Candlestick analysis: 31 interesting candlestick patterns in the market
Candlestick analysis of the currency market has been popular for over 200 years. Invented by the Japanese, it confirms its effectiveness today and therefore is in demand by traders. Candlestick patterns are a combination of market bars from 1 to 5, which predict the further movement in the market.
How to trade by candlestick analysis?
To trade on patterns - also called candlestick analysis - you don't need anything but a stream of quotes. The market indicators are the bars themselves and their formations. This is especially useful for long term trading on higher timeframes, when you only need to look at the terminal once a day.
Using a candlestick analysis in trade is quite simple - you need to know the pattern itself and the consequences of its appearance - the continuation of the trend or reversal. The trade should be opened after the closing of the last candle of the pattern to avoid a false signal.
Stop-orders levels are placed for each candlestick pattern according to their own rules, but usually for a reversal pattern it will be the lower point of the pattern, for a trend continuation pattern - the highest.
This article will give a list of interesting non-traditional candlestick patterns with brief recommendations for trading. If you want to use them, we recommend delving into the operation and economic sense of each individual pattern.
A description and application of traditional technical analysis models can be found here.
Candlestick analysis in practice right now
There are quite a few different candlestick analysis patterns - modern and quite ancient. We have selected the main patterns that you may encounter in the market. There are quite a lot of them - as many as 31, so this article will be divided into several parts.
One list of candlestick patterns will complement the other, so you can start studying and applying it today, starting with this article. And then you will simply go deeper into the candlestick analysis, supplementing your knowledge with each new publication.
For convenience, we have divided the patterns into trend continuation models, where you want to enter the market in the direction of the general movement, and reversal models, where you want to focus on the correction or change of trend.
In the article, bullish candles are denoted by green colors, and bearish candles by red colors.
Candle of uncertainty in the market
1. Doji (doji)
We would like to start with a doji candle as the most unusual market situation. This is a candle in which the opening price is equal to the closing price. The size of the shadows may vary. As a result, the candle looks like a cross, an inverted cross or a plus sign.
The appearance of doji in the candlestick analysis indicates uncertainty in the market. The bulls and bears seem to be playing tug-of-war.
More on the Dodge: "Dodgy": the complicated qualities of a simple graphic model
Candlestick analysis reversal patterns
2. abandoned baby
A rare reversal pattern of candlestick analysis, where a doji candle is surrounded by two oppositely directed gaps. The doji's shadows must necessarily be lower / higher than the shadows of the neighboring candles.
3. Dark cloud cover
A bearish reversal pattern of candlestick analysis. The first candle is bullish with a large body, the second is bearish with the opening price above the maximum price of the previous candle and the closing price below the middle line of the previous candle's body.
Often this pattern appears at the end of a sharp fast movement on the news, when all the positive is played out.
4. Dragonfly doji (dragonfly doji)
A doji candlestick with a long lower shadow and no upper shadow. This pattern is one of the trend reversal signals. The bulls no longer have the strength to break through the opening level and further growth. The signal is stronger if there was a large rising candle before the doji.
5. Gravestone doji (gravestone tombstone)
Similar to the dragonfly doji, this doji has a very long upper shadow and almost no lower shadow. The signal for an upward trend reversal is especially strong if it was preceded by a downward candle with a massive body.
6. The engulfing pattern
A reversal pattern of candlestick analysis, which can be either bullish or bearish. At uptrend bearish engulfment pattern appears, on the descending one - bullish. The first candle of the model is formed with a small body. The body of the second candle completely overlaps or absorbs the body of the previous one.
Such a situation shows that the strength of the previous trend is completely finished and the trend reversal occurs with strong momentum.
7. Evening star (evening star)
A bearish reversal pattern of candlestick analysis. A bullish candle with a large body appears on an uptrend, then a gap and a second candle with a small body. The third candle closes below the midline of the first candle's body.
Economically, this candlestick analysis pattern is explained by an abrupt change in traders' mood when a general positive movement is interrupted by negative news. For high timeframes Daily, Weekly such behavior may indicate trading in a narrow range in anticipation of an important event, which is predicted to have favorable consequences.
8. Evening doji star
A bearish reversal candlestick pattern consisting of three candles, which is similar to the "Evening Star" pattern. A bullish candle with a large body occurs on an uptrend. The next candle trades within a small range (doji candle). The third candle closes below the midline of the body of the first candle.
The economic rationale for this pattern in the candlestick analysis is similar to the "Evening Star" pattern with a more pronounced neutral market mood.
Candlestick patterns of trend continuation
9. Downside tasuki gap
Trend continuation pattern. First there is a long bearish candle, then a gap, then another bearish candle. The third candle is bullish with the opening price inside the body of the previous bearish candle and the closing price inside the gap (the gap is not completely overlapped).
In this situation, according to the logic of the candlestick analysis, the bulls make an attempt to close the gap, but to no avail, because the market is dominated by the mood to sell. At higher levels, short trades begin to open with more force.
10. Bear model "three methods" (falling three methods)
A pattern of continuation of the downtrend. First there is a long bearish candle, then three candles with a small body, which fully fit into the range of the previous candle. The fifth candle updates the low.
Candlestick analysis requires confirmation
As with any other type of market forecasting, candlestick analysis requires confirmation. Therefore, ForTrader.org experts recommend either using additional indicators in trading or waiting for confirmation of pattern signals.
In the next issue we will look at 10 more interesting candlestick analysis patterns.
This article is featured in the 95th issue of ForTrader.org magazine
I completely agree with Julia! The candlestick analysis and the patters presented in the article can only be used as an additional (confirmation) signal for entry/exit at predetermined levels. Otherwise, you will be disappointed in candlestick analysis and say it does not work. From experience I can say that ALL works in combination and in the right hands! The main thing is to understand where the market is going and WHAT, WHERE, WHEN and WHY you're going to do it.