patterns
Candlestick charts are useful in identifying patterns such as trends, reversals, or indecision. Analyze the patterns formed by the candlesticks and pay attention to the size of the body, the length of the wicks or shadows, and the number of candles in a pattern.
- Consider the color of the candlestick
A green or white candlestick generally indicates that the closing price is higher than the opening price, while a red or black candlestick signifies that the closing price is lower than the open price.
By understanding these basics of candlestick charts, traders can make more informed trading decisions based on market trends and movements.
Before starting to discuss all of the 35 candlestick patterns, let us discover their powerful importance among traders.
The Importance of Candlestick Patterns
Candlestick patterns are important tools for traders to analyze markets and make powerful trading decisions. Here are some reasons why:
- Provides information about price movement: Candlestick patterns provide traders with information on the market sentiment for a given asset, including opening and closing prices, highest and lowest prices, and price movements during a specific time period.
- Helps to identify trends and reversals: Candlestick patterns are used to identify trends and potential reversals in the market. By analyzing the patterns formed by the candlesticks, traders can make predictions about the future price movements of a given asset.
- Provides entry and exit points: Based on the candlestick patterns, traders can enter trades at the right time and exit them before the market reverses. Candlestick patterns can also help to set stop-loss orders and profit-taking levels.
- Increases trading efficiency: Candlestick patterns can help traders achieve more efficient trading resulting in better risk management and higher profitability. It allows traders to identify the right trading opportunities quickly and execute trades with precision.
- Popular among traders: Candlestick patterns are widely used among traders because of their simplicity, effectiveness, and reliability. The patterns are easy to read, and traders can easily identify support and resistance levels based on the chart patterns.
Overall, candlestick patterns provide valuable information for traders making them an important tool for analyzing markets and making informed trading decisions. Market participants utilize candlestick patterns to identify bullish and bearish formations and recognize reversal, and continuation (consolidation) shapes.
What is the most powerful candlestick pattern ?
Altogether, there are 35 famous powerful candlestick patterns that appear on charts. These candlestick patterns can take the form of a single candle or a certain combination of two or more candles on the trading graph. The more candlesticks that form the pattern, the more powerful the formation. Traders use candlestick patterns to build powerful trading systems and predict future price moves. Hence, let us explain all of the 35 patterns. Before that, note that these formations are divided into three principal types:
- Bullish (reversal) candlestick patterns
- Bearish (reversal) candlestick patterns
- Continuation candlestick patterns
Types of candlestick patterns
Now, let us discuss each type of candlestick patterns separately considering 35 formations.
Bullish formations
Here is a brief explanation of some of the most common bullish reversal candlestick patterns:
One-candle designs
Hammer:
It is a bullish reversal pattern that forms when the price opens lower, trades higher, then closes near the opening price. It resembles a hammer with a long lower shadow and a short real body.
Inverted Hammer:
Occurs when the price falls significantly lower after opening. But then recovers to close higher. It has a long upper wick, a small real body, and a tiny lower wick.
White Marubozu:
It is a long green candle with no visible wicks. It suggests a strong bullish sentiment, as the price has moved up throughout the session with little to no resistance from sellers.
Two-candle designs
Bullish Harami:
It is a two-candle pattern where the first candle has a long real body, and the second candle is a small green candle that is completely included within the range of the first candlestick.
Tweezer Bottom:
Forms when two candles bottom out at nearly the same price level, creating a support level.
Bullish Engulfing:
It is a two-candle pattern that occurs at the bottom of a downtrend. It starts with a small red candle, then is followed by a larger green candle that engulfs the entire body of the previous red candle.
Piercing Pattern:
It is a two-candle bullish reversal pattern. It forms when a long red candle is followed by a long green candle that opens below the low of the first candle. But closes above its halfway point. The pattern suggests that buying pressure is overtaking selling pressure.
On-Neck Pattern:
It is a two-candle bullish reversal pattern that starts with a long red candle, followed by a small green candle that opens at the low of the previous day’s candle.
Bullish Counterattack:
It is a 2-candle pattern that occurs when a red candle’s real body is completely engulfed by the green candle’s real body. It suggests a strong bullish sentiment, as buyers have completely overpowered sellers.
Three-candle designs
The Morning Star:
It is a three-candle bullish reversal pattern that forms after a downtrend. It starts with a long red candle, followed by a gap down and a small candle where the price doesn’t move much. The third candlestick is a long green candlestick that closes above the midpoint of the first candlestick.
Three White Soldiers:
It is a three-candle bullish reversal pattern that forms after a downtrend. It consists of three long green candles that close higher than the previous day’s close.
Three Inside Up:
It is a three-candle bullish reversal pattern that forms after a downtrend. It starts with a long red candle, followed by a small green candle that is completely engulfed by the third long green candle.
