🕯️ What are Candlestick Patterns?
Candlestick patterns are visual representations of price action that help traders identify potential reversals, continuations, and market sentiment. They're essential for price action trading and technical analysis.
Introduction to Candlestick Patterns
Candlestick charts were developed in Japan over 300 years ago for rice trading. Today, they're the most popular chart type in forex trading, providing valuable insights into market psychology and price movements.
Why Use Candlestick Patterns?
- Visual Clarity: Easy to read and interpret
- Market Psychology: Show buyer/seller sentiment
- Reversal Signals: Identify potential trend changes
- Entry/Exit Points: Provide specific trading signals
- Works on All Timeframes: From M1 to monthly charts
Understanding Candlestick Anatomy
Basic Components
- Body: Opening and closing price range
- Wick/Shadow: High and low price range
- Color: Green/White (bullish) or Red/Black (bearish)
Bullish vs Bearish Candles
- Bullish: Close > Open (green/white)
- Bearish: Close < Open (red/black)
Reversal Patterns
Bullish Reversal Patterns
1. Hammer
- Location: At support in downtrend
- Signal: Potential bullish reversal
- Confirmation: Next candle closes higher
2. Bullish Engulfing
- Pattern: Green candle engulfs previous red candle
- Signal: Strong bullish reversal
- Location: At support or end of downtrend
3. Morning Star
- Pattern: Three candles (red, small, green)
- Signal: Bullish reversal
- Strength: Very strong signal
4. Piercing Pattern
- Pattern: Green candle opens below red candle's low, closes above midpoint
- Signal: Bullish reversal
Bearish Reversal Patterns
1. Shooting Star
- Location: At resistance in uptrend
- Signal: Potential bearish reversal
- Confirmation: Next candle closes lower
2. Bearish Engulfing
- Pattern: Red candle engulfs previous green candle
- Signal: Strong bearish reversal
- Location: At resistance or end of uptrend
3. Evening Star
- Pattern: Three candles (green, small, red)
- Signal: Bearish reversal
- Strength: Very strong signal
4. Dark Cloud Cover
- Pattern: Red candle opens above green candle's high, closes below midpoint
- Signal: Bearish reversal
Continuation Patterns
Bullish Continuation
1. Rising Three Methods
- Pattern: Uptrend, three small red candles, then green continuation
- Signal: Trend continuation
2. Bullish Harami
- Pattern: Small green candle inside large red candle
- Signal: Potential continuation after pause
Bearish Continuation
1. Falling Three Methods
- Pattern: Downtrend, three small green candles, then red continuation
- Signal: Trend continuation
2. Bearish Harami
- Pattern: Small red candle inside large green candle
- Signal: Potential continuation after pause
Indecision Patterns
Doji
Types:
- Standard Doji: Open = Close
- Long-Legged Doji: Long wicks, shows indecision
- Dragonfly Doji: Long lower wick (bullish)
- Gravestone Doji: Long upper wick (bearish)
Signal: Market indecision, potential reversal
How to Trade Candlestick Patterns
Step-by-Step Process
- Identify the Pattern: Recognize the candlestick formation
- Check Location: Pattern at support/resistance?
- Confirm Context: Trend direction and market conditions
- Wait for Confirmation: Next candle confirms the signal
- Enter Trade: With proper risk management
- Set Stop Loss: Below/above the pattern
- Take Profit: At next level or 2:1 risk/reward
Combining with Other Analysis
Support and Resistance
Candlestick patterns are strongest at key support and resistance levels.
Indicators
Combine with:
- RSI: Confirm overbought/oversold
- MACD: Confirm momentum
- Volume: Confirm pattern strength
Trend Analysis
Patterns work better when aligned with the overall trend.
Best Timeframes for Candlestick Patterns
Day Trading
- Primary: M15, H1
- Patterns: All patterns work
Swing Trading
- Primary: H4, D1
- Patterns: Stronger patterns preferred
Position Trading
- Primary: D1, W1
- Patterns: Major reversal patterns
Common Mistakes
- Trading Every Pattern: Not all patterns are equal
- Ignoring Context: Pattern location matters
- No Confirmation: Entering before confirmation
- Wrong Timeframe: Using inappropriate charts
- Ignoring Risk Management: Not using stop losses
Candlestick Pattern Checklist
Before trading a pattern:
- [ ] Pattern clearly identified
- [ ] Pattern at key level (support/resistance)
- [ ] Context confirmed (trend direction)
- [ ] Confirmation candle closed
- [ ] Stop loss set
- [ ] Risk/reward ratio at least 1:2
- [ ] Position size calculated using risk management rules
Summary
Candlestick patterns are powerful tools for identifying trading opportunities. They work best when combined with support and resistance, trend analysis, and proper risk management.
Key Takeaways:
- Always wait for confirmation
- Location matters (support/resistance)
- Context is crucial (trend direction)
- Combine with other analysis
- Use proper risk management
- Not all patterns are equal