The Big Guide to Candlestick Patterns

 

Japanese candlestick patterns originated from a Japanese rice trader called Munehisa Homma during the 1700s. Homma is rumoured to have made the equivalent of $10 billion in today's dollar, trading in the Japanese rice markets. In fact, he was such a skilled trader that he served as an important financial advisor to the Japanese government at the time and was later raised to the rank of honorary Samurai. Almost 300 years later this was introduced to the western world by the “Father of modern candlestick charting” Steve Nison, in his book called, Japanese Candlestick Charting Techniques.

Since his book (1991) the original ideas have been modified which now result in the candlestick patterns you use and see today. There are a number of different Japanese Charting Patterns such as Renko, Bar, Line, Heikin, Ashi, Point & Figure. But by the far the easiest and most popular are Candlestick patterns or simply “Candles”. This is because they are so simple to learn and read.

 

The guide below will walk you through the various different types of Candlestick patterns be it Bullish, Bearish, Indecisive, Continuation and give example of set ups. It is also important to note that these patterns can work on any time frame from Daily to 1min. When used in conjunction with other indicators or Bollinger Bands they can be a very useful tool in determining trading set ups.

Reading a Japanese candlestick chart

Each candle has 4 data points.

Open – The opening price.

High – The highest price over a fixed time period.

Low – The lowest price over a fixed time period.

Close – The closing price.

The below diagram illustrates this. 

Bullish reversal candlestick patterns

Bullish reversal candlestick patterns signify that buyers are momentarily in control.

This doesn't mean you should go "long" immediately when you spot such a pattern, because it may not necessarily offer you an immediate “edge” in the market. If you see this candlestick pattern in conjunction with other patterns or tools such as Bollinger Bands, Inchimoku Lines, Moving Averages then there is a possibility you can find a high probability trading setup.

 

There are 6 basic Bullish reversal candlestick patterns you should be aware of:

  • Hammer

  • Bullish Engulfing Pattern

  • Piercing Pattern

  • Tweezer Bottom

  • Morning Star

  • Bullish Harami

Hammer

A Hammer is a (1-candle) Bullish reversal pattern that forms after a decline in price.

Hammers are recognizable by the following components:

  • Little to no upper shadow.

  • The price closes in the top ¼ of the range.

  • The lower shadow is about 2 or 3 times the length of the body.                                                                                                

How do you interpret this formation?

  1. When the market opened, the sellers took control and pushed the price lower.

  2. At the selling climax, huge buying pressure stepped in and pushed the price higher.

  3. The buying pressure is so strong that it closed above the opening price.                                                                       

In short, a Hammer is a Bullish reversal candlestick pattern that shows rejection of lower prices.

Bullish Engulfing Pattern

A Bullish Engulfing pattern is a (2-candle) Bullish reversal candlestick pattern that forms after a decline in price.

Bullish Engulfing patterns are recognizable by the following components:     

                                                        

  • The first candle has a Bearish close.

  • The body of the second candle completely “engulfs” the body of the first candle (without taking into consideration the shadow).

  • The second candle closes Bullish.                                                                                                                            

How do you interpret this formation?

  1. On the first candle, the sellers are in control as they closed lower for the timeframe.

  2. On the second candle, strong buying pressure stepped in and it closed above the previous candle’s high — which tells you the buyers are in control for the timeframe.

Essentially a Bullish Engulfing pattern tells you the buyers have overwhelmed the sellers and are now in control.

Piercing Pattern

A Piercing Pattern is a (2-candle) reversal candlestick pattern that forms after a decline in price.

Unlike the Bullish Engulfing pattern which closes above the previous open, the Piercing pattern closes within the body of the previous candle.Thus, in terms of strength, the Piercing pattern isn’t as strong as the Bullish Engulfing pattern.

Piercing patterns are recognizable by the following components:

  • The first candle has a Bearish close.

  • The body of the second candle closes beyond the halfway mark of the first candle.

  • The second candle closes Bullish.                                                                                                                           

How do you interpret this formation?

  1. On the first candle, the sellers are in control as they closed lower for the period.

  2. On the second candle, buying pressure stepped in and it closed bullishly (more than 50% of the previous body) – This tells you there is buying pressure momentarily.

