Candlestick Patterns
(Candle Patterns)

What are Candlestick patterns?

They are formed by variations and combinations of Japanese candle lines. They not only depict the price movements, but also graphically represent the psychology of the traders.

The Candle patterns are ancient Japanese method of technical analysis. They were used in trading rice in 1600's and rice contracts from 1710 onwards. They were well organised by Homma Munehisa who is often referred to as the father of the Japanese Candlestick charting.


Click here to read about the origin of candlestick patterns.
 


These patterns are very appealing. Just a look of the candle pattern flashes the market's turmoil or its preparation to continue with the trend or to reverse the trend. After the shift from the hand written charts to computerized charts, the study of candle pattern is becoming more popular. With the combination of modern, western methods of technical analysis, they have become indispensable for a serious trader.

They give early signals to predict tops and bottoms. Trend reversals are more flashing to the trader. The force of the trend looks obvious. On the whole they tell a better story about the market than bar charts.


The patterns formed by Japanese candles may be simple or complex.

Simple Patterns
The variations of the wick and the body of the candle lines give rise to varieties of simple candlestick patterns.

  • White Candlestick
    White Candles are bullish lines in candlestick and candlevolume charts. They signify that the closing price is higher than opening price for that time period.
  • Black Candlestick
    Black Candles or black candlesticks are bearish lines in candlestick and candlevolume charts. They signify that the closing price is lower than opening price for that time period.
  • Long Lower Shadow
    Long lower shadow of a candlestick indicates that the bears are loosing power and bulls are gaining power in that time period.
  • Long Upper Shadow
    Long upper shadow of a candlestick indicates that the bulls are loosing power and bears are gaining power in that time period.
  • Hammer
    A Candlestick Hammer is a reversal candle pattern with long lower shadow and no upper wick. They are bullish in nature.
  • Inverted Hammer
    Inverted Hammer is a bullish reversal candlestick pattern. They occur at the bottom of a down trend. It is so named because a Candlestick Hammer, which is also a bullish reversal pattern is placed upside down.
  • Shooting star
    Shooting Star is a bearish reversal candlesticks pattern. They occur at the top of an up trend.
  • Hanging Man
    A Hanging Man candlestick is a reversal candle pattern with long lower shadow and no upper wick. They are bearish in nature.
  • Spinning Top
    Spinning Top candlestick is a candle pattern with small real body. They represent the areas of uncertainty.
  • Doji
    Doji candlestick is a candle pattern with out a real body. They represent the areas of uncertainty.
  • Dragonfly Doji
    Dragonfly Doji candlestick is a candle pattern with out a real body and upper shadow. They represent the areas of uncertainty.
  • Gravestone Doji
    Gravestone Doji candlestick is a candle pattern with out a real body and lower shadow. They represent the areas of uncertainty.
  • Marubozu White
    Marubozu White candlestick is a white candlestick with out shadows. They represent strong bullish trend in the market.
  • Marubozu Black
    Marubozu Black candlestick is a black candlestick with out shadows. They represent strong bearish trend in the market.
  • Candlevolume
    These are hybrid created by combining the features of Equivolume charts and Candlestick charts. The effect of high volume is pictorially emphasized.


Complex Patterns
In addition to the rather simple candlestick patterns listed above, there are more complex patterns which have been identified since the charting method's inception. They are formed by combinations of various types of candlelines.

Some of the common complex candlestick patterns, which are formed by more than one candlestick are:

  • Dark-cloud cover
    Dark cloud cover is a bearish reversal candlesticks pattern. They occur at the top of an up trend.
  • Piercing Pattern
    Piercing Pattern is a bullish reversal candlesticks pattern. They occur at the bottom of a down trend.
  • Bullish Engulfing pattern
    Bullish Engulfing Pattern is a major bullish reversal candlesticks pattern. They occur at the bottom of a down trend.
  • Bearish Engulfing pattern
    Bearish Engulfing Pattern is a major bearish reversal candlesticks pattern. They occur at the top of an up trend.
  • Morning star
    Morning Star is a bullish reversal candlesticks pattern. They occur at the bottom of a down trend.
  • Evening star
    Evening Star is a bearish reversal candlesticks pattern. They occur at the top of an up trend.
  • Morning doji star
    Morning Doji Star is a bullish reversal candlesticks pattern. They occur at the bottom of a down trend.
  • Evening doji star
    Evening Doji Star is a bearish reversal candlesticks pattern. They occur at the top of an up trend.
  • Three white soldiers
    Three White Soldiers is a candlesticks pattern formed by a group of three white candles, which shows the strength of the advancing market.
  • Three black crows
    Three Black Crows is a candlesticks pattern formed by a group of three black candles, which shows the strength of the declining market.
  • Harami
    Harami is a candlesticks pattern, which shows the indecision of the market. In Japanese language, it means, pregnant. It is made of two candles, one containing the other.
  • Gaps
    Gaps are continuation chart pattern, formed by an unfilled space between two trading session. Gaps are referred as Tasuki, meaning window in candlestick charting.
  • Island Formation
    Island Formation is a reversal chart pattern, formed by price action in a group of multiple time period, which is separated from rest of the price action by gaps. It is very reliable with 80% probability.
  • Abandoned Baby
    Abandoned Baby is a reversal chart pattern, formed by price action in a single time period, which is separated from rest of the price action by gaps. It is very reliable with 80% probability.


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