Most Important Single Candlestick Patterns To Understand

Candlestick charts are becoming more and more popular with technology-based traders and investors. These charts make it easy to evaluate the four main levels in the formation of each candlestick. This includes the opening price, the highest price, the lowest price, and the closing price. In addition, a single candle or a combination of candles can form patterns that can help traders better understand potential price dynamics. In this discussion, we will focus on four important patterns that form a unique candlestick structure.

Single Candlestick Patterns

The candlestick chart is a price charting technique that was originally developed in the East, especially in Japan, hundreds of years ago. In the Western world, traders and investors use a similar charting technique called a bar chart. But unlike bar charts, candlestick charts tend to be more visually appealing and easier to read. In a candlestick chart, each individual pattern is called a candle. These candles can form certain patterns and provide information about future price movements.
 
Generally, the candlestick pattern can be formed as a single candle, a two-candle structure, or a three-candle structure. Our focus here will be on some of the more important single candlestick patterns that appear in the price series. There are three main types of candlestick patterns, depending on their participation. In other words, when the overall structure represents the continuation of existing price movements, the candlestick pattern can be classified as a continuation pattern. On the other hand, candlestick patterns that may be contrary to existing price movements can be classified as reversal patterns.
 
Finally, there is a type of candlestick pattern that is considered a neutral pattern, which means that the pattern itself may be important, but the meaning of the pattern cannot be reasonably understood until a certain point in time. We will discuss in detail the patterns including the hammer candlestick and the meteor candlestick. The only continuous single sail formation we will see is the Marubozu sail formation. Finally, there is the Doji pattern, which is essentially a neutral candlestick pattern.
 
Although these are not all single candle patterns that appear on the market, they are the most important candle patterns that every price action trader should study and understand. One important thing to remember when incorporating individual candlestick patterns into a trading strategy is that you should always use them in conjunction with some other technical research to ensure the most likely outcome of the transaction.
 
For example, you can combine various individual candlestick patterns with support and resistance levels, moving averages, and Bollinger bands. The key is that you should look for the confluence of one or more technical signals with these candlestick patterns.

Hammer Candlestick Pattern

The Hammer candlestick pattern is one of the most powerful patterns in the entire candlestick pattern series. It is a single candle reversal pattern that usually occurs at the end of downtrend market conditions. In addition, it can often be seen at the end of the correction phase in a larger uptrend.

Below you can see a picture of the Hammer candlestick pattern:

hammer-candlestick-pattern

The hammer structure has several key attributes. First, the lower shadow of the hammer line is relatively long, and the upper shadow is small or not. In addition, compared with the entire structure of the candle, the main body of the hammer candle is relatively small. Finally, the hammer candle must be closed within the upper third of the entire structure. As can be seen from the above figure, all these attributes clearly exist.
 
The hammer candlestick pattern conveys a lot of information about the dynamics behind the current price action. The long lower shadow or wick inside this candle indicates that the seller tried to push the price lower, but failed because the bulls finally controlled the market during the candle formation period. This is evident from the closure in the upper third of the hammer frame.
 
Some merchants prefer Hammer’s candlestick as a bullish rejection bar or a bar of bullish pastors. Either way, the implication is the same. That is, that, at the end of the formation of Hammer chandeliers, prices should begin to move higher. There are several techniques to negotiate the Hammer candelabra. One of the most common entry techniques is to wait for a break over the sail and immediately enter a long position at that event. Alternatively, some merchants prefer to expect a lower kick after the end of the hammer sail to enter a long position, thus performing a better point of entry.
 
This is also a good entry technique, because, after the completion of hammer formation, prices will often go back a part of its structure before resuming on the rise. A typical setback input would require a setback of 38% or 50% of the hammer sail before entering the long position.

The below example shows the two entry techniques that we’ve discussed for the hammer pattern.

Hammer-candle-setup

The above chart shows market conditions in a downtrend, which eventually led to the formation of a hammer candle near the bottom of the price range. The hammer candle is surrounded by yellow. Note the longer lower wick inside the candle structure. In addition, you will notice that the main body of the hammer candle is relatively small, and the upper wick is also relatively small. Most importantly, we can see that the candle is closing within the upper third of the price range. Satisfying all these conditions, and knowing that the structure occurred in the context of falling prices, we can be quite confident that the structure is indeed an effective hammer candle pattern.
 
Let us now return to these two entry techniques. The first entry technique needs to break through the high point of the hammer chart as a signal to go long. The signal appears on the candle immediately after the hammer candle is completed. Although it is a bit difficult to see on the price chart, the next candle moves above the high of the hammer candle, so it will use this entry technique to trigger a long trade. Now, if we use the 50% retracement entry technique, this will also trigger on the same bar after the hammer candle is completed. Note how this candle moves below the midpoint of the hammer candle before it rises again.
 
Therefore, if we place a limit order at the 50% retracement level, we will be able to use the second entry technique to enter a long position. Both entry techniques will allow us to trade long, but please note how the second entry technique provides us with better entry points. Therefore, we can use the retracement entry method to create a better risk-reward profile.

Shooting Star Candlestick Pattern

The Shooting Star candlestick is the inverse form of the hammer candlestick and this is also an important formation. Shooting Star is a reversible single candle pattern that usually appears at the end of an uptrend market environment. In addition, Shooting Star also appears at the end of the correction phase in a larger downtrend. You can find a description of the shooting star candle pattern below.