Tweezer Bottom Pattern

A Tweezer Bottom is a (2-candle) reversal candlestick pattern that occurs after a decline in price.

A Tweezer Bottom Patterns is recognizable by the following components:

  • The first candle shows rejection of lower prices.

  • The second candle re-tests the low of the previous candle and closes higher.

 

How do you interpret this formation?

  1. On the first candle, the sellers pushed the price lower and met with buying pressure.

  2. On the second candle, the sellers again tried to push the price lower but failed and were finally overwhelmed by strong buying pressure.                                                                                                                      

A Tweezer Bottom tells you the market has had difficulty trading lower after two attempts and it is probable that it will head higher.

.

Morning Star Pattern

A Morning Star is a (3-candle) Bullish reversal candlestick pattern that forms after a decline in price.

A Morning Star Pattern is recognizable by the following components:

  • The first candle has a Bearish close.

  • The second candle has a small range (Doji).

  • The third candle closes aggressively higher (more than 50% of the first candle).                                                  

How do you interpret this formation?                                                                                                                           

  1. As the first candle shows, the sellers are in control as the price closes lower.

  2. On the second candle, there is indecision in the markets as both the selling and buying pressure are in equilibrium (possible Doji).

  3. On the third candle, the buyers gained control and the price closes higher.                                                      

A Morning Star patten tells you the sellers are exhausted and the buyers are momentarily in control.

Bullish Harami

A Bullish Harami is a (2-candle) Bullish reversal candlestick pattern that forms after a decline in price.

A Bullish Harami Pattern is recognizable by the following components:

  • The first candle is Bearish and larger than the second candle and is a continuation of a trend.

  • The second candle has a small body and range and can be Bullish. This can be called an inside candle.                                                                                                                                                                                  

How do you interpret this formation?                                                                                                                           

  1. On the first candle, it shows strong buying pressure as the candle closes Bearish.

  2. On the second candle, it shows indecision as both buying and selling pressure is similar (likely because of traders taking profits and new traders entering long positions)

  3. Note that this can also be used as a continuation pattern.

Trading high probability Bullish reversal setups

Now, we have established the different types of Bullish reversal candlestick patterns. The next step is to teach yourself how to identify high probability trading setups and trade them.

As previously stated, trading candlestick patterns in isolation is not the “be all and end all”. It’s not that simple. If the setup is showing other characteristics such as Bollinger Band support, Trend Line support or other market indicators (i.e. there are a number of “signs” that tell you a reversal may happen) then typically the suggestions below are how to trade a Bullish reversal set up.

  1. If the market is trending higher, then wait for a pullback towards support and enter the trade.

  2. If the price pulls back towards support, then wait for a Bullish reversal candlestick pattern and enter the trade.

  3. If there’s a Bullish reversal candlestick pattern, then make sure the size of it is larger than the earlier candles (signalling strong support).

  4. If any of the above happen around other significant market indicators this would suggest short term support in the market.

Hammer

The adjacent chart is the Daily Dow mini chart. You can see the Hammer clearly followed by 8 green candles.

 

Note the purple lines - these are the Bollinger Bands. The Hammer candle actually pierces the 3rd Standard deviation band and hits exactly to the Trend Line prompting immediate buying and showing support to the market. The market over the next 8 days became very Bullish. The Hammer clearly signifies support and a Bullish reversal.

.

Morning Star

The adjacent chart is a good example - it’s a 1hr Dow mini chart. You can see the Morning Star followed by a Hammer candle and then 5 green candles.

Note Bollinger Bands again. The first red candle pierces the 3rd Standard deviation band, then a Doji candle, then the 3rd candle hits the 3rd Standard deviation band again -  finds support and creates a Morning Star. Then the market over over the next 7 hours turns very Bullish.

Bullish Engulfing

The adjacent example is a very clear Bullish Engulfing pattern. Again, it’s the 1hr Dow chart.

After the Bullish Engulfing candle, the market goes on a rip.  Note again the Bollinger Band. This time it's the middle band intersecting with the Trend Line providing support to the market.

Bearish reversal candlestick patterns

Bearish reversal candlestick patterns signify that sellers are momentarily in control.

