There are numerous strategies to trade candlestick patterns that appear on a chart. Some traders use them to enter or exit trades, while others use them to identify potential areas of support or resistance.
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One thing to keep in mind is that not all candlestick patterns are created equal. Some are more dependable than others, and some are more successful than others.
The hammer, doji, and engulfing patterns are some of the more prominent candlestick patterns used by traders.
In this blog post, you will be able to read more about different candlestick patterns you could use while trading. Scroll down to read more about the Candlestick patterns cheat sheet.
Hammer Candlestick Pattern
A hammer is a candlestick pattern that can be used to indicate a likely price reversal. Hammers form after a period of decline and can be utilized by traders as a buy signal.
Hammer patterns are classified into three types: inverted hammers, bullish hammers, and bearish hammers.
- Inverted hammers occur when prices decline and then reverse to close near the period's highs.
- Bullish hammers occur when prices rise and then revert to close near the period's lows.
- Bearish hammers occur when prices decline and then reverse to close near the period's highs.
Traders can use hammers to signify a purchase if the price is higher than the hammer's low, or a sell if the price is lower than the hammer's high.
Stop-loss orders should be placed below the hammer's low for long trades and above the hammer's high for short trades. Take-profit orders can be put in at prior support levels or at Fibonacci levels.
Inverted Hammer
The inverted hammer candlestick pattern appears at the bottom of a decline. It is seen as a bullish reversal pattern, since it indicates that the sellers are losing control and buyers are stepping in.
To trade the inverted hammer, wait for it to form before entering a long position when the price breaks above the candle's peak.
Your stop-loss would be set below the candle's low, and your take-profit would be set at a previous resistance level.
Dragonfly Doji
The dragonfly doji is a candlestick pattern that can appear in both bullish and bearish market conditions. When the open, high, and close are all equal to or very close to one another, this pattern is formed. The extended wick on either side of the Dragonfly Doji indicates that there is still some market hesitation.
This pattern appears in both uptrends and downtrends. A dragonfly doji in an uptrend indicates that buyers are still in charge, despite some selling pressure. A dragonfly doji in a downtrend indicates that sellers are still in charge, despite some buying pressure.
The dragonfly doji is typically traded as part of a wider strategy rather than on its own. Waiting for a confirmation candle, such as a bullish or bearish engulfing candle, is one strategy to trade this pattern. Another strategy to trade this pattern is to look for a breakout above or below the dragonfly doji candle's highs or lows.
When trading this pattern, it is critical to set your stop-loss below or above the dragonfly doji candle's highs and lows. Your take-profit goal.
Bullish Spinning Top
The bullish spinning top candlestick pattern is a candlestick pattern that can be used to predict a market turnaround. The design consists of a small body with top and lower shadows.
The upper shadow should be at least twice as large as the body, while the lower shadow should be modest. The pattern is visible on any time frame, although it is most effective on daily or weekly charts.
Traders looking to trade the bullish spinning top should look for a candlestick with a tiny body and upper and lower shadows. The optimum entry point would be when the candlestick breaks above the upper shadow's highs.
Traders might set a stop-loss right below the candlestick's lows and take profit at previous levels of resistance.
Hanging Man Pattern
The hanging man pattern is a bearish reversal pattern that appears at the end of an upswing. It occurs when the price opens higher than the previous day's close and then falls below the open.
The long upper shadow suggests strong selling pressure during the session, while the little lower shadow implies modest buying pressure. This pattern can be used to indicate a probable market peak and a change in trend.
It is critical to wait for confirmation before taking any action when trading this pattern. This entails waiting for the price to close below the candlestick formation's opening. When this happens, you can enter a short position with a stop-loss slightly above the formation's high. The take-profit level can be set at a previous support level or at a risk-to-reward ratio of 1:1.
Shooting Star
A shooting star is a candlestick pattern that can be used to predict a market reversal. When the market rallies and then quickly sell-off, it forms a candle with a small body and a long wick. Shooting stars can be observed near the top of bullish trends and can suggest that the market is about to turn.
When trading a shooting star, it is critical to set your stop-loss below the candle's low to protect yourself from future losses. You can set your take-profit level at a previous support level, or you can utilize a trailing stop to lock in profits as the market rises.
Bearish Spinning Top
The negative spinning top is a candlestick pattern that appears at the peak of an uptrend. It has a small body with a long wick on both sides, indicating that the market is losing momentum and the bulls are losing control.
