What have charting apps, stock analysis software and technical analysis tools in common? They all offer multiple chart types for price visualization, including candlestick charts. But what are the best bullish and bearish candlestick patterns that help you identify trend continuation and trade reversals?
What Is a Candlestick?
Before we jump into the details of the best bullish and bearish candlestick patterns, let’s ensure we are all on the same page regarding the terms. Below you will find a picture that indicates what I refer to when talking about the open, high, low and close prices, bullish and bearish candlesticks and the upper and lower wicks and shadows:
Open, High, Low, Close
A candlestick always consists of four price points that are shown in a candlestick chart. The open represents the opening price of the period, the high is the highest price of the period, the low represents the lowest low within the period, and the close is the closing price of the period.
Candle Body
The body of the candlestick represents the price difference between the opening price and the closing price of the period. If the close is above the open, the candlestick is bullish, and if the close is below the open, the candlestick is bearish.
Candle Wick/Shadow
The small lines above and below a candle body are called shadows of the candle or wicks and represent the price difference between the high of the period vs. the upper price of the candle body (upper wick/shadow) and the price difference of the low of the period vs. the lower price of the candle body (lower wick/shadow).
Candle Color
The candle color can be chosen within your trading or analysis platform. Most of the time, green candles signal a bullish period, and red candles are a bearish period, but you can also mark your candles in blue, purple or whatever color you want. It is important that you use colors that you interpret correctly to identify price trends correctly.
Bullish Candlestick Patterns
Bullish candlestick patterns are used within the technical analysis to either confirm an uptrend (higher lows, higher highs) or to identify potential reversals of an existing downtrend that potentially reverses to a bullish uptrend.
Hammer Candlestick
The Hammer is a reversal pattern frequently occurring at the end of a selloff, indicating that the demand increases after multiple periods with downside momentum. The Hammer candlestick is especially powerful when the previous market selloff showed high trading volume, so people who potentially sold their positions earlier will help to get more upside momentum again to move to the upside.
The Hammer candlestick works pretty well at higher lows in an overall uptrend of the market.
- Type: Bullish
- Most powerful: At higher lows, after a market selloff
- Number of candles required: 1
Inverted Hammer
The Inverted Hammer is also a bullish reversal pattern, such as the regular Hammer candlestick. However, the setup looks a bit different since the closing price of the candle is at its lows, and it needs confirmation that the setup is valid. Such confirmation is the break of the high of the Inverted Hammer candlestick.
The psychology behind this is that within the period where the Inverted Hammer was formed, bears had control, and the assumption was that the market would continue to the downside, just like within the previous periods. But then, a big reversal starts in the following period, where the high of the Inverted Hammer gets broken to the upside to confirm the bullish validness of the candlestick pattern.
- Type: Bullish
- Most powerful: At higher lows
- Number of candles required: 1
Bullish Engulfing Pattern
The Bullish Engulfing Pattern appears, as the name suggests, under bullish market conditions. That’s typically at higher swing lows. Let’s say the market went up strongly, then consolidated at a high price level. Three to five candlesticks later, you see a small red candle with small wicks on both ends. The following candlestick opens near its lows and then strongly moves to the upside.
The green bullish candlestick body is larger than the previous candles red body, and the close of the green candle is near its highs.
- Type: Bullish
- Most powerful: At higher lows
- Number of candles required: 2
Piercing Pattern
The Piercing Pattern can be seen as a slight variation of the Bullish Engulfing Pattern, where the open of the new period is below the previous period close and then steadily climbs up to over the previous candlestick’s midpoint to close there, but without reaching the previous body’s high.
The candlestick pattern is a bullish one and indicates that bulls have gained back control.
- Type: Bullish
- Most powerful: At higher lows
- Number of candles required: 2
Morning Star Pattern
The Morning Star Pattern is the first bullish candlestick pattern that consists of 3 candles. The first period’s candle has a long red body, the second period’s candle then has a small-bodied candle (green or red body), and finally, a long green body in the third period.
