What is a candlestick?

A candlestick is a way of displaying information about an asset’s price movement. Candlestick

charts are one of the most popular components of technical analysis, enabling traders to interpret
price information quickly and from just a few price bars.

This article focuses on a daily chart, wherein each candlestick details a single day’s trading. It has
three basic features:

 The body, which represents the open-to-close range

 The wick, or shadow, that indicates the intra-day high and low

 The colour, which reveals the direction of market movement – a green (or white) body
indicates a price increase, while a red (or black) body shows a price decrease

Over time, individual candlesticks form patterns that traders can use to recognise major support
and resistance levels. There are a great many candlestick patterns that indicate an opportunity
within a market – some provide insight into the balance between buying and selling pressures,
while others identify continuation patterns or market indecision.
Before you start trading, it’s important to familiarise yourself with the basics of candlestick
patterns and how they can inform your decisions.

Six bullish candlestick patterns

Bullish patterns may form after a market downtrend, and signal a reversal of price movement.
They are an indicator for traders to consider opening a long position to profit from any upward
trajectory.

Hammer
The hammer candlestick pattern is formed of a short body with a long lower wick, and is found at
the bottom of a downward trend.

A hammer shows that although there were selling pressures during the day, ultimately a strong
buying pressure drove the price back up. The colour of the body can vary, but green hammers
indicate a stronger bull market than red hammers.
Inverse hammer
A similarly bullish pattern is the inverted hammer. The only difference being that the upper wick is
long, while the lower wick is short.

It indicates a buying pressure, followed by a selling pressure that was not strong enough to drive
the market price down. The inverse hammer suggests that buyers will soon have control of the
market.
Bullish engulfing
The bullish engulfing pattern is formed of two candlesticks. The first candle is a short red body
that is completely engulfed by a larger green candle.

Though the second day opens lower than the first, the bullish market pushes the price up,
culminating in an obvious win for buyers.
Piercing line
The piercing line is also a two-stick pattern, made up of a long red candle, followed by a long
green candle.

There is usually a significant gap down between the first candlestick’s closing price, and the
green candlestick’s opening. It indicates a strong buying pressure, as the price is pushed up to or
above the mid-price of the previous day.
Morning star
The morning star candlestick pattern is considered a sign of hope in a bleak market downtrend. It
is a three-stick pattern: one short-bodied candle between a long red and a long green.
Traditionally, the ‘star’ will have no overlap with the longer bodies, as the market gaps both on
open and close.

It signals that the selling pressure of the first day is subsiding, and a bull market is on the horizon.
Three white soldiers
The three white soldiers pattern occurs over three days. It consists of consecutive long green (or
white) candles with small wicks, which open and close progressively higher than the previous
day.

It is a very strong bullish signal that occurs after a downtrend, and shows a steady advance of
buying pressure.
Six bearish candlestick patterns
Bearish candlestick patterns usually form after an uptrend, and signal a point of resistance.
Heavy pessimism about the market price often causes traders to close their long positions, and
open a short position to take advantage of the falling price.

Hanging man
The hanging man is the bearish equivalent of a hammer; it has the same shape but forms at the
end of an uptrend.
It indicates that there was a significant sell-off during the day, but that buyers were able to push
the price up again. The large sell-off is often seen as an indication that the bulls are losing control
of the market.

Shooting star
The shooting star is the same shape as the inverted hammer, but is formed in an uptrend: it has a
small lower body, and a long upper wick.

Usually, the market will gap slightly higher on opening and rally to an intra-day high before closing
at a price just above the open – like a star falling to the ground.
Bearish engulfing
A bearish engulfing pattern occurs at the end of an uptrend. The first candle has a small green
body that is engulfed by a subsequent long red candle.

It signifies a peak or slowdown of price movement, and is a sign of an impending market

downturn. The lower the second candle goes, the more significant the trend is likely to be.
Evening star
The evening star is a three-candlestick pattern that is the equivalent of the bullish morning star. It
is formed of a short candle sandwiched between a long green candle and a large red candlestick.

It indicates the reversal of an uptrend, and is particularly strong when the third candlestick erases
the gains of the first candle.
Three black crows
The three black crows candlestick pattern comprises of three consecutive long red candles with
short or non-existent wicks. Each session opens at a similar price to the previous day, but selling
pressures push the price lower and lower with each close.

Traders interpret this pattern as the start of a bearish downtrend, as the sellers have overtaken
the buyers during three successive trading days.
Dark cloud cover
The dark cloud cover candlestick pattern indicates a bearish reversal – a black cloud over the
previous day’s optimism. It comprises two candlesticks: a red candlestick which opens above the
previous green body, and closes below its midpoint.

It signals that the bears have taken over the session, pushing the price sharply lower. If the wicks
of the candles are short it suggests that the downtrend was extremely decisive.
Four continuation candlestick patterns
If a candlestick pattern doesn’t indicate a change in market direction, it is what is known as a
continuation pattern. These can help traders to identify a period of rest in the market, when there
is market indecision or neutral price movement.

Doji
When a market’s open and close are almost at the same price point, the candlestick resembles a
cross or plus sign – traders should look out for a short to non-existent body, with wicks of varying
length.

This doji’s pattern conveys a struggle between buyers and sellers that results in no net gain for
either side. Alone a doji is neutral signal, but it can be found in reversal patterns such as the
bullish morning star and bearish evening star.

Spinning top
The spinning top candlestick pattern has a short body centred between wicks of equal length. The
pattern indicates indecision in the market, resulting in no meaningful change in price: the bulls
sent the price higher, while the bears pushed it low again. Spinning tops are often interpreted as
a period of consolidation, or rest, following a significant uptrend or downtrend.

On its own the spinning top is a relatively benign signal, but they can be interpreted as a sign of
things to come as it signifies that the current market pressure is losing control.

Falling three methods

Three-method formation patterns are used to predict the continuation of a current trend, be it
bearish or bullish.
The bearish pattern is called the ‘falling three methods’. It is formed of a long red body, followed
by three small green bodies, and another red body – the green candles are all contained within
the range of the bearish bodies. It shows traders that the bulls do not have enough strength to
reverse the trend.

Rising three methods

The opposite is true for the bullish pattern, called the ‘rising three methods’ candlestick pattern. It
comprises of three short reds sandwiched within the range of two long greens. The pattern shows
traders that, despite some selling pressure, buyers are retaining control of the market.