Even if you're unfamiliar with trading, you've probably encountered candlestick charts. These charts are a standard visual tool for depicting price fluctuations in the stock, forex, and cryptocurrency markets. They offer more than mere snapshots of price positions; seasoned traders interpret recognizable patterns in these charts as indicators of impending market trend changes.
This article will delve into the definition of candlestick patterns, differentiate between bearish and bullish patterns, and provide illustrative examples. It serves as a useful resource for those seeking an introduction to candlestick patterns and contains a piece of advice for those who want to try using patterns in trading routines.
- Candlestick Charts
- What Are Candlestick Patterns?
- How to Read Candlestick Patterns?
- All Candlestick Patterns You Need to Know to Trade
- Bearish and Bullish Candlestick Patterns
- Other Candlestick Patterns
- How to Use Candlestick Patterns in Crypto Trading?
- Final Thoughts
Before we define candlestick patterns, it's crucial to understand the concept of candlestick charts. Although the first recorded use of candlestick charts dates back to the 19th century, similar analytical tools were in use even earlier. Munehisa Homma, a Japanese trader operating in the Ojima Rice market in the late 18th century, employed similar charts, giving rise to the alternative name for candlestick charts, "Japanese candles."
Candlestick charts represent market data across multiple time frames and price bars, aiding traders in analyzing market trends and predicting future prices. Traders often use technical indicators to enhance the accuracy of their market analysis, thereby informing their trading strategies.
Candlestick charts display the open, high, low, and close prices within the specific time frame (typically 24 hours). Their distinctive visual presentation facilitates rapid comprehension of price trajectories during a given period.
Beyond this, traders discern specific patterns in these charts, drawing conclusions about future prices and adjusting their actions accordingly. Subsequent sections will elaborate on these candlestick patterns.
What Are Candlestick Patterns?
Modern traders recognize over 40 primary candlestick patterns, many of which have several variants. Thomas Bukowski, an author and trader, lists 103 such formations that can provide insight into trend direction.
Most patterns have descriptive names and the opposite variation with the same name. For instance, the "three white soldiers" pattern embodies both of these characteristics: its name derives from the resemblance between the pattern and three soldier figures, and it has a bearish counterpart named "three black crows."
If you're unfamiliar with the terms "bullish" and "bearish," now is the time to clarify. Price changes represent the ongoing tug-of-war between buyers (bulls) and sellers (bears). Bulls anticipate rising prices and want to buy, whereas bears expect dropping prices and aim to sell. These terms originated from the ways these animals attack—bears strike downward, and bulls thrust upward. As such, a bearish "three black crows'' pattern signals an impending price drop, while a bullish "three white soldiers" pattern indicates upcoming price growth.
How to Read Candlestick Patterns?
Each candlestick captures the key price movements within a specific time frame via its body and wick (also referred to as shadow or tail). The body—the thick colored portion—represents the open and close prices, while the wicks reflect the asset's highest and lowest values in a given interval.
The color of each candle indicates the price trend during the period. Cryptocurrency exchanges typically use green (price increase) and red (price decrease) candles. However, traditional stock markets employ white (rise) and black (fall) candles. We should keep it in mind because many candlestick patterns have traditional white and black colors in their names (for instance, "three black crows").
When deciphering patterns, look out for those signaling trend reversals. Bearish patterns hint at the onset of a downtrend, while bullish ones suggest an upcoming uptrend. Some patterns, however, indicate market indecision or the continuation of the current trend. If you're uncertain about the pattern at hand or cannot corroborate it with other patterns and indicators, it's wise to allow the market to evolve and see what happens.
All Candlestick Patterns You Need to Know to Trade
The following section introduces the several of the most commonly used bearish and bullish patterns. Remember, the more patterns you recognize, the deeper your understanding of price movements will be. However, avoid relying on a single pattern; always cross-verify signals with technical indicators or other patterns. This approach minimizes potential errors and enriches your knowledge base.
Bearish and Bullish Candlestick Patterns
Evening Star and Morning Star
The Evening Star is a bearish pattern typically occurring at the tail end of an uptrend, signifying an impending trend reversal. It's a trio of candles: the first (left-most) exhibits a small or non-existent wick and is green. The second candle, also green, is characterized by a diminutive body and an elongated wick stretching upwards. This showcases a significant gap between the maximum price and the closing price. The third candle, red in color, appears around the lower mark of the first candle. Upon recognizing this pattern, you might want to wait for an additional red candle to confirm the trend change or utilize indicators such as RSI, Stochastic Oscillator, MACD, etc.
Image source: TradeSanta
On the other hand, the Morning Star represents a bullish pattern that mirrors the Evening Star but with two red candles flanking a green one. The wick of the central candle points downward. The Morning Star typically emerges at the conclusion of a downtrend, signaling an impending price surge.
Bullish and Bearish Engulfing Patterns
The Engulfing pattern, composed of a pair of candles, serves as another set of trend reversal signals. In the bullish version, a small red candle is positioned to the left of a considerably larger green one. Conversely, the bearish engulfing pattern presents a small green candle on the left, juxtaposed with a large red one on the right.
Image source: Elearn Markets
Significantly, the body of the right candle dwarfs the entire left candle, including its wicks — effectively 'engulfing' it.
Three White Soldiers and Three Black Crows
The Three White Soldiers pattern, consisting of three substantial green candlesticks, foretells the upcoming reversal of a downtrend. The second candle opens within the body level of the first and concludes above it, while the third opens within the second candlestick's body level, with its closing level surpassing the second candle's mark. Wicks are typically short, and if elongated, this pattern should not be considered as Three White Soldiers. This pattern is generally reliable and traders often use the Relative Strength Index (RSI) for confirmation.
Image source: Think Markets
The bearish counterpart of this pattern is the Three Black Crows, featuring three descending red candles with short wicks.
Additional popular patterns encompass the Shooting Star, Harami, Hammer, among others.
Other Candlestick Patterns
In addition to bearish and bullish patterns, some patterns indicate market indecision or the continuation of the current trend. These include the spinning top, doji, rising three (during an uptrend), falling three (during a downtrend), and others.
How to Use Candlestick Patterns in Crypto Trading?
Cryptocurrency candlestick charts are similar to traditional ones, with a few distinctions. For instance, crypto exchanges use green and red candles instead of black and white ones. Also, unlike most traditional markets, cryptocurrency exchanges operate 24/7, implying that open and close prices are somewhat formal, as trading is continuous. Most crypto exchanges offer interactive charts that allow for graph scaling and the use of multiple technical indicators to analyze market conditions.
Cryptocurrencies have broadened trading horizons, with newcomers learning much from established stock market trading practices. Candlestick charts and their associated trading strategies are now commonplace in crypto trading. A crypto trading service XGo Plus provides candlestick charts too.
It's crucial to remember that while relying on a single pattern can save time, it might jeopardize your funds if interpreted incorrectly. Always corroborate your observations from a pattern with technical indicators or other patterns before buying or selling an asset.