- Type: Bullish
- Most powerful: At higher lows
- Number of candles required: 3
Three White Soldiers
The Three White Soldiers pattern does not happen that often since it needs 3 nearly identical candlesticks in subsequent order. The first candle is a bullish one with an open near the low and a close near the high with a wide green body.
The second period firstly opens weak with a huge down gap, but the prices turn to the upside again and close at new highs with a second strong green wide-range candle. Then, the same happens in the third period.
Think of it like this. After a strong period with upside direction, the price gaps lower, which at first is bearish, but before the candle closes, prices go beyond the previous period’s high and close above them. And the same happens the period after.
- Type: Bullish
- Most powerful: At higher lows, after a market selloff
- Number of candles required: 3
Rising Three Methods
The Rising Three Methods pattern consists of 3 downside candles with a small candle body between two bullish upside candles, where the price range of the three candles in the middle is within the price range of the body of the first bullish candle.
The lowest prices of the small consolidation candles should never exceed the lowest price of the first candle and the fifth candle should close higher than the upper body price level of the first consolidation candle.
The psychology behind this chart pattern is that the first strong up move gives bulls control over the market, and bears try to push the market back to the downside. However, they fail and prices only consolidate slightly before bulls gain finally control with another strong up-move.
So, in the first period, prices rise significantly between the open and close, then in periods 2,3 and 4, the bears try to regain control. Still, they finally gave up in period 5 when the prices continuously rose from a low point to a close near the period’s high.
- Type: Bullish
- Most powerful: Near all-time highs
- Number of candles required: 5
Bearish Candlestick Patterns
Bearish candlestick patterns are used within technical analysis to either confirm a downtrend (lower highs, lower lows) or to identify potential reversals of an existing uptrend that potentially reverses to a bearish downtrend.
Shooting Star Candlestick
Do you remember the Hammer candlestick mentioned in the bullish candlestick pattern section? The Shooting Star is the exact opposite of it and signals a potential reversal of an existing uptrend to the downside price momentum.
At this point, you don’t know yet if it is a short-term reversal or longer term, but the bears got control of the market in that period that formed the Shooting Star.
Here, the market shoots up strongly making new highs but then falls together back to near its opening price.
- Type: Bearish
- Number of candles required: 1
Hanging Man Candlestick
The Hanging Man candlestick is the counterpart pattern to the Inverted Hammer, where the market opens strong, then consolidates to significant new lows but closes near the daily high.
This, at first, looks like a bullish signal, but it is not necessarily the case because the reversal back to the upside is often the first building of a lower high on a lower time frame.
A confirmation of the bearishness of the Hanging Man candle is a downside move in the following period.
- Type: Bearish
- Number of candles required: 1
Bearish Engulfing Pattern
The Bearish Engulfing Pattern is for bears, while the Bullish counterpart is for bulls and consists of 2 candlesticks. The first period closes strong with small wicks on the upside and downside.
Then, in the second period, the market opens strong but falls together and closes below the previous period’s open. Therefore, the red body of the current period integrates the smaller green body of the previous candle.
This bearish candlestick pattern often ignites a subsequent down move since support zones of lower time frames have often been broken before.
- Type: Bearish
- Number of candles required: 2
Dark Cloud Cover
The Dark Cloud Cover is the counterpart to the Piercing Pattern and the least stronger variant of the Bearish Engulfing Pattern. The market opens above the previous period’s close but then loses upside momentum to close below the previous period’s candlestick body midpoint signaling a weakening market.
The break of the 2nd candle’s low of the Dark Cloud Cover is then the final confirmation of the trend reversal from bullish to bearish.
- Type: Bearish
- Number of candles required: 2
Evening Star Pattern
The Evening Star is the bearish counterpart to the Morning Star Pattern and signals a reversal from a bullish market to a bearish market.
It is the first bearish candlestick pattern that requires 3 candlesticks for its appearance, where the first period is a strong bullish period, followed by a kind of tight-range neutral period, and then a third period with bearish weakness in the market.
- Type: Bearish
- Number of candles required: 3
Three Black Crows
The Tree Black Crows are as seldom as the Three White Soldiers due to the price action needed to be a valid pattern. You see a first period with an open near the high of the period, then a close near the low of the period.
