Candlestick charts are a form of technical analysis tool that condenses data from different time periods into a single price bar. This distinguishes them from conventional open-high, low-close bars or clear lines connecting closing price dots. When finished, candlesticks create patterns that indicate the course of the price. Proper color coding brings complexity to this vibrant scientific instrument, which dates all the way back to Japanese rice traders in the 18th century.
Through his influential 1991 book, "Japanese Candlestick Charting Techniques," Steve Nison introduced candlestick patterns to the western world.
Numerous traders are now familiar with hundreds of these formations, which are dubbed bearish dark cloud cover, evening star, and three black crows. Additionally, scores of long- and short-side trading techniques incorporate single bar trends such as the doji and hammer.
It's important to note that candlestick trends are not always indicative of a buy or sell signal. Other than that, they are a method of analyzing the market structure and a possible indicator of an impending opportunity. As such, it is often beneficial to examine trends within their meaning. This could be the background of the chart's technical trend, but it could also be the wider business situation or other considerations.
6 Best Candlestick Patterns
- Morning Star
- Three Line Strike
- The Hammer
- The Inverted Hammer
- Abandoned Baby
- Evening Star
1. Morning Star
A morning star is a visual pattern comprised of three candlesticks that technical analysts view as a bullish symbol. A morning star forms as a result of a downward trend and signals the beginning of an upward climb. It is a symbol of a price pattern turnaround. Traders look for the appearance of a morning star and then use other markers to confirm that a turnaround has occurred.
Since a morning star is a visual pattern, no special calculations are needed. After three sessions, then a morning star shapes or does not. However, there are additional technical factors that can help forecast the formation of a morning star, such as whether the market activity is approaching a support zone or whether the relative strength index (RSI) indicates that the stock or asset is oversold.
Morning star trends can be used as a visual indication of the start of a market turnaround from bearish to bullish, but they become more important when accompanied by other technical indicators. Another critical factor is the amount that contributes to the formation of the pattern. Generally, a trader needs to see turnover increase over the course of the pattern's three sessions, with the third day having the most volume. Regardless of other measures, a high volume on the third day is often interpreted as an affirmation of the cycle (and eventual uptrend). If the morning star forms in the third session, an investor will take a bullish stance in the stock/commodity/pair/etc. and ride the uptrend until there are hints of another reversal.
How to identify it:
The first candlestick closes bearishly.
The second candle has a relatively narrow spectrum.
The third candle aggressively closes higher (more than 50 percent of the first candle).
What Is the Distinction Between a Morning Star and a Doji Morning Star?
The morning star pattern is slightly variable. When the price action in the middle candlestick is basically flat, a doji is created. This is a tiny candlestick with no discernible wicks, resembling a plus sign. The doji morning star more precisely demonstrates the market's indecision than a morning star with a thicker middle candle. When a doji appears after a black candle, there is usually a more aggressive volume surge and a correspondingly longer white candle, as more traders are able to easily distinguish the formation of a morning star.
What Is the Distinction Between a Morning and an Evening Star?
Naturally, the opposite of a morning star is an evening star. The evening star is composed of a long white candle, a small black or white candle, and a long black candle that is at least half the length of the white candle in the first session. The evening star indicates a reverse of an upward trend, with bulls yielding to bears.
2.Three Line Strike
Recognizing patterns is a critical aspect of technical research. You want to ensure that if you have a déjà vu moment, you can behave appropriately as you have experienced the situation before.
When you use technical analysis to evaluate pricing behavior, you're determining the ebbs and flows of consumer sentiment based on industry dynamics and restructuring.
When markets continue to shift in the opposite direction, they create trends that can be used to forecast potential market fluctuations.
If you develop an understanding of various chart cycles, you will develop the ability to distinguish between those that indicate a continuity and those that indicate a turnaround is imminent.
The three-line strike candlestick pattern is one of the most effective continuation patterns.
Three black candles are carved out by the bullish three-line spike reversal pattern inside a downtrend. Each bar establishes a lower low and closes near that level. The fourth bar opens much lower, then reverses to form a wide-range outside bar that closes above the series' opening high. Additionally, the opening print indicates the low of the fourth bar. Bulkowski estimates that this turnaround accurately forecasts higher prices at an 83 percent rate.