However as previously stated, it doesn’t mean you should go "short immediately" when you spot such a pattern because it doesn’t offer you an “immediate edge” in the market.

Instead, you want to combine candlestick patterns with other tools so you can find a high probability trading setup.

There are 6 basic Bearish reversal candlestick patterns you should be aware of: 

  • Shooting Star

  • Bearish Engulfing Pattern

  • Dark Cloud Cover

  • Tweezer Top

  • Evening Star

  • Bearish Harami

Shooting Star

A Shooting Star is a (1- candle) Bearish reversal pattern that forms after an advance in price.

Shooting Stars are recognizable by the following components:

  • Little to no lower shadow.

  • The price closes in the bottom ¼ of the range.

  • The upper shadow is about 2 or 3 times the length of the body.                                                                          

How do you interpret this formation?

  1. When the market opened, the buyers took control and pushed the price higher.

  2. At the buying climax, huge selling pressure stepped in and pushed the price lower.

  3. The selling pressure is so strong that it closed below the opening price.                                                            

In short, a Shooting Star is a Bearish reversal candlestick pattern that shows rejection of higher prices.

Bearish Engulfing

A Bearish Engulfing pattern is a (2-candle) Bearish reversal candlestick pattern that forms after an advance in price.

Bearish Engulfing patterns are recognizable by the following components:

  • The first candle has a Bullish close.

  • The body of the second candle completely “engulfs” the body of the first candle (without taking into consideration the shadow).

  • The second candle closes Bearish.                                                                                                                      

How do you interpret this formation?

  1. On the first candle, the buyers are in control as they closed higher for the period.

  2. On the second candle, strong selling pressure stepped in and it closed below the previous candle’s low — which tells you the sellers are in control for the timeframe.                                                                                  

Essentially, a Bearish Engulfing pattern tells you the sellers have overwhelmed the buyers and are now in control.

Dark Cloud Cover

A Dark Cloud Cover is a (2-candle) Bearish reversal candlestick pattern that forms after an advance in price.

Unlike the Bearish Engulfing pattern which closes below the previous open, the Dark Cloud Cover closes within the body of the previous candle.Thus, in terms of strength, the Dark Cloud Cover isn’t as strong as the Bearish Engulfing pattern.

Dark Cloud Cover patterns are recognizable by the following components:

  • The first candle has a Bullish close.

  • The body of the second candle closes below the halfway mark of the first candle.

  • The second candle closes Bearish.                                                                                                                                                                   

How do you interpret this formation?                                                                                                                                        

  1. On the first candle, the buyers are in control as they closed higher for the period.

  2. On the second candle, selling pressure stepped in and it closed Bearishly (greater than 50% of the previous candle's body) — This tells you there is selling pressure momentarily.

Tweezer Top

A Tweezer Top is a (2-candle) Bearish reversal candlestick pattern that occurs after an advance in price.

A Tweezer Top pattern is recognizable by the following components:

  • The first candle shows a rejection of higher prices.

  • The second candle re-tests the high of the previous candle and closes lower.                                                   

How do you interpret this formation?

  1. On the first candle, the buyers pushed the price higher and were met with selling pressure.

  2. On the second candle, the buyers again tried to push the price higher but failed and were finally overwhelmed by strong selling pressure.                                                                                                                                    

A Tweezer Top tells you the market has had difficulty trading higher after two attempts and it is probable that it will head lower.

Evening Star

An Evening Star is a (3-candle) Bearish reversal candlestick pattern that forms after an advance in price. 

An Evening Star pattern is recognizable by the following components:

  • The first candle has a Bullish close.

  • The second candle has a small range (Doji).

  • The third candle closes aggressively lower (greater than 50% lower of the first candle's body).                                                

How do you interpret this formation?                                                                                                                           

  1. As the first candle shows, the buyers are in control as the price closes higher.

  2. On the second candle, there is indecision in the markets as both the selling and buying pressure are in equilibrium (possible Doji).

  3. On the third candle, the sellers gained control and the price closed lower.                                                         

An Evening Star pattern tells you the buyers are exhausted and the sellers are momentarily in control.

Bearish Harami

A Bearish Harami is a (2-candle) Bearish reversal candlestick pattern that forms after an advance in price.

