If you're new to trading, understanding candlestick patterns is like learning the language of the market itself. These patterns, developed over decades of watching how prices move, give us hints about where prices might go next. In this guide, we'll explore the top 10 candlestick patterns that every beginner trader should know. Whether you're curious about how markets work or eager to improve your trading skills, mastering these candlestick patterns for beginners will enable you to identify potential opportunities with confidence.
Key Takeaways
-
Candlestick charts are a visual representation of an asset’s price movement (opening, closing, high, and lows, in a specific timeframe.
-
Green/white bodies indicate upward momentum (bullish, close > open), while red/black bodies indicate a dip in price (bearish, close < open).
-
Bullish Harami and Rising Three methods are patterns indicating a rise in stock price. Upside Gap Two Crows and Dark Cloud Cover reflect a bearish sentiment forming in a market.
-
No single pattern guarantees success; you should use them to decode market sentiment, confirm entry/exit points, and use other technical indicators.
Candlestick charts are among the most important tools for traders. They visually represent an asset's price movement—including the opening price, closing price, highest, and lowest points—within a specified timeframe.
The thick body and thin wicks of a candle instantly communicate market sentiment: green/white for bullish momentum and red/black for bearish dips. These formations help traders identify momentum, potential breakout zones, and support/resistance levels.
Mastering key patterns like the Hammer, Morning Star, Bullish Engulfing, and Dark Cloud Cover is crucial for decoding market moves. This guide explores 10 essential candlestick patterns for beginners to confirm trading decisions and manage risk.
What Is a Candlestick?
Candlesticks are critical for anyone wanting to learn trading; they are arguably one of the most crucial charting tools. They denote the price movement of the asset in a specified time frame. Each part of the candlestick represents key data points of the stock: the opening price, the closing price, the highest and lowest points of the stock in a specified timeframe. The candle pattern of a stock can show its momentum, breakout zones, and identify the support and resistance lines of the particular asset.
A single candle pattern shows us if the stock is dipping or rallying. Over time, these stock market candle patterns reveal how the stock has performed historically and its potential momentum in the near future. This helps traders determine their trading strategy for that stock.
The thickest part of the candlestick is called the body, which represents the difference between the opening price and the closing price in that time frame. The thin lines above or below the body are called wicks; which represent the price movement to a certain point for a smaller period of time in that timeframe. While learning trading candlestick patterns, one must also know that green or white candles show an upward momentum, and red or black candles indicate a dip in the price.
The Most Popular Candlestick Patterns
1. Hammer Candlestick Pattern
The hammer candlestick pattern features a short body with a long lower wick and typically appears at the bottom of a downtrend. It suggests that despite initial selling pressure, strong buying interest pushed prices higher. The colour of the body can vary, with green hammers indicating a stronger bullish market compared to red hammers.
An inverted hammer is a similar bullish pattern in which the upper wick is long, and the lower wick is short. It indicates an initial bout of selling pressure followed by buying interest that prevents the price from falling further. The inverted hammer suggests that market control may shift to buyers in the near future.
2. Bullish Engulfing Pattern
The bullish engulfing pattern consists of two candlesticks. The first candle has a small red body that is entirely engulfed by a larger green candle in the next session. Despite opening lower than the first candle, this bullish candlestick pattern shows an upward price sentiment in markets.
3. Piercing Line Pattern
The piercing line pattern consists of two candles. First, there is a long red candle, followed by a long green candle. Typically, there is a notable gap between the closing price of the first candle and the opening price of the green candle. This pattern suggests strong buying pressure, as the price is pushed up to close above the midpoint of the previous red candle's body.
4. Morning Star Pattern
The morning star pattern is seen as a hopeful sign during a market downtrend. It consists of three candles: a long red candle, a short-bodied candle in between, and a long green candle. Importantly, the 'star' does not overlap with the longer bodies, showing gaps both open and closed.
It indicates that the selling pressure from the first day is easing, suggesting a potential shift towards a bullish market trend.
5. Three White Soldiers
The three white soldiers pattern unfolds over three days, characterised by three consecutive long green (or white) candles with minimal wicks. Each candle opens and closes at progressively higher levels compared to the previous day.
This pattern is a robust bullish signal observed after a downtrend. It indicates a consistent increase in buying pressure and strong upward momentum in the market.
6. Hanging Man
The hanging man pattern is the bearish counterpart of a hammer, sharing a similar shape but appearing at the end of an uptrend.
This candlestick indicates a notable sell-off during the trading day, followed by a recovery where buyers manage to push the price back up. The substantial sell-off suggests a potential shift where bullish control over the market may be weakening.
7. Shooting Star
The shooting star pattern resembles the inverted hammer but appears during an uptrend. It is characterised by a small lower body and a long upper wick.
Typically, the market opens slightly higher with a small gap and reaches an intraday high before closing just above the opening price. This formation is likened to a star falling from the sky, signalling a potential reversal in the uptrend.
8. Tweezer Bottom
The tweezer bottom pattern is typically observed at the bottom of a downtrend. It involves two candles with identical lows but different colours. A reliable reversal signal occurs when the first candle has a large body and the second has a small body.
This pattern indicates a strong bullish sentiment, suggesting that buyers have entered the market and are purchasing at the same price level, while sellers' influence diminishes. Identifying a Tweezer Bottom on a price chart is straightforward when two or more candles share identical lows.
9. Dark Cloud Cover
This dark cloud cover candlestick pattern signifies a bearish reversal, akin to a shadow cast over previous optimism. It consists of two candles: a red candle that opens above the prior green body and closes below its midpoint.
This pattern indicates a shift in market sentiment, with bears dominating, driving prices significantly lower. Short wicks on the candles suggest a strong and decisive downtrend during the session.
10. Three Black Crows
This three black crows candlestick pattern consists of three consecutive long red candles with minimal or no wicks. Each session opens near the previous day's closing price, but persistent selling pressure drives the price progressively lower at each close.
This pattern is interpreted by traders as the beginning of a bearish downtrend, indicating that sellers have gained control over buyers during three consecutive trading sessions.
Other Popular Candlestick Patterns
Concealing Baby Swallow
A rare four-candlestick pattern indicative of a bearish trend, the Concealing Baby Swallow is a classic continuation pattern that appears during a sharp decline.
The structure of this pattern is two long red candles showing heavy selling of the stock, immediately followed by a red short candle that closes near its open. The final fourth candle is longer than the third, completely engulfing the third candle and concealing it, and ‘swallowing’ the baby candle.
The Concealing Baby Swallow is a candlestick pattern that heavily confirms and already bearish trends, indicating a further decline
Rising Three Methods
The Rising Three Method typically appears in an existing bullish trend; it is a continuation candle pattern. It is denoted by a one strong uptrend candle, followed by three small downtrend candles, and finishing with a strong bullish candle that is longer than the first bullish candle. The three bearish candles in the middle indicate profit booking by traders, rather than a drop in the price.
This pattern will have one large green candle, three smaller red candles, followed by a long green candle in the middle of a chart, showing the stock price is rising.
The Rising Three Method candlestick pattern is a clear sign that the bullish trend will continue as buyers are still controlling the momentum. This candle pattern indicates the stock is stable in the ongoing trend, and traders can take a buy call to book profits.
Bullish Abandoned Baby
A rare candlestick pattern that is typically formed at the end of a bearish or downtrend of a stock price. The