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shooting-star-candlestick

As we can see from the image above, the Shooting Star candle pattern is an inverted version of the hammer candle pattern. However, although the hammer candle pattern occurs against a bearish price background, the Shooting Star candle pattern occurs against a bullish price background. Please note that the upper wick of the Shooting Star candle is relatively long, while the lower wick is small or not. . Relative to the overall structure, the main body of the Shooting Star candle will be very small. One of the most important criteria is that the Shooting Star shuts down within the lower third of its entire structure. If all these characteristics are confirmed and the price rises, we can categorize the structure as a Shooting Star formation.
 
The long wick inside the candle indicates that the buyers tried to increase the price but ultimately failed to do so because the shorts entering the market overwhelmed the longs. We know this because the closure of the Shooting Star formation occurs at or below the lower third of its structure. Some traditional technical analysts refer to the Shooting Star pattern as a bearish rejection bar or a bearish pin bar. However, once the Shooting Star formation is complete, the price will move lower.
 
The general technique of trading Shooting Star patterns is similar to that of the hammer candlestick but in the opposite direction. This means that the most common entry technique requires a breakthrough the low of the candle line to enter a short position. And the retracement entry will require a higher retracement at the level of 38-50% to complete the formation of Shooting Stars. Shooting Star patterns can provide reliable short-selling opportunities because many markets tend to fall faster than they rise. Therefore, trading when the right conditions exist can be a very profitable model.

Marubozu Candle Pattern

The Marubozu candlestick pattern is a single candle pattern and is reckoned a continuation pattern. Marubozu candles can be produced in any type of market environment. This includes bullish markets, downtrend markets, or market conditions with no direction and limited scope (range-bound).

Below you can see a picture of the Marubozu candlestick pattern.

Marubozu-candle

Here, we show the bullish change of the Marubozu candle and the bearish change of the red Marubozu candle in green. In essence, the bullish Marubozu candle opens at or near the lower end of the model and closes at or near the upper end of the structure. Marubozu bearish candles open at or near the upper end of the frame and close at or near the lower end of the frame. There is almost no shadow at the ends of the bullish or bearish varieties of the Marubozu pattern. In addition to this, the most likely Marubozu patterns tend to be relatively large compared to recent price movements.
 
So what does Marubozu’s single candle continuation pattern tell us about the underlying psychology of the market? Well, Marubozu’s bullish pattern shows that the market is showing bullish momentum and that market demand is much higher than supply. Therefore, this means that prices should continue to rise, and Marubozu’s bearish pattern indicates that the market is showing bearish momentum and that supply is much higher than demand.
 
Therefore, it is expected that the price will continue to fall, so in the case of a bullish Marubozu, the price movement after the Marubozu candle will usually continue to develop in a bullish direction, and in the case of a bullish Marubozu, it will continue to develop in a bearish direction. The best Marubozu candle model, however, tends to appear in alignment with the overall trend.
 
In other words, the bullish Marubozu pattern that occurs in the rising price range is more important than the one that occurs in the falling price range. Similarly, when the bearish Marubozu pattern occurs in the context of falling prices, it is more important than what happens in the context of rising prices.
 
The Marubozu formation is particularly important when it appears as a sign of a breakout. An example is when a bullish Marubozu appears as a breakout candle for the main resistance level or a bearish Marubozu appears as a breakout candle for the main support level. Most traders who rely on the Marubozu pattern will usually issue a market order to buy when they complete a bullish Marubozu, or a market order to sell when they complete a bearish Marubozu.

Doji Candlestick Pattern

Doji candlestick patterns often appear on price charts. Therefore, traders must selectively distinguish between the Doji patterns that are worth trading and the Doji patterns that are not necessarily so important. Experience will play an important role in identifying the most likely Doji pattern on the price chart. A special case in which the formation of a Doji is important is that it continuously forms after the price rises or falls.

Below you can see a picture of the Doji candlestick pattern

doji-candlestick-pattern

The Doji candlestick is a relatively small structure, which appears to have a small body and a shadow with relatively equal lengths on both sides. These shadows are usually longer than the body of the candle. Doji candles can close up or close at exactly the same price, so the actual closing price is not important in this pattern. But the most important consideration is that the price closes at or near the center of the entire candle. Please note how all these criteria are met in our illustrations.
 
The price dynamics within the Doji candles indicate that the market is going through a phase of indecision. This period of indecision can be seen as price rises and falls, but close to the candle’s opening price. Therefore, both bulls and bears are out of control during the formation of this candle. On the contrary, the market seems ambivalent about where the next price range might go.
 
Many times, before a scheduled major news event or economic report, a Doji candle or a group of Doji candles will be formed. Therefore, just before this event, the market seems to be looking forward to what the news will bring. After the news is released, traders will start a long or short position. At this time, the price movement will eventually break through the high point of the Doji candle, indicating that the price will rise, or break through the low point of the Doji candle, indicating that the price will fall.

Summary

We discuss the main single candlestick patterns that often appear on price charts. These patterns can occur in all time periods, but when they appear in relatively high time periods (such as four-hour charts, daily charts, and weekly charts), they tend to be more predictive. As we mentioned above, these candlestick patterns should not be used alone. Instead, they should be associated with some other technical analysis methods, such as support and resistance levels, Fibonacci levels, or moving averages.