Here we will nail down all things candlesticks. From what they mean, to how to read patterns and translate them into significant data and even trading signals.
We will break it down into 4 major sections and explain the meaning of bullish, bearish, reversal, and continuation patterns.
We begin with the definition of Candle, which is a figure that represents a period of negotiation, that can be better seen with the image below:
A candle can be bullish (usually green or white, but could be any color) and bearish (usually red or black, but could also be any color).
Usually the candle is a similar drawing to what we have above, but it may vary. Imagine if the open price was the same as the close price, the real body would be a line, and if the high or low of that period were different fro the value of the open and close price, we will have a vertical line cutting through a horizontal line, which gives us a drawing of a cross. Well then, there are certain drawings that have been studied in the Japanese rice market in the 1700s and that almost always occur before an important movement in price, like a bullish tendency, bearish tendency, a reversal or even show continuous price movement.
This interpretation is easy to explain, the drawings are nothing more than a reflexion between the strength of the agents of the market. It shows who is stronger, the agents that want to buy or the agents that want to sell. The drawings can also be an idea of volatility and sequence of negotiation, when we analyze 2 or 3 consecutive candles.
With that being said, we will now present a few patterns of bullish candlestick patterns, and then show them applied in a graph. There are many more patterns than the ones shown here, we’re aiming to show just the most well known.
1. Bullish Candlestick Patterns
Means that in the next period (for example, day) the prices will go up.
This candle happens when the open price is close to low and the close price is close to the high.
Similar to the Long White, but stronger, occurs when the open price is the same as the low and the close price is equal to the high.
This is a bullish pattern that occurs after a bearish tendency. If this patterns happens after a bullish tendency, then it’s called Hanging Man, which we will go over in the next section. This candle is composed of a small real body and a long lower shadow. Although the candle is green in this image, the color is irrelevant.
Formed by a Long Black (opposite of a Long White, which we will see in the next section), followed by a Long White, that opens below the previous low and closes above the half way line of the previous real body.
This is a very strong pattern if occurs after a bearish tendency. This happens when a small bearish candle is totally engulfed by the real body of the next bullish candle.
This pattern shows a probable bottom, formed by the star (middle candle) and confirmed by the following bullish candle. The star’s color is irrelevant.
Bullish Doji Star
This pattern signals a bullish tendency after an unidentified period, therefore, it needs to be confirmed by another bullish pattern, like the Morning Star. The first candle’s color is irrelevant.
2. Bearish Candlestick Patterns
Means that in the next period (for example, day) the prices will go down.
This candle happens when the open price is close to high and the close price is close to the low.
This is a bearish pattern when it happens after a significant bullish movement. If it occurs after a bearish tendency, it is called Hammer, as seen on the previous section. Although the color here is red, the actual candle color is irrelevant.
Dark Cloud Cover
This pattern is more significant if the real body of the second candle (red) is below the half way line of the first candle (green), as shown in this figure.
This is a very strong pattern if it occurs after a bullish tendency. This occurs when a small bullish candle is completely engulfed by the real body of the next bearish candle.
This pattern shows a probable top, formed by the Star (middle candle) and confirmed by a bearish candle. The star’s color is irrelevant.
Bearish Doji Star
This pattern signals a bearish tendency after an unidentified period, therefore, it needs to be confirmed by another bearish pattern, like the Evening Star.
This pattern suggests a small reversal when it occurs after a bullish period. It must be confirmed by a long bullish candle and by a bearish candle where the close price is close to the low.
3. Reversal Candlestick Patterns
Means that in the next period (for example, day) the prices will change direction. All of the reversal patterns are dependent on the confirmation of the previous. Therefore, this is just the first warning that a reversal might be on the way.
When the lower shadows as well as previous shadows are long and of the same size, and the open price is equal to the close price, we have a classic signal of a reversal point.
Formed when the open price and the close price are equal and very close to the high, while the low stays distant, generating a long lower shadow. It can happen that the upper shadow might not even exist, which is also a reversal pattern.
Similar to the Dragon-fly, it forms when the open price is equal to the close price and the lower shadow is very small or inexistent. Like the other candlesticks shown in this section, the Gravestone Doji can show up after a bullish or bearish tendency, always indicating a reversal.
A star indicates a reversal. Notice that the candle’s real body are of the same kind, bullish or bearish, and the reversal occurs toe the side that is opposite to the type of candle.
Occurs after an unidentified period and also indicates a reversal.
3. Neutral Candlestick Patterns
Neutral candlestick patterns can indicate a reversal or a continuous tendency, either in a bullish or bearish period.
A pattern of continuity where the real body is small in relation to its entire size. When this pattern is identified, wait for the next signal.
A pattern of indecision that can show up among other patterns. This happens when it’s a duplicate, called Double Doji, it’s usually very strong, provoking a bullish or bearish momentum, as long as the previous tendency is well defined.
The Harami pattern has its name because the second candle is completely engulfed by the first candle. Indicates a weakening in the current tendency, and can become a reversal sign. Attention, because it doesn’t necessarily indicates a reversal. It works in bullish and bearish tendencies. The bearish pattern has the first bullish candle (green) and the bullish pattern has the first bearish candle (red).
Has the same interpretation as the Harami, though much stronger. It also shows up in bullish or bearish tendencies and is related closely to a reversal than the Harami.
Trading Candlestick Patterns
Candlestick patterns may sound confusing as they can be quite complex and many times difficult to correctly identify them on a graph.
For this reason, we rely on advanced artificial intelligence to recognize these patterns, and test future outcomes on decades of historical market data. Thus removing the human error of inconsistency and emotions when deciding to pull the trigger on a trade.
You can also use this incredible technology, completely automated and done-for-you, with candlestick patterns that are recognized and trading signals that are precise and that occur daily.