A Bearish Harami Pattern is recognizable by the following components:

  • The first candle is Bullish and larger than the second candle and is a continuation of a trend.

  • The second candle has a small body and range and will be Bearish. This can be called an inside candle.                                                                                                                                                                                  

How do you interpret this formation?                                                                                                                            

  1. On the first candle, it shows strong selling pressure as the candle closes Bullish.

  2. On the second candle, it shows indecision as both buying and selling pressure is similar (likely because of traders taking profits and new traders entering short positions)

  3. Note that this can also be used as a continuation pattern.

Trading high probability Bearish reversal setups

Now, we have established the different types of Bearish reversal candlestick patterns. The next step is to teach yourself how to identify high probability trading setups and trade them.

As previously stated, trading candlestick patterns in isolation is not the “be all and end all”. It’s not that simple. If the setup is showing other characteristics such as Bollinger Band support, Trend Line support or other market indicators (i.e. there are a number of “signs” that tell you a reversal may happen) then typically the suggestions below are how to trade a Bearish reversal set up.

  1. If the market is trending lower, then wait for a pullback towards resistance and enter the trade.

  2. If the price pulls back towards resistance, then wait for a Bearish reversal candlestick pattern and enter the trade.

  3. If there’s a Bearish reversal candlestick pattern, then make sure the size of it is larger than the earlier candles (signalling strong resistance).

  4. If any of the above happen around other significant market indicators this would suggest short term support in the market.

Shooting Star

The adjacent chart is the 10 min Dow mini chart. You can see the Shooting Star candle clearly followed by 4 red candles (ending in a Hammer and a bounce).

 

Note the purple lines again - these are the Bollinger Bands. The Shooting Star candle actually pierces the 3rd Standard deviation resistance band prompting immediate selling and showing resistance to the market. The market over the next 40 mins became very Bearish. The Shooting Star candle clearly signifies resistance and a Bearish reversal. The  market then hits the 3rd Standard deviation support band, forms a Hammer and bounces.

Evening Star

The adjacent chart is the 10 min E-mini chart. You can see the Evening Star candle clearly followed by 5 red candles.

 

Note the purple lines again - these are the Bollinger Bands. The Evening Star candle actually finds resistance at the 3rd Standard deviation band (on the second Doji candle) a decision is made and selling overwhelms on the 3rd candle showing resistance to the market (finding support at the 2nd Standard deviation band). The market over the next 30 mins became Bearish. The Evening Star candle clearly signifies resistance and a Bearish reversal.

Bearish Engulfing

The adjacent chart is the 1hr E-mini chart. You can see the Bearish Engulfing candle clearly followed by 2 large red candles.

 

Note the purple lines - these are the Bollinger Bands. The Bearish Engulfing candle actually pierces the 2nd Standard deviation band prompting immediate selling and showing resistance to the market. The market over the next 2 hours became very Bearish. The Bearish Engulfing candle clearly signifies resistance and a Bearish reversal.

Indecision candlestick patterns

Indecision candlestick patterns signify that both buying and selling pressure are in equilibrium.

There are 2 indecision candlestick patterns you should be aware of:

  • Spinning Top

  • Doji

Spinning Top

A Spinning Top is an indecision candlestick pattern that signifies both buying and selling pressure are fighting for control.

A Spinning Top pattern is recognizable by the following components:

  • The candle has long upper and lower shadow.

  • The candle has a small body.                                                                                                                                

How do you interpret this formation?                                                                                                                           

  1. When the market opened, both the buyers and sellers aggressively tried to gain control (which results in upper and lower shadows)

  2. At the end of the session, neither have gained the upper hand (which results in a small body)                         

In short, a Spinning Top shows significant volatility or volume in the market but with no clear winner.

Doji

A Doji represents indecision in the markets as both buying and selling pressure are in equilibrium.

A Doji pattern is recognizable by the following components:

  • The candle’s open and close are around the middle of the range.

  • The upper and lower shadows are short and about the same length.                                                                 

How do you interpret this formation?                                                                                                                           

  1. It is important to note that Doji’s are indecision candles thus not to trade off of them but to observe them. They signify an overall lack of indecision in the market or a given timeframe.

