How to use Top Candlestick Patterns To Trade the Markets

The candlestick pattern is an important tool in technical trading. Understanding them allows traders to explain potential market trends and make decisions based on these inferences. There are several types of candlestick patterns that can indicate a bullish or bearish trend. This article will briefly introduce what candlestick patterns are, and introduce the top 10 patterns that all traders need to know in order to easily trade the market.

What are candlestick patterns?

A candlestick is a single bar that represents the changes in the price of a specific asset within a specific time period. The information it displays includes the opening price, highest price, lowest price and closing price of the time period.

candlestick pattern

The candlestick pattern considers one or more candles to help technical traders infer the future trend and price pattern of the underlying asset. These are displayed graphically on the chart and used for market analysis. Our candlestick chart guide is a good place to start learning how to interpret candlesticks for trading.

Candlestick Patterns can be Bullish or Bearish

To identify the most commonly used candlestick patterns and apply them to trading strategies, traders must understand how the steepness of these patterns affects the market direction . The following table summarizes the two main types of price changes that candles can indicate. Many of these patterns appear in our top 10 list below.

Bullish Candlestick Patterns:

Morning star : bullish (reversal)
Bullish engulfing : bullish (reversal)
Doji : bullish/ bearish (Indecision)
Hammer : bullish (reversal)
Bullish Harami : bullish (reversal)
Pierced pattern : bullish (reversal)
Inside Bars : Bullish (Continuation)
Long wick : bullish / bearish (reversal)

Bearish Candlestick Patterns:

Evening star :  bearish (reversal)
Bearish Engulfing : bearish (reversal)
Doji : bearish/bullish (Indecision)
Bearish Harami bearish (reversal)
Dark cloud : bearish (reversal)
Inside Bars : bearish/bullish (Continuation)
Long wick bearish/bullish (reversal)
Shooting Star : bearish

Top 10 Candlestick Patterns Traders Should Know

1 – EVENING STAR AND MORNING STAR

The evening and morning star candlestick patterns appear at the end of an up/down trend, respectively, and often indicate reversal patterns. These names come from the arranged star structure. As you can see in the chart below, the first candle is in the direction of the trend, followed by a small solid bullish or bearish candle. Looking at the third candle from the reversal direction, it is best to close after the midpoint of the first candle. Trading this candlestick pattern will require confirmation candles in the corresponding reversal direction; for example, traders will look for bearish candles. After the evening star.

evening star candlestickmorning star candlestick

2 – BULLISH & BEARISH ENGULFING

A bullish or bearish engulfing candle pattern can indicate a reversal pattern. The bullish engulfing candle pattern shows that the bulls are outperforming the bears. As shown in the figure below, the green body (Bulls) completely covers the first candle (Bears). The bearish engulfing candle pattern is a small green (or bullish) candle followed by a larger red (bearish) candle, which submerges the small green candle.

bullish engulfing candlestickTop 10 Candlestick Patterns To Trade the Markets

3 – DOJI

The Doji candlestick chart pattern is related to the indecision of the underlying asset market. This may mean a possible reversal of the current trend or consolidation.
This pattern may appear at the top of an uptrend, at the bottom of a downtrend, or in the middle of a trend. This candlestick has an very small body centered between a long upper and lower wick.

doji candlestick

4 – HAMMER

The Hammer candle looks like a bullish reversal that usually occurs at the bottom of a downtrend. This candlestick pattern consists of a small body in which the opening price, the highest price, the lowest price and the closing price are approximately equal. There is a longer lower wick under the body of the candle, its length should be more than twice the length of the body of the candle. The body can be bullish or bearish, but bullish is considered more favorable.

hammer candlestick

5 – BULLISH & BEARISH HARAMI

A Bullish or Bearish Harami can indicate a reversal pattern. The word “Harami” means “pregnancy” in Japanese, and the candle pattern is named because it resembles a pregnant woman. As shown in the picture below, the second candle in the pattern must be contained in the body of the first candle. This is true for both bullish and bearish Harami. The downtrend precedes the bullish Harami, and the uptrend precedes the downtrend Harami.

bullish harami candlestickbearish harami candlestick

6 – DARK CLOUD COVER

The dark cloud cover pattern looks like a bearish reversal pattern. This candlestick pattern should appear in an uptrend. As shown in the chart below, the bullish candle is followed by the bearish candle. This bearish candle must confirm certain criteria to verify the dark cloud cover pattern
 
The opening price must be higher than the closing price of the previous day. The closing price should be closed below the midpoint of the previous bullish candle.
 
The dark cloud cover pattern is similar to the bearish engulfing pattern. The difference between the two is related to the second candle. The bearish engulfing pattern causes the opening price of the second candle to be higher than the closing price of the first candle, while the opening price of the dark cloud cover is higher than the high of the first candle, and the closing price is lower than in the body of the first candle point.

dark cloud cover candlestick

7 – PIERCING PATTERN

A piercing pattern is regarded as a bullish candle reversal pattern, which appears at the end of a downtrend or during a pullback in an uptrend, or at a support level. There are two components to forming a piercing pattern:
 
1. Bearish candle
2. Bullish candle:
 
When the bullish (second) candle closes above the middle of the bearish (first) candle in the market and is in a downward trend.
The open price of the second candle must gap down at market open and follow by closing above the mid-point of the previous candle as indicated below.
Both the piercing pattern and the dark cloud cover have similar characteristics. The difference is that the perforation line is the bullish reversal pattern mentioned above, while the dark cloud cover is a bearish reversal pattern.

piercing pattern

8 – INSIDE BARS

Inside Bar patterns are used in trending markets, where the height of the inside line is within the parameters of the previous candlestick or “bus bar”.
Inside bars are trading in the trend direction. If the market is in a downward trend, traders will seek to continue with a short position in the presence of inside bar. The same principle applies to upward trends. Trades in the direction of the trend are not always given, as key support/resistance levels may indicate a reversal. Traditionally, the entry point of the trader is located above or below the high or low of the parent column, depending on the direction of the trade.
The inside line is also similar to the bullish or bearish harami candlestick pattern. The main difference is that when using inside bar, highs and lows are considered, while the body is ignored.

inside bar candlestick

9 – LONG WICKS

Long Wicks candlestick patterns usually indicate a trend reversal. When the price was tested and then rejected, Long Wicks appeared. The wick indicates the price of rejection. Identifying trends is important to explain the importance of long wicks. Identifying key levels and price action is often used in conjunction with the long wick pattern.

long wicks candlestick

10 – SHOOTING STAR

Shooting Star is a bearish candle with a long upper wick, little or no lower wick, and a small body near the low point of the day. It appears after an uptrend and may indicate a reversal of the downtrend. The distance between the high point of the candle and the opening price should be more than twice that of the Shooting Star’s body. The distance between the lowest price of the day and the closing price must be very small or nonexistent.

shooting star candlestick