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Last updated on June 4th, 2024
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Cate Cook

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Cate Cook
Cate is a journalist by profession who started trading shares in 2008, after which she became a full time CFD day trader for more than 10 years. She now combines her passions for writing and trading at MarketMates. Join the blog to receive the latest articles from Cate.
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Sam is the Cofounder and CEO of MarketMates. He has traded since 2008 and is the Author of the Amazon best-seller The Consistent Trader. Over 42,000 traders have taken his Advanced Forex Course for Smart Traders. Join the blog to get his latest articles.
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Candlestick Chart Patterns: Essential Guide for Traders 

Learn the art of Japanese candlestick analysis and how to identify potential trading opportunities.

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In this article

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At MarketMates, we are committed to providing accurate information. Our content undergoes a rigorous process of fact-checking before it is published. Learn more about our editorial policy.

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Reading trading charts is an essential skill for all successful traders.

First you need to understand what individual candlesticks are telling you.

Then you need to understand what the combinations of candlesticks signify when they appear together in certain patterns.

In this lesson we dive deep into candlestick chart patterns to help you gain the knowledge to become a more successful trader.

What are candlestick patterns?

There are two different elements to candlestick pattern recognition that you need to become familiar with in order to be able to read and understand trading charts:

  • the shape of the candlesticks themselves, and
  • the patterns they form when they appear together in a certain order

Understand the shape of candlesticks

We know that candlesticks come in different shapes and sizes.

This is because they reflect price behaviour in whatever timeframe you are viewing price action.

All candlesticks show the open price, the closing price, the highest price achieved, and the lowest price for that particular timeframe.

Green candlestick anatomy
Red trading candlestick showing the anatomy of a trading candlestick

For example:

  • if you are viewing price action on a daily chart (for a market that has a set open and closing time), the candlesticks will show the opening price and closing price for that one day
  • if you are viewing candlesticks on a 15-minute chart, the opening and closing prices will be for that 15-minute period.

Green candlesticks indicate the price opened low, and rose up to close at a higher level, suggesting an upward trend.

Red candlesticks indicate the price closed lower than it opened, indicating downward movement.

Therefore, green candlesticks are referred to as bullish (indicating upward movement) and red candlesticks are indicative of downward price action (or bearish sentiment.)

If you are viewing candlesticks in black and white:

  • black or ‘closed’ candlesticks represent red bearish price movement
  • white or ‘open’ candlesticks represent green bullish price behaviour.

Candlestick body length

The difference between opening and closing price determines how long the body of the candlestick will be.

If there is a large price difference, the candlestick will be a long one.

For example, in this sequence, there is a series of long green candlesticks, showing us there was a substantial difference in the opening and closing price in this uptrend:

 

 

If opening and closing prices are almost identical, the candlestick will look very different, short and squat, with no ‘body’ to them at all.

This type of candlestick is known as a ‘doji,’ which is the Japanese word for ‘simultaneous.’

This is what a series of dojis look like on a price chart:

This doji sequence suggests the asset is in a period of consolidation, or a ‘resting’ pattern.

Such sequences are often seen after strong upward or downward trends, and suggest that neither the bulls or the bears are in control.

Therefore, price action remains almost static until a news item or sudden buying or selling pressure sets off the sequence again.

Dojis can be regarded as indicating market indecision.

They are often associated with low trading volumes, or seen in quiet trading periods between major forex market opening times.

Here are some of the other most common candlestick shapes:

Long green trading chart candlesticks diagram
Long red trading chart candlesticks
Short candlesticks
Spinning top
Doji
Dragonfly and gravestone doji
Hammer and hanging man
Shooting star
Long legged doji

The Japanese word ‘marubozu’ translates to ‘shaven head’ or ‘bald’, as these candlesticks have no head or tail, or upper or lower wick, indicating that open and close prices were identical to the highest and lowest prices in that time period.

Most pro traders will look at these different candlestick shapes and immediately know what they reveal about price action.

For example:

  • a hanging man candlestick is frequently seen at the bottom of a downtrend, and is a warning sign that the trend is about to end
  • a shooting star is frequently seen at the bottom of a downtrend, and indicates that a trend reversal may follow
  • a dragonfly doji, with its very long tail, indicates that although the opening and closing price were identical, price action did fall in that session, but rose again to end the period the same as it opened. This indicates that bears had a go at pushing price action down, but were ultimately unsuccessful by the end of the session.