  2. There are also variations of Doji’s with different significance, listed below.                                                         

 1. Dragonfly Doji

 2. Gravestone Doji

Dragonfly Doji

Unlike a regular Doji which opens and closes near the middle of the range, the Dragonfly Doji opens and closes near the highs of the range with long a lower shadow.

How do you interpret this formation?

  • This tells you there are a rejection of lower prices as buying pressure stepped in and pushed the market higher towards the opening price.

  • Note it is a bit like a Hammer but is still an indecision candle.

Gravestone Doji

Gravestone Doji’s open and close near the lows of the range with long upper shadow.

How do you interpret this formation?

  • This tells you there are a rejection of higher prices as selling pressure stepped in and pushed the market lower towards the opening price.

  • Note it is a bit like a Shooting Star but is still an indecision candle.

Continuation candlestick patterns

Continuation candlestick patterns signify the market is likely to continue trading in the same direction.

However as previously stated, it doesn’t mean you should go “short or long immediately” when you spot such a pattern because it doesn’t offer you an “immediate edge” in the markets.

Instead, you want to combine candlestick patterns with other tools so you can find a high probability trading setup. As the below patterns are “Continuation“ patterns they are essentially used to follow the trend, thus, using them in conjunction with a Trend Line is particularly useful.

There are 2 Continuation patterns you should be aware of:

  • Rising Three Method - Bullish

  • Falling Three Method - Bearish

Rising Three Method

The Rising Three Method is a Bullish trend continuation pattern that signals the market is likely to continue trending higher.

A Rising Three Method pattern is recognizable by the following components:

  • The first candle is a large Bullish candle.

  • The second, third and fourth descending candles have a smaller range and body and trade above the low of the first candlestick.

  • The fifth candle is a large bodied candle that closes above the highs of the first.                                               

How do you interpret this formation?                                                                                                                           

  1. On the first candle, it shows the buyers are in control as they closed the session strongly.

  2. On the second, third, and fourth candle, buyers are taking profits which led to a slight decline. However, it’s not a strong sell off, as there are new buyers entering long at these prices, showing a decline but a period of consolidation. (Note sometimes there may be more than 3 candles)

  3. On the fifth candle, the buyers regain control and pushed the price to new highs.

  4. This is not dissimilar to the Bullish Flag.                                                                                                                

Falling Three Method

The Falling Three Method is a Bearish trend continuation pattern that signals the market is likely to continue trending lower.

A Falling Three Method pattern is recognizable by the following components:

  • The first candle is a large Bearish candle

  • The second, third and fourth ascending candles have a smaller range and body and trade below the high of the first candlestick.

  • The fifth candle is a large bodied candle that closes below the lows of the first candle.                                     

How do you interpret this formation?                                                                                                                           

  1. On the first candle, it shows the sellers are in control as they closed the session strongly lower.

  2. On the second, third, and fourth candle, sellers are taking profits which led to a slight advanced. However, it’s not a strong rally, as there are new sellers entering short at these prices, showing a rise but a period of consolidation. (Note sometimes there are more than 3 candles)

  3. On the fifth candle, the sellers regain control and pushed the price to new lows.

  4. This is not dissimilar to a Bearish Flag.

Trading high probability Continuation set ups

Now, we have established the different types of Continuation reversal candlestick patterns. The next step is to teach yourself how to identify high probability trading setups and trade them.

As previously stated, trading candlestick patterns in isolation is not the “be all and end all”. It’s not that simple. If the setup is showing other characteristics such as Bollinger Band support, Trend Line support or other market indicators (i.e. there are a number of “signs” that tell you a reversal may happen) then typically the suggestions below are how to trade a Bearish reversal set up.

  1. If the market is in a range, then wait for it to breakout out of resistance.

  2. If the market breaks out of resistance, then wait for it to form a continuation candlestick pattern (like Rising Three Method or Bullish Harami)

  3. If the market forms a continuation candlestick pattern, then go long on the break of the highs

  4. Do the opposite for short setups

I hope you have found this extensive guide to candlestick patterns useful. If you have any further questions regarding trading these patterns please do not hesitate to contact me. Good luck and happy trading. TI

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