Wait for confirmation, such as a bearish candlestick pattern or a break of support, before trading this pattern. The stop-loss should be positioned immediately above the spinning top's high, and the take-profit at the following support level.
Gravestone Doji
When the open, low, and close prices are all approximately equal, the gravestone doji candlestick pattern appears. The extended upper shadow indicates that there was substantial selling pressure earlier in the day, but buyers eventually pushed prices back up to close near the opening level.
This pattern appears at the peak of an upswing or following a period of consolidation. It indicates that the bulls are losing control and the bears are taking power.
To trade this pattern, enter a short position when the candlestick opens below the gravestone doji's shadow. Your stop-loss would be above the candlestick's peak, and your goal would be the preceding low.
Bullish Kicker
The bullish kicker is a candlestick pattern that can be used to forecast market changes in the future. When a tiny candlestick body is followed by a large candlestick body, the pattern is formed.
The massive candlestick should close near the range's top, indicating strong buying pressure. This pattern can be used to begin long positions, with the stop-loss below the low of the massive candlestick body and the take-profit at a level where price movement has previously reversed.
Bullish Engulfing Pattern
The bullish engulfing candlestick pattern indicates that the market is poised to rise. When a small black candlestick is followed by a giant white candlestick that totally engulfs the small black candlestick, this pattern forms. This activity suggests that the market is about to rise.
When the huge white candlestick closes above the small black candlestick, you should buy it. Your stop-loss should be set below the low of the enormous white candlestick, and your take-profit should be set at a risk-to-reward ratio of 1:1 or above.
Bullish Harami
A bullish hamishi candlestick pattern is found in an up-trending market. It is composed of two candles, the first of which is a long white candle and the second of which is a small black candle that is totally contained within the body of the first. This pattern implies that the market is losing steam and that a reversal is possible.
Wait for the second candle to close before entering a short position to trade this pattern. Your stop-loss would be slightly above the second candle's high, and your take-profit would be at the preceding low.
Piercing Line
A “piercing line” is a bullish candlestick pattern that can be used to predict a market reversal. When a candlestick with a small body trades below the close of the preceding candle and subsequently closes above the midpoint of the previous candle, the pattern is formed.
The piercing line pattern can be used alone or with other technical indicators to confirm a trend reversal. When trading this pattern, it is best to set a stop-loss exactly below the piercing candle's low and take profit at a 1:1 ratio.
Tweezer Bottom
The Tweezer Bottom is a bullish reversal pattern that appears following a downtrend. The design gets its name from the two candlesticks that compose it, which resemble a pair of tweezers.
The pattern begins with a long bearish candle, which is followed by a second candle that is either bullish or has a small body. The key to this pattern is that the second candle closes above the first candle's halfway point. This indicates that buyers are beginning to enter the market and drive up prices.
To trade this pattern, wait when the second candle closes above the first candle's halfway point. Your stop-loss would be below the low of the second candle, and your take-profit would be at a level where resistance is expected to be broken.
Bearish Kicker
The bearish kicker pattern is a two-candlestick pattern that occurs near the peak of an uptrend. The first candlestick is a long white candle, followed by a short black candle with a closing that is below the first candle's halfway point.
When the Bearish Kicker pattern appears, it is considered a bearish reversal signal, and traders will attempt to enter short positions. The stop-loss should be above the high of the second candlestick, and the take-profit should be below the low of the first.
Bearish Engulfing pattern
The bearish engulfing candlestick pattern is a two-candle pattern that appears at the peak of an uptrend. The first candle is bullish, while the second candle is bearish, engulfing the first candle. This pattern can be used to predict a possible market reversal.
Traders will often attempt to enter short positions at the opening of the third candle when trading this pattern. Stop-loss orders can be placed just above the second candle's high, while take-profit orders can be placed near previous support levels.
Bearish Harami
The bearish hammer is a candlestick pattern that indicates a potential price reversal in an asset. The pattern is made up of two candles, the first of which is much larger than the second.
The second candle should open above the first's close and close below its midpoint. This pattern can be found in any timeframe, but it is most common on daily charts.
It is critical to wait for the second candle to close before starting a short position when trading this pattern. The stop-loss should be placed just above the second candle's high, and the take-profit should be placed at previous support levels.
Dark Cloud Line
A bearish reversal candlestick pattern that can be spotted at the top of an uptrend is the dark cloud line. The pattern consists of two candlesticks: a long white candle and a black candle that opens above the close of the first candle and closes below its middle.
The black cloud line pattern is often seen as a bearish reversal pattern, so if you see it emerging at the top of an uptrend, you should consider going short. However, before making any trading decisions, it is usually a good idea to confirm the pattern with additional technical indicators.