Therefore, the shape of each individual candlestick tells a ‘story’ about price action in that period.

Candlesticks sequences

Learning to read trading charts is like learning to read music.

First you need to understand what each individual candlestick or ‘note’ means.

Then you need to understand what the different notes mean in combination on the music score to be able to hear the melody.

Candlesticks form recognisable patterns as they appear one after another.

These patterns form regular sequences which reveals far more about overall market trends than individual candlesticks alone tell us.

Here are some of the more common candlestick patterns:

Evening Star

This is a three-candle pattern with one long green bullish candle at the top of an uptrend, then a doji or spinning top at the top of the trend, followed by a large bear candlestick.

It implies a bearish reversal after an uptrend.

Morning Star

This pattern features a long red bearish candle at the bottom of a downtrend, then a doji or spinning top, followed by a large green bullish candle.

This is the reverse of an evening star, and denotes that the downtrend has ended, and a new uptrend is beginning.

The doji or spinning top at the base of the downtrend can be either bearish (red) or bullish (green) like the one below. The colour of the doji or spinning top does not really matter – it’s the long red and green candlesticks either side of the doji that are really important.

Three Soldiers

The three soldiers pattern develops over three days and is a strong bullish signal after a downtrend.

It consists of three green candles with long bodies and short wicks, which open and close progressively higher than the previous day.

It shows steady buying pressure, which suggests the start of an uptrend.

Three Black Crows

This three-stick pattern is the reverse of three soldiers.

It consists of three consecutive long red candles with short or non-existent shadows or wicks.

Each session opens at a similar price to the previous day, but bear pressure pushes the price lower and lower with each close.

It suggests a strong downtrend is developing as the bears take charge.

Piercing Line

This is a two-candle pattern which is a reversal signal after a downtrend.

It consists of a long red candle followed by a long green candle.

There is usually a significant gap down between the first red candlestick’s closing price, and the green candlestick’s opening price.

It indicates strong buying pressure, and a reversal after a downtrend.

Hammer

A hammer candlestick at the bottom of a downtrend is a reversal pattern, which suggests the downtrend has ended, and a new uptrend is about to begin.

The hammer has a small body and a long tail, or shadow underneath, but no upper wick.

Candlesticks on a trading chart showing a Hammer reversal pattern

The long lower shadow signifies that the price dropped significantly during the trading period, but buying pressure emerged, pushing the price back up to close near the opening price.

It suggests a potential trend reversal after a period of decline.

Hanging Man Reversal

A Hanging Man is the opposite to a hammer.

It consists of a long green candlestick, followed by a doji or Spinning Top, with a short red body with a long wick or tail below it, followed by another red bearish candlestick, indicating that the uptrend is over.

It appears at the top of an uptrend,and is a warning to traders that the uptrend is about to reverse.

It signals that an uptrend is over and a downtrend is to follow.

There are many more candlestick patterns that you can familiarise yourself with if you wish to continue studying this fascinating topic.

Remember that candlestick price patterns are merely tools for the trader to use, in conjunction with other tools such as indicators.

Candlestick patterns are not a guarantee

While price patterns formed by candlesticks offer valuable clues, the market remains a complex beast, influenced by many factors.

So always use price patterns as a guide, not a guarantee.

Till next time, happy trading,

Cate

Marketmates uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial guidelines to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

Get this week's best trading content

Lessons for all levels of trader. Nail the basics, master your mindset and learn advanced techniques.

Cate Cook

Cate Cook

Cate is a journalist by profession who started trading shares in 2008, after which she became a fulltime CFD day trader for more than 10 years. She now combines her passions for writing and trading at MarketMates. Join the blog to get the latest articles from Cate.
Cate Cook

Cate Cook

Cate is a journalist by profession who started trading shares in 2008, after which she became a fulltime CFD day trader for more than 10 years. She now combines her passions for writing and trading at MarketMates. Join the blog to get the latest articles from Cate.

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© 2024 – MarketMates.
All rights reserved | Privacy Policy | Risk Disclosure

General Advice Warning: From time to time, you may receive general non-binding advice from us. This information is intended to be general and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation, and needs. MarketMates is not liable for or held responsible for any loss, financial or otherwise in relation to information received from MarketMates.

© 2024 – MarketMates.
All rights reserved | Privacy Policy | Risk Disclosure

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