Candlestick Patterns - The Ultimate Guide 2021

Candlestick Patterns - Those colorful sticks

The colorful sticks are often referred to as Japanese Candlesticks. When grouped together, you get Candlestick Patterns! 

The Japanese candlestick is the purest visualization of all market participants trading any particular asset - be it stocks, bonds and even cryptocurrency trading.

Honestly? It may be the most powerful foundational concept you learn. 


Afterall, the study of candlestick patterns is a key component of the foundations of technical analysis. All the complex, intimidating, "white-collar-ugly-tie" concepts are built on top of this really.

Why Learn Candlestick Patterns?

Well, you didn't hit this world running, now did you?

You first cried, crawled, and then walked. Learning to analzye Candlestick patterns is much like crawling. It's the first foundational lesson in technical analysis.

Chart Patterns at first glance can appear to be daunting - the red makes a lot of people whine, and cry. But...

  • Japanese Candlesticks patterns can "tip" you off before the reddit rebels - be it on reversal signals, price continuation, or price consolidation.
     
  • When used with other trading indicators and technical analysis stretegies, Candlestick patterns can give you a serious edge. Even for beginner traders.
     
  • You won't rely on a youtuber with cartoon for a display picture to help you spot bullish, bearish, or continuation signals. Candleststick patterns will help help you with that!

  • Learning how to read candlestick patterns can help with macro trend analysis. You'll be able to spot market momentum changes in no time. 

Tldr: This guide will help you master Japanese Candlestick charts at first glance. Irrespective of your type of trading personality - Scalp trader, range trader, or trend trader, you'll be spotting Bullish Candlestick Patterns, and Bearish Candlestick Patterns without a sweat! 

Ready to jump in?

If the answer is "YES", well, I'm afraid we'll have to eat our veggies before we get to the steak. 

Here comes the first of three (only 3 ... promise!) mundane questions people ask about Japanese candlestick charts: 

What makes Candlestick Charts better than Line Charts?

The colours of course! duh!

Those aren't just there to make your chart look pretty. Those colours add more information to the candlestick patterns. 

What information, you ask?

Well, the color Green is pretty universal for "GO", "YES", "Correct". Pretty much everything that's positive. And the color Red is universal for everything negative.

Similarly, in the the world of trading, the color Green is also a positive - It means "UP". When price moves up (positive) the candle is Green, and when it when price moves down (negative), its Red.


Unlike line charts, which is pretty much a line depicting the price moves, Japanese candlestick charts will tell you who won the fight between the Bulls and the Bears.

This will give you a better read on the trend, which will also help you weed out false signals. Like a bull trap, and a bear trap.  

How to read a Japanese Candlestick?

A rough drawing resembling that of a single "Candlestick" was first used by a Japaenese rice trader named Munehisa Homma a very long time ago. He used the visual aspect of a candlestick to record the price fluctutaion of rice within a specific timeframe.  

For example: Let's say Mr. Homma was recording the price of rice for 1 Week using a Japanese Candlestick, it would look something like this:

Recording Price using Candlesticks 

1) OPEN Price - The price at which Homma sold his rice at the beginning of the week
2) CLOSE Price - The price at which Homma sold his rice at the end of the week
3) HIGH Price - The highest price Homma sold his rice during the week
4) LOW Price - The Lowest price Homma sold his rice for during the week

So if you've heard the terms "Japanese chart patterns" or " Japanese candlestick patterns", know that they're all the same thing. The use of "Japanese" is primarily in due respect of the founder, Mr. Homma. 

Lets be honest though, if Homma was born of this age, the mundane "Japanese Candlestick" would've been the "Japanese Dynamite" - which would've sounded way cooler.

Another common question beginners like to ask about candlestick charts is:

How many candlesticks does it take to make a pattern?

It varies really. 

Some single Japanese candlesticks are bullish / bearish enough  to signal a reversal. While others come in 2-4 series of candles to signal a reversal.

Ultimately, its all about trading psychology.

Remeber, each candle represents buyers and sellers - Humans! 

Which means that along with price, each candlestick is also a representation of human emotions - Fear, Despair, Joy, Irrationality, Exuberance etc. 

Cool! Now lets get to the fun part! phew!

How many candlestick patterns are there?

Around 80-100 known candlestick patterns have been identified. 

Don't worry, we won't be going over all. Just the important ones you ought to know of.

The important candlestick patterns are the ones that signal a trend reversal.

So we'll be looking at the most important Bullish Candlestick patterns, and the most important Bearish Candlestick Patterns below. 

If you just want to cut to the chase, you'll find the index on the right-hand-side. :)


BULLISH Candlestick Patterns

Dragonfly Doji

The Dragon fly doji is a bullish reversal candlestick as it depicts buyers completely overpowering a bearish sell-off

Hammer Pattern

The bullish hammer doji looks much like a hammer, and depictics aggressive buying activity in a period previously dominated by bears. 

Bullish Englufing Pattern

A bullish engulfing pattern consists of 2 candlesticks where the buyers undo a previous sell-off and then some. 

Piercing Line Pattern

The piercing line patterns consists of 2 candlesticks wherein the buyers step in to undo more than half the previous sell-off 

Tweezer Bottom Pattern

the tweezer bottom Pattern consists of 2 candlesticks where in sellers aren't willing to sell at a price lower than first low.  

Morningstar Doji Pattern

The bullish morningstar doji is an indecision candle in an established downtrend. Noramally marks a reversal point. 

Bullish Three-Line Strike Pattern

A 4-candlestick pattern wherein the bulls overpower 3 candelsticks of aggressive sell-off in 1 green, bullish candle

Three White Soldiers Pattern

A 3-candlestick bullish pattern depicted by 3 green bullish candles. Each closing higher than the previous one

Bullish Hikkake Pattern

A 5-candlestick bullish pattern wherein price reveals Bears losing stregth, only to let the bulls takeover with a bullish engulfing candle to dwarf the previous sell-off


Diving into Bullish Candlestick Patterns!