When trading the dark cloud line pattern, a stop-loss order should be placed slightly above the peak of the second candle. You can target past support levels for take-profit orders, or employ a risk-to-reward ratio of 1:1.
Tweezer Top
The Tweezer Top is a bearish reversal pattern that appears following an uptrend. It is made up of two candlesticks with similar heights. Typically, the first candlestick is longer and bullish, while the second is shorter and bearish.
This pattern implies that buyers are losing steam and that sellers are starting to seize control of the price.
Tweezer Tops can be found in all timeframes, but they perform best on daily and weekly charts. Search for this pattern as a day trader at the top of an intraday trend or after a period of consolidation. Look for Tweezer Tops at the end of an intermediate-term trend for swing traders. Long-term investors should seek this pattern near the end of a long-term bull market.
It is critical to wait for confirmation before entering a short position when trading Tweezer Tops. A bearish engulfing candle, a break below support, or a move below the lows of the second candlestick in the Tweezer Top pattern can all serve as confirmation. After receiving confirmation, short positions can be entered with a stop loss above the pattern's highs and a target profit.
Morning Star pattern
The morning star candlestick pattern is a bullish sign that occurs when a small body candle is followed by a large body candle of the opposite color to the small body candle. The third candle in the pattern is another small body candle, and this candlestick formation suggests a market trend reversal.
To trade this pattern, purchase when the third candle forms and set your stop-loss below the second candle's low. Your stop-loss would be set at a level where you believe the market will revert to its original trend.
Bullish Abandoned Baby
The bullish abandoned baby is a three-candlestick pattern that indicates a bearish to bullish trend reversal. The first candlestick is bearish, followed by a doji candlestick (open and close prices are equal), and finally a bullish candlestick. The doji represents the “abandoned baby” that the bears abandon as the bulls take control and push prices higher.
This pattern can be used to trade both long and short positions. Long positions should be entered near the doji candlestick's lows, with a stop-loss placed below the bearish candlestick's lows.
Short positions should be entered near the doji candlestick's highs, with a stop-loss placed above the bullish candlestick's highs. Take-profit levels can be put at prior support or resistance levels or at Fibonacci levels.
Three White Soldiers
The three white soldiers are a bullish candlestick pattern that indicates a downtrend reversal. It is distinguished by three consecutive white candlesticks, each of which opens higher than the previous one and closes near its high point.
This pattern is often interpreted as a bullish indicator and can be utilized to trade bullish reversals. To trade this pattern, look for three successive white candlesticks on a chart and purchase when the fourth candlestick opens above the high of the third.
A stop-loss order can be put below the third candlestick's low, and a take-profit order can be placed at a target price higher than the current level.
Bullish Three-Line Strike
The bullish three-line strike is a candlestick pattern that indicates a possible market reversal. Three consecutive candlesticks that close higher than the previous day form the pattern, with each candlestick opening within the body of the previous candle.
This pattern can be utilized to trade both long and short positions, with the stop-loss set below the pattern's low and the take-profit goal set at a level where price has previously reversed.
The bullish three-line strike is a candlestick pattern that can be used to trade forex reversals. This pattern is made up of three consecutive candlesticks with higher highs and lower lows, with each candlestick closing above the previous one.
The pattern suggests that buyers are gaining strength and that a reversal is possible. To trade this pattern, traders should look for a breakout above the high of the pattern's third candlestick, with a stop-loss placed below the pattern's low. Take-profit levels can be set at previous resistance levels or at a risk-to-reward ratio of one to one.
Morning Doji Star
The morning doji star is a bullish reversal pattern seen at the bottom of downtrends. It is made up of three candles: a small black candle, a large white candle, and a small black candle with a doji (a candle with a small body and long wicks).
This pattern indicates that the bears are losing control and the bulls are taking over. You would buy at the open of the third candle and place your stop-loss below the low of the second candle to trade it. Your take-profit level would be set at previous highs.
Evening Star pattern
The evening star is a three-candlestick pattern that indicates an uptrend reversal. The first candlestick is a tall white candle, then a small black candle, and finally another tall white candle. If the second candlestick gaps down from the first, the pattern is deemed bearish.
This pattern can be traded in two ways. The first method is to wait for the third candlestick to close below the first candlestick's midpoint. The second method is to wait for the third candlestick to close below the second candlestick's low.
Stop-loss orders should be put above the high of the third candlestick, and take-profit orders should be placed at previous support levels.
