Every price chart you see in crypto, stocks, or forex tells a story. That is why when you understand candlestick patterns, you do not just see numbers moving on a screen, you see the emotions and decisions of thousands of traders.
Indeed, price charts may look confusing at first, but when you connect them, you see patterns. These patterns give you signals about what traders might do next, and if you know how to spot them, you gain an edge. This is why I will be discussing the basics of candlestick patterns n this article.
By the time you finish reading, you will understand how to read candles, what the patterns mean, and how to avoid common mistakes. More importantly, you will feel more confident in your trades because you will know how to read the market’s language.
KEY TAKEAWAYS:
- Candlesticks are a way of showing price movement on a chart, and each candlestick represents a set period of time.
- The two main types of candlestick patterns are reversal and continuation patterns.
- Popular single-candle patterns are Doji, Hammer, Inverted hammer, and shooting star.
- Major three-candle patterns include morning star, evening star, three white soldiers, and three black crows.
What Are Candlesticks?
Candlesticks are a way of showing price movement on a chart, and each candlestick represents a set period of time. It could be one minute, one hour, one day, or even one week, depending on the chart you are looking at.
A single candlestick shows four important pieces of information:
Source: Axi.com
- Open: The price when the period started.
- Close: The price when the period ended.
- High: The highest price during the period.
- Low: The lowest price during the period.
Other things to know are that:
- The body of the candle is the space between the open and the close.
- If the close is higher than the open, the candle is usually green, showing that buyers had control.
- If the close is lower than the open, the candle is usually red, showing that sellers had control.
- The thin lines above and below the body are called wicks or shadows, and they show how far the price moved before returning to the close.
Why Candlestick Patterns Matter
Candlestick patterns matter because they give you insight into market psychology. Instead of just looking at raw numbers, you see who has the upper hand. For example:
- A long green candle tells you buyers were strong during that time.
- A long red candle tells you sellers dominated.
- A candle with a long wick on top shows that buyers tried to push the price higher, but sellers pushed it back down.
- A candle with a long wick on the bottom shows that sellers tried to push the price down, but buyers defended it.
The Two Main Types of Patterns
There are many candlestick patterns, but you can divide them into two main groups:
- Reversal patterns: These suggest the market might change direction. If the trend has been going up, a reversal pattern may signal it could go down. If the trend has been going down, the pattern may suggest it could go up.
- Continuation patterns: These suggest the market will keep moving in the same direction after a short pause.
Source: litefinance.org
Popular Single-Candle Patterns
Some candlestick patterns only need one candle, and common ones include:
- Doji: A doji happens when the open and close are almost the same, so the candle looks like a cross or plus sign. This shows indecision and that neither buyers nor sellers had full control. Additionally, if you see a doji after a strong uptrend, it could mean the buying strength is fading. If you see it after a strong downtrend, it could mean the selling pressure is weakening.
- Hammer: A hammer has a small body at the top and a long lower wick that looks like a hammer. It usually forms after a downtrend and signals a possible reversal upward. Sellers pushed the price down, but buyers brought it back up.
- Inverted hammer: This has a small body at the bottom and a long upper wick. It also shows a possible reversal upward, but it needs confirmation from the next candle.
- Shooting star: It is the opposite of a hammer and has a small body at the bottom and a long upper wick. It usually forms after an uptrend and signals a possible reversal downward. Buyers tried to push higher, but sellers pushed the price back down.
- Spinning top: A spinning top has a small body with long upper and lower wicks. It shows indecision and often signals a pause in the market.
Source: stolo.in
Read Also – How to Read Crypto Charts: A Beginner’s Guide
Key Two-Candle Patterns
Sometimes, patterns need two candles to send a clear signal, and critical examples here are:
- Bullish engulfing: This happens when a small red candle is followed by a large green candle that completely covers the first one. It signals that buyers are taking control, and the price may rise.
- Bearish engulfing: Here, a small green candle is followed by a large red candle that covers it. This shows sellers are in control, and the price may fall.
- Tweezer tops and bottoms: Tweezer tops happen when two candles form at nearly the same high price, often signaling a reversal down. Tweezer bottoms form at nearly the same low price, signaling a possible reversal up.
Source: HowToTrade.com
Major Three-Candle Patterns
Examples of three-candle patterns include:
- Morning star: This pattern forms after a downtrend. It has three candles: a long red candle, a small candle (which can be red or green), and then a long green candle. Together, they suggest the trend may reverse upward.
- Evening star: It forms after an uptrend with a long green candle, a small candle, and then a long red candle. It signals a possible downward reversal, which is the opposite of a morning star.
- Three white soldiers: This is a strong bullish pattern. It shows three long green candles in a row, each closing higher than the last, and suggests strong buying momentum.
- Three black crows: It shows three long red candles in a row, each closing lower. It suggests strong selling pressure and is the opposite of three white soldiers.
Source: trendytraders.in
How to Use Candlestick Patterns in Your Trading
Candlestick patterns are helpful, but you should never rely on them alone. They work best when you adopt these practical tips:
- Always check the trend first: A bullish pattern in a strong downtrend may not work. Patterns are stronger when they match the overall trend.
- Look for confirmation: Do not act on a pattern right away. Wait for the next candle or other signals to confirm the direction.
- Use support and resistance levels: If a pattern forms near a key level, it is more reliable.
- Combine with volume: Higher trading volume makes a pattern more trustworthy.
- Practice on charts: The best way to learn is to spot these patterns in real charts.
- Don’t use patterns alone: Combine candlestick patterns with technical analysis, indicators, and risk management.
Conclusion
While candlestick patterns do not guarantee results, they give you a framework to understand the market instead of guessing. If you practice and apply these patterns correctly, you will improve your technical skills and gain a powerful edge in the market. So, take your time, practice daily, and let candlestick patterns guide you toward smarter and safer trades.
References
- trendspider.com – Trading Candlestick Patterns 101: Introduction and Common Candlesticks & Patterns
- investopedia.com – Understanding Basic Candlestick Charts
- ig.com – 16 candlestick patterns every trader should know
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