Three Outside Up:
It is a three-candle bullish reversal pattern that forms after a downtrend. It starts with a short red candle, followed by a long green candle that engulfs the previous red candle entirely. The third candle is another long green candle that closes higher than the second candle.
Bearish formations
Here is a straightforward explanation of some of the most familiar bearish reversal counterparty of candlestick patterns discussed in the previous section:
one-candle shapes
Hanging Man:
Is a bullish reversal pattern that can also act as a bearish reversal pattern. It forms when the price is in an uptrend, and the candle has a small real body, a long lower shadow, and little or no upper shadow.
Shooting Star:
Occurs when the price rallies higher after opening, but then sells off to close near the low of the day. It has a long upper wick, a small real body, and a lower wick.
Black Marubozu:
Is a long red candle with no visible wicks. It suggests a strong bearish sentiment, as the price has moved down throughout the session with little to no resistance from buyers.
Two-candle shapes
Bearish Harami:
Is a two-candle pattern where the first candle has a long real body, and the second candle is a small red candle that is completely retained within the range of the first candlestick.
Tweezer Top:
Forms when two candles top out at nearly the same price level, creating a resistance level.
Bearish Engulfing:
Is a two-candle pattern that materializes at the top of an uptrend move. It starts with a small green candle, then is followed by a larger red candle that engulfs the entire body of the previous green candle.
Dark Cloud Cover:
Is a two-candle bearish reversal pattern. It starts with a long green candle, then is followed by a long red candle that opens above the previous day’s high but closes below the midpoint of the previous day’s green candle.
Bearish Counterattack:
Is a 2-candle pattern that occurs when a green candle’s real body is completely engulfed by a red candle’s real body. It suggests a strong bearish sentiment, as sellers have completely overpowered buyers.
Three-candle shapes
The Evening Star:
It starts with a long green candle, followed by a gap up and a small candle where the price doesn’t move much. The third candlestick is a long red candlestick that closes below the midpoint of the first candlestick.
Three Black Crows:
It consists of three long red candles that close lower than the previous day’s close.
Three Inside Down:
It starts with a long green candle, followed by a small red candle that is completely engulfed by the third long red candle.
Three Outside Down:
It starts with a short green candle, followed by a long red candle that engulfs the previous green candle entirely. The third candle is another long red candle that closes lower than the second candle.
Continuation formations:
Now that we have discussed bullish and bearish formations, let us explain briefly some of the continuation candlestick patterns:
one-candle figures
Doji:
This candlestick pattern that occurs when the opening and closing prices are very close or the same. It suggests indecision in the market and may signal a continuation of the current trend or a reversal.
Spinning Top and Bottom:
Those candlestick patterns are characterized by a small real body and long upper and lower shadows. It indicates indecision in the market and may signal a continuation of the current trend or a reversal.
Two-candle figures
Upside Tasuki Gap:
It is a bullish continuation pattern that consists of two candles, typically in an uptrend. The first candle is a long green candle, and the second candle opens higher with a gap and closes within the real body of the first candle.
Downside Tasuki Gap:
It is a bearish continuation pattern that consists of two candles, typically in a downtrend. The first candle is a long red candle, and the second candle opens lower with a gap and closes within the real body of the first candle.
Rising Window:
It is a bullish continuation gap that forms when the low of one candlestick is higher than the high of the previous candlestick. This pattern suggests the continuation of the uptrend move.
Falling Window:
It is a bearish continuation gap that forms when the high of one candlestick is lower than the low of the previous candlestick. It denotes a continuation of the prevailing downtrend.
Three-candle figures
High Wave:
It is a candlestick pattern that occurs when the opening and closing prices are similar but the price movement fluctuates significantly during the period. It indicates uncertainty in the market, and whether it is a continuation or reversal pattern depends on the direction of the trend.
Mat-Hold:
It is a bullish continuation pattern that occurs when a long green candle is followed by smaller red candles that form the real body of the green candle. The pattern indicates that the uptrend may continue. This pattern is a four-candle formation.
Falling Three Methods:
It is a bearish continuation pattern that occurs during a downtrend. It consists of a long red candle followed by multiple small green candles that stay within the range of the red candle, then ends with another long red candle.
Rising Three Methods:
It is a bullish continuation pattern that occurs during an uptrend. It consists of a long green candle followed by multiple small red candles that stay within the range of the green candle, then ends with another long green candle.
How to build a Trading Strategy based on these Patterns ?
A trading strategy based on candlestick patterns involves using candlestick charts to identify potential entry and exit points in the market. Candlestick patterns provide information about market sentiment and price trends, and by using this information, you can make informed trading decisions.