Then, the second period’s candle gaps up strong but weakened to finally close below the previous period’s close. And in the third period, it happens again. The bulls try to get control back over the market, and the period opens strong, but again, the close is below the previous period’s close.
- Type: Bearish
- Number of candles required: 3
Falling Three Methods
The Falling Three Methods pattern consists of 3 upside candles with a small candle body between two bearish downside candles, where the price range of the three candles in the middle is within the price range of the body of the first bearish candle.
The highest prices of the small pullback candles should never exceed the highest price of the first candle and the fifth candle should close lower than the lower body price level of the first small upside candle.
The psychology behind this chart pattern is that the first strong downside move gives bears control over the market, and bulls try to push the market back to the upside. However, they fail and prices only consolidate slightly before bears gain finally control with another strong downside move.
So, in the first period, prices fall significantly between the open and close, then in periods 2,3 and 4, the bulls try to regain control. Still, they finally gave up in period 5 when the prices continuously fell from a high point to a close near the period’s low.
- Type: Bearish
- Number of candles required: 5
Special Candlestick Patterns
Doji Candle
A Doji Candle can signal a reversal of an uptrend and downtrend. What makes it special is that the price of the close of the period equals the opening price (or at least extremely near together). So, neither bulls nor bears have control here.
Suppose a Doji appears after multiple bullish periods. In that case, it can signal a reversal to the downside, while when a Doji appears after multiple bearish periods, it can signal a reversal to the upside.
The upper and lower wicks are relatively small.
- Type: Neutral
- Number of candles required: 1 + confirmation
Spinning Top
The Spinning Top’s small body and long wicks suggest that neither the bulls nor the bears have gained market control.
While the Doji candle has only small candle shadows, the spinning top has relatively long shadows (wicks), and the closing prices are nearly equal to the opening prices.
- Type: Neutral
- Number of candles required: 1 + confirmation
Inside Bar Pattern
The inside bar pattern is a special 2-candlestick pattern, where the price range of the second period is entirely within the range of the previous period’s candle. So the high of the current period is below the high of the previous period, and the low of the current period is above the low of the previous period.
The break of the smaller candlesticks’ high or low signals the direction of the trend.
- Type: Neutral
- Number of candles required: 2 + confirmation
3 Bar Play Pattern
The 3 Bar Play Pattern is a powerful pattern that combines the power of the inside bar pattern with the opening range breakout. After a first period with a really strong bullish or bearish candlestick with a big candlestick body, the market consolidates in a narrow range collecting energy to finally break out of the formations high or low.
- Type: Bullish and Bearish
- Number of candles required: 3 + confirmation
What Is a Candlestick Pattern
Candlestick patterns are trading tools used by traders who utilize technical analysis methods to predict the price of an underlying asset. There are dozens of candlesticks and candlestick patterns, where a single candlestick can already signal a trend confirmation or reversal, and also candlestick patterns which consist of a minimum of two candles and signal also a trend confirmation or reversal.
What are Reversal Candlestick Patterns
Reversal candlestick patterns are more speculative than trend continuation patterns and indicate a potential reversal of the overall market trend from an existing bullish uptrend to a bearish downtrend or vise versa, from a bearish downtrend to a bullish uptrend.
Bullish Reversal Patterns
The bullish reversal patterns are those that appear in a current downtrend, where higher and lower time frames point lower. Then a bullish reversal pattern appears on a time frame where traders try to predict that the subsequent price moves in other time frames follow the trend to reverse the market from a bearish to a bullish one.
Bearish Reversal Patterns
The bearish reversal patterns are those that appear in a current uptrend, where higher and lower time frames point higher. Then a bearish reversal pattern appears on a time frame where traders try to predict that the subsequent price moves in other time frames follow the trend to reverse the market from a bullish to a bearish one.
Day Trading Patterns – Top 5
There are bullish and bearish day trading patterns, which can be used to time the entry for long trades and sell-signals or shorting.