Bearish Abandoned Baby
The bearish abandoned baby is a three-day candlestick pattern that indicates a trend reversal from up to down. On the first day, there is a large black candlestick, followed by a small white candlestick in the middle, and then another large black candlestick on the third day.
The pattern gets its name from the fact that it resembles a baby being abandoned by its mother.
Selling when the third black candlestick closes below the midpoint of the first black candlestick is how to trade the bearish abandoned baby. Stop-loss orders should be put above the high of the third black candlestick, and take-profit orders should be placed at previous support levels.
Three-Black Cows
The “three black cows” candlestick pattern is a bullish reversal pattern found at the bottom of a downtrend. The first candle is black, then a white candle, and finally another black candle. The black candles indicate days when the bears are in charge and the price is plummeting.
The white candle in the center signifies a day when the bulls seize control and drive the price higher. The third black candle indicates a day when the bears regain control and push the stock downward. This pattern can be used to trade downtrend reversals.
The stop-loss should be placed below the second candle's low, and the take-profit should be placed above the second candle's high.
Bearish Three-Line Strike
A bearish three-line strike is a three-candlestick pattern. The first candle is a lengthy bearish candle, followed by a shorter bullish candle, and then another long bearish candle. This is a reversal pattern that can be used to indicate that the current decline may be coming to an end.
When trading this pattern, it is necessary to set a stop-loss order right below the lows of the third candle. Take-profit orders can be placed at past support or resistance levels.
Evening Doji Star
The evening doji star is a bearish reversal pattern occurring at the peak of an uptrend. A little body candle with a long upper shadow precedes a doji candle with a long lower shadow to form the pattern. The third candle in the pattern is a bearish candle that closes below the first candle's midway.
When spotted at the top of an uptrend, the evening doji star is a bearish reversal pattern and should be considered as such. The low of the doji candle would be an appropriate objective for a short trade, with a stop-loss put just above the high of the first candle in the pattern.
FAQ
Can one rely on candlestick patterns?
Candlestick patterns are a popular technical analysis tool, but keep in mind that they are only one part of the picture. While candlestick patterns can provide insight into potential price movements, they should not be used as the sole indicator.
To provide a more complete picture of the market, candlestick patterns should be used with other technical indicators and fundamental analysis.
Why do candlesticks have different shapes and sizes?
Candlesticks are available in a variety of shapes and sizes for a variety of purposes. The type of wax used, the size of the wick, and the purpose of the candle are just a few of the reasons. Because pillar candles are made of harder wax, they are typically taller and thinner than votive candles.
This allows them to maintain their shape while burning. Votive candles, on the other hand, are made of a softer wax that allows them to be easily inserted into votive holders. The shape of the candle is also affected by the size of the wick. A thicker wick results in a taller, wider flame, whereas a thinner wick results in a smaller, more controlled flame.
Finally, the purpose of the candle influences its shape. Candles that are used for decoration or as part of a display are frequently shaped in unusual ways to add visual interest.
What does it take to create the perfect trading strategy?
There is no perfect trading strategy because everyone's goals and risk tolerance differ. A good trading strategy, on the other hand, should be based on sound analysis and have clear rules for entry and exit points. It should also be adaptable to changing market conditions.
What is a candlestick in forex trading?
In forex trading, a candlestick is a graphical representation of price action over a specified time. Each candlestick typically represents one day of price action and contains four key price levels: open, high, low, and close. Candlesticks are used by traders to identify potential trading opportunities based on price patterns.
Which candlestick pattern is most reliable?
There is no definitive answer to this question, as different traders have different opinions. The hammer, inverted hammer, shooting star, and doji are some of the most commonly cited candlestick patterns that are considered to be relatively reliable.
These patterns can provide valuable information about potential trend reversals or continuations. To make the most informed decisions possible, it is critical to use these trading strategies with other technical indicators and market analysis.
CONCLUSION
Candlestick Patterns Cheat Sheet
Candlestick patterns can assist traders in identifying potential market reversals. There are numerous candlestick patterns, each with its meaning. The hammer, inverted hammer, shooting star, and doji are some of the more common patterns.
When trading candlestick patterns, it is critical to consider the pattern's context to determine whether it is likely to signal a reversal. Factors to evaluate include the placement of the pattern on the chart, the size, and form of the candles, and whether there are any other supporting signs present.
While candlestick patterns can be useful, it is crucial to remember that they are only one piece of the puzzle when it comes to trading. Use them with other technical analysis tools, and never make decisions solely because of them.