Here’s a simple but effective candlestick pattern trading strategy:
Looking for Candlestick Patterns
Scan the charts for candlestick patterns relevant to your trading style (day trading, swing trading, or scalping). The most popular patterns have been mentioned in my previous answers and. Analyze the patterns and look for confirmation of trend reversals or continuations through other technical indicators or price action.
Determining Entry and Exit Points
Determine your entry and exit points based on the trend and the analysis of the candlestick patterns. You can use a stop-loss order to limit your potential losses, and a take-profit order to lock in your profits.As with any trading strategy, it’s essential to manage the risk. Don’t risk more than 1-2% of your trading account in any single trade, and adjust your position size accordingly.
Remember that no strategy is perfect, and it’s important to backtest your strategy, adjust it to your trading style, and consider other factors like market news and economic indicators. It’s also important to have a disciplined approach, and not let your emotions drive your trading decisions.
Which candlestick pattern is best for scalping ?
Scalping involves making a high volume of trades over a short period, so the best candlestick pattern strategy for scalping focuses on quick price movements and requires a high degree of precision. Here is one of the most popular candlestick patterns and strategies for scalping.
Example
You may look for reversal candlestick patterns like hammer designs for quick trade execution. Considering this XAUUSD (Gold) 1-minute example. Enter a long position after a hammer at the bottom of a downtrend. This bottom is marked by the candlestick pattern below the SMA(5) line. Here you may earn a maximum profit of 141 pips, purchasing at 1854.39 and leaving at 1855.98 dollars. Also, exit the later position and/or enter a short position after a shooting star or a hanging man at the top of an uptrend. This top is marked by the candlestick pattern above the SMA(5) line. Here you may earn a maximum profit of 159 pips, shorting at 1856.10 and leaving at 1854.69 dollars. Hence, this candlestick scalping strategy considers both trading signals and money management based on patterns.
Remember that scalping is a challenging and high-risk trading style, and it requires experience, discipline, and focus. Start with a demo account to practice and test your strategy before moving to a live account. Always use risk management tools like stop-loss orders to avoid excessive losses, and don’t forget to adjust your strategy to the current market conditions.
Which candlestick pattern is most reliable for day trading ?
There are numerous candlestick patterns that can be applied to day trading. However, here is one of the most popular and effective candlestick patterns for day traders.
Example
This pattern strategy occurs when a smallish candlestick is heeded by a more extensive candlestick that totally engulfs the body of the smaller one. This can be an indication of a reversal in price direction. The following EURO, US dollar M30 chart depicts the considered candlestick as a reliable pattern for day trading.
It’s important to note that no trading strategy is foolproof, and it’s always essential to do your research and analysis before making any trades. Additionally, combining these patterns with other technical indicators can help improve their effectiveness as we did in the previous example.
Which candlestick pattern is most reliable for swing trading ?
Swing trading involves holding a position over several days or weeks, so the best candlestick pattern strategy for this type of trading can be slightly different from day trading. Here is one of the most popular candlestick patterns and strategies that are effective for swing trading.
Example
Bullish/Bearish Candles with Long Lower/Upper Shadows can be a very useful candlestick pattern strategy for swing trading. These candles indicate that sellers/buyers are trying to push the price down/up but fail, and buyers/sellers then take control. They suggest a potential reversal. The downer BTCUSD daily chart depicts crypto reverses near long-tailed candles.
As with day trading, it’s important to note that no trading strategy is foolproof, and it’s essential to perform thorough research and analysis before making any trades. Combining these patterns with other technical indicators and fundamental analysis can help improve their effectiveness. Additionally, backtesting is crucial to test their performance over time, and applying risk management rules is important to protect your trading capital.
Do candlestick patterns work in forex ?
Candlestick patterns can be useful tools for forex traders as they provide valuable information about market sentiment and potential market trends. However, they should not be solely relied upon as a trading strategy. It’s important to consider other factors such as technical indicators, economic news, and geopolitical events when making trading decisions. Overall, incorporating candlestick patterns into your analysis can help improve your trading strategy, but it should be done in combination with other analytical tools.
Do candlestick patterns work for crypto ?
Candlestick patterns can also be useful for trading cryptocurrencies as they provide similar information about market sentiment and trends. However, it’s important to note that cryptocurrency markets can be more volatile and unpredictable than traditional markets. This means that technical analysis, including candlestick patterns, should not be the only factor in your decision-making process when trading cryptocurrencies. A combination of technical analysis, fundamental analysis, and an understanding of market trends and news can help improve your trading strategy.
Conclusion
In short, candlestick 35 patterns and PDF strategies are widely used by traders to analyze powerful market movements and make informed trading decisions. These patterns provide important insights into market sentiment and can be combined with various trading strategies for a more complete approach. However, it is important to note that they are not guaranteed to be successful and must be used in combination with other analysis techniques and risk management strategies.