1) The DRAGONFLY DOJI

TYPE:   1-Candlestick Pattern
BEST AS:  Bullish Trend Reversal Pattern
FULL Article Here

The Dragonfly doji candlestick is a bullish reversal candlestick pattern. In a downtrend, a dragonfly doji depicts buyers completely overpowering an initial bearish sell-off.

The Bullish Dragonfly Doji is represented by the long wick/shadow at the bottom. This tells us that while bears sold enough to push price down to a new low, the buyers stepped-in to a point where price was back up where it started.

In a prevailing downtrend where sellers dwarf buyers, the Bullish Dragonfly doji pattern is the first sign of market equilibrium.

You'll find that it's most effective as a reversal signal in established downtrends.

2) HAMMER Candlestick

TYPE:   1-Candlestick Pattern
BEST AS:  Bullish Trend Reversal Pattern

The Hammer candlestick pattern is a bullish candlestick pattern.  You'll find that it's most effective as a reversal signal in established downtrends.

The Bullish Hammer candlestick is represented by the long wick/shadow at the bottom, followed by a green body at the top.

This tells us that while bears sold enough to push price down to a new low, the buyers stepped-in to overpower the sell-off, to a point where price closes higher than where it started.

In a prevailing bearish downtrend where sellers dwarf buyers, the Bullish Hammer candlestick pattern is the first sign of sellers getting exhausted, and buyers gaining momentum. 

3) BULLISH ENGULFING Candlestick

TYPE:   2-Candlestick Pattern
BEST AS:  Bullish Trend Reversal Pattern 

The Bullish engulfing candlestick pattern has a minimum of 2 candlesticks, and is most telling & effective at market bottoms.

The Bullish engulfing candlestick is represented by 2 candlesticks wherein the 2nd bullish candlestick (buyers) egulfs the 1st bearish candlestick (sellers). 

A bullish engulfing pattern is only valid if the bearish candlestick fits within the body of the bullish candlestick - this includes the wick high & wick low.

This tells us that while bears sold enough to push price down to a new close low, the buyers step-in to not only take out the previous open, but also the wick high. This show's immense demand from the buyers.

In a prevailing bearish downtrend, a bullish engulfing pattern not only shows strong buyer interest pouring in. 

4) The PIERCING LINE Pattern

TYPE:   Bullish 2-Candlestick Pattern
BEST AS: Bullish Trend Continuation Pattern

The Bullish Piercing Line candlestick pattern has a minimum of 2 candlesticks, and is a show of bullish momentum taking over amongst high seller expectations.

It's most effective as a bullish trend continuation pattern. This is especially true when price is range bound on a local top, and either side can take over.

The piercing line pattern is represented by 2 candlesticks wherein the the 2nd bullish candlestick (buyers) opens gap down, and ticks up to cover more than 50% of the 1st bearish candlestick. 

In 24-hr markets, like the crypto market, it would be appropriate to look for a considerable lower wick low on the 2nd green candlestick. This would show high seller expectation, only for buy pressure to come swinging in.

The bullish piercing line pattern shows unexpected, high buy pressure to to dwarf high sell pressure. 

5) The TWEEZER BOTTOM Pattern

TYPE:   Bullish 2-Candlestick Pattern
BEST AS: Bullish Trend Reversal Pattern

The tweezer bottom candlstick pattern is a bullish reversal pattern. This candlestick pattern has a minimum of 2 candlesticks, and is a show of waning sell pressure from the bears. 

The tweezer bottom pattern is most effective when spotted in an overarching downtrend. Since it reveals strong price support being hit.  

The tweezer bottom pattern is represented by 2 candlesticks wherein both candlestick wick Low's are around the same price. This marks a "floor price" at which bears aren't willing to sell past, signalling a temporary trend reversal. 

6) The MORNING STAR  DOJI

TYPE:   Bullish 3-Candlestick Pattern
BEST AS: Bullish Trend Reversal Pattern

The Morning star doji pattern is usually a sign of a bullish reversal. This candlestick pattern has a minimum of 3 candlesticks, and is a show of indecision in a prevailing downtrend.

The point of indecision being marked out by a doji candlestick. During this phase, the bears show signs of hesistance in selling at lower prices.

Bearish hesistance in prevailing downtrends can also bring about low sell-side liquidity, allowing Bulls to push price up with little volume/effort. 

Like other popular bullish reversal patterns, the Morning star Doji is also most effective when found on established downtrends. 

It consists of 3 Candlesticks wherein, the first candlestick is in the direction of the downtrend, the 2nd candlestick is the indecision doji, and the 3rd candlestick is a green bullish candlestick suggesting a change in momentum. 

6) THREE WHITE SOLDIERS Pattern

TYPE:   Bullish 3-Candlestick Pattern
BEST AS: Bullish Trend Reversal Pattern

The three white soldiers pattern is often found on many japanese candlestick guides. It consists of 3 back-to-back bullish candlesticks with long bodies.

The three white soldiers are best found in established intermediate or major downtrends, as it marks waning bearish momentum. The sell-side temporarily dries out, allowing bulls to buy up the asset.

This is depicted through 3 consecutive bullish japanese candlesticks. Which could be the impetus to a bullish trend reversal. 

Work of caution: The thing about soldiers (like teams) is that they're only as strong as their weakest link. When three white soldiers find themselves battling strong resistance, pay heed to who wins. Because that may just be the determining factor on a bullish reversal, or price rejection leading to a bearish continuation . 

TO BE CONTINUED...

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