A bullish three-line strike pattern contains many critical components, including the following:
- Three successive days in which the close is greater than the previous day's close.
- Three straight days with a lower low than the previous day's low.
- Four straight days with a higher average than the previous day's high.
- The low of the fourth bar in the pattern is smaller than the lows of the previous three bars.
- On the fourth bar in the pattern, the close is lower than the close for each of the prior 3-bars.
A bearish three-line strike pattern has several key elements that include:
- Three consecutive periods where the open is higher than the close.
- Three consecutive periods where the high is lower than the prior days high.
- Four consecutive periods where the low is lower than the prior days lower.
- On the fourth bar in the pattern, the high is higher than the high for each of the prior 3-bars.
- On the fourth bar in the pattern, the close is higher than the close for each of the prior 3-bars.
3. The Hammer
A hammer is a candlestick charting pricing trend that happens when a security trades slightly lower than its opening price but bounces to close near the opening price. This design results in a hammer-shaped candlestick with a lower shadow that is at least twice as large as the actual body. The candlestick's body reflects the disparity between the open and closed rates, while the shadow represents the period's high and low prices.
The hammer candlestick is a bullish trading pattern that indicates a market has hit its bottom and is poised for a trend turnaround. It means that sellers joined the market, driving the price down, but were eventually overwhelmed by investors, who pushed the asset price higher. Notably, the upward price reversal must be validated, which ensures that the subsequent candle must close above the prior closing price of the hammer.
While a hammer candlestick pattern indicates the reversal of a bullish trend, a shooting star pattern indicates the reversal of a bearish trend. Shooting star trends form following an upward trend in the stock market, indicating an upper shadow. Essentially the inverse of a hammer candlestick, the shooting star candlestick rises after opening then closes at the same stage as it began. A shooting star pattern indicates the trend's peak.
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4.The Inverted Hammer
The inverted hammer candle has a tiny true body, a long upper wick, and a short or nonexistent lower wick. It forms at the bottom of a downtrend and indicates the possibility of a bullish turnaround. The prolonged upper wick indicates that bulls are attempting to push price higher. The move's validity would be validated or denied by future market action.
Contrary to popular belief, the inverted hammer is not to be confused with the shooting star. Both candles look identical but have vastly different meanings. The shooting star is a bearish symbol that appears at the crest of an uptrend, while the inverted hammer is a bullish signal that appears at the crest of a downtrend.
How to tell whether a candlestick pattern is an Inverted Hammer:
Tiny real-body candle with a long upper wick and little or no lower wick.
This pattern appears at the bottom of a downtrend.
When the candle appears near critical levels of help, stronger signals are produced.
5. Abandoned Baby
The bullish abandoned baby reversal pattern forms at the downtrend's low, after a string of black candles printing lower lows. The demand gaps lower on the next bar, but no new sellers emerge, resulting in a small range doji candlestick with identical opening and closing prices. The pattern is completed by a bullish gap on the third bar, indicating that the rebound will extend to higher highs, perhaps causing a broader-scale uptrend. According to Bulkowski, this trend accurately forecasts higher costs by 49.73 percent.
6. Evening Star
An evening star is a pattern on a stock price map that technical analysts use to determine whether a trend is about to reverse. It is a bearish candlestick style made up of three candles: a big white candlestick, a small white candlestick, and a red candlestick.
The evening star trend is widely regarded as a highly accurate predictor of potential market declines. Its trend develops over a three-day period:
The first day is marked by a big white candle, indicating that prices will begin to climb.
The second day features a smaller candle that indicates a more moderate price rise.
The third day features a big red candle that opens lower than the prior day and then closes at the first day's midpoint.
The evening star pattern is regarded as a reliable predictor of the onset of a downward trend. However, amidst the chaos of stock-price results, it can be difficult to discern. To assist in accurately identifying it, traders often use market oscillators and trendlines to validate the occurrence of an evening star pattern.
The Bottom Line
We examined six of the most often used candlestick chart trends for identifying purchasing opportunities. They assist in identifying a shift in trader sentiment in which buyer demand prevails over seller pressure. Such a downtrend turnaround may be followed by the possibility of making substantial gains. Nonetheless, patterns do not guarantee that the trend will reverse. Before executing a trade, investors should always confirm reversal through subsequent market action.