1. Bullish Flag Pattern
The bull flag pattern is an easy-to-identify pattern frequently used by day traders due to its simplicity. The pattern consists of a flagpole, which comes from the initial up move on a high momentum, causing a stock to make new highs on high volume. Then, the consolidation begins, and it remains in the upper one-third of the flagpole size, consisting of multiple up and down moves with lower highs and lower lows.
Then, after 2 or 3 consolidation waves, enormous trading volume kicks in and causes the stock to move sharply to the upside, breaking the flag resistance and the highest point of the previously built flag pole.
What makes the bullish flag pattern that powerful? It is a fact that the consolidation after the initial move attracted many short sellers who speculated the prices to go significantly lower. But the consolidation movement never even hit the 50% Fibonacci retracement, nor did it consolidate even further. Instead, the final move goes straight to all previous highs without ever consolidating back.
The length of the flagpole can be used to determine the price target of the breakout.
2. Bearish Flag Pattern
The bear flag pattern is the counterpart of the bull flag pattern and is primarily used by short sellers. The initial movement is a sharp price drop that happens in a short time, with prices falling straight to new lows. Then, a slight upside movement in multiple waves occurs, where prices stay in the lower third of the initial flagpole.
Once the short continuation triggers, the highest price of the consolidation can be used as a stop-loss level, while the length of the flagpole of the initial downside movement can be projected from the highest point of the consolidation to evaluate the target of the final downside movement after breakdown through all support levels.
3. Ascending Triangle Pattern
The ascending triangle pattern is basically similar to the bull flag pattern, and there is just a minor difference. In both cases, we have an initial movement on high momentum and high relative volume making new highs, and then a consolidation begins that stays in the upper third of the flagpole.
But while the bull flag pattern consolidates in slowly lowering lower highs, the ascending triangle pattern consolidation highs remain relatively at the same highs as the flagpole. In addition, the lows of the sideways consolidations are not lower than the low before and not relatively on the same level, but instead, they are higher lows in the sideway movement.
This way, the range of the price zig-zag within the triangle gets tighter until the final movement triggers a breakout to the upside, confirmed by high trading volume to make news highs. The price target can be evaluated by projecting the flagpole size from the last low in the triangle.
4. Cup and Handle Pattern
Cup and Handle is a popular chart pattern that day traders use to identify potential buy or sell opportunities. It is formed when the price of a stock or other asset moves in an upward direction, then pauses at a certain level before continuing its uptrend. The pause forms two distinct parts, the cup and the handle.
The cup part of this pattern occurs when the price begins to move up but eventually reaches a point where it stalls out for some time before continuing its trend upwards. This can be seen as a “cup” shape on the chart, with the bottom being where the stall occurred and the sides representing how long it took for prices to move back up after that stall.
After forming what looks like a cup, there will usually be another short-term pullback or consolidation period, which creates a handle extending from one side of the cup downwards towards slightly lower prices.
This handle should form over several periods (when day trading over various intraday candles, when investing over various daily candles) and provides an opportunity for traders to enter into positions if they believe that prices will continue their previous trend once this handle has been completed.
5. Head and Shoulders Pattern
The head and shoulders pattern is a reversal pattern and part of various technical analysis pattern scanners. The head and shoulders patterns indicate the reversal from a bullish trend to a bearish trend.
The head and shoulders pattern consists of two shoulders and one head. The left shoulder is formed first and is simply a recent high. Following the left shoulder, a minor consolidation follows with a higher low, then prices move to a new higher high, forming the head.
Once the head is formed, prices decline again near the latest higher low (the one built before the head was formed) and mark a new equal low near the latest one. From here, prices try to reach new highs but never reach the last high.
Therefore, here the right shoulder gets formed. Compared to the previous high, a new lower high gets formed, which then is the right shoulder and completes the head and shoulders pattern.
The pattern is confirmed once the lows of the head and shoulders pattern are broken to the downside. Often, the market breaks down and retests the previous support, and then the price level becomes resistant.
Candlestick Patterns Summary
Candlestick patterns and charts help traders to understand the price movements within the chosen time frame better and provide more insights than a line chart would. Backtesting software is frequently used to identify the candle patterns that work best in current market environments. A combination of candlestick patterns and other tools out of the technical analysis toolbox can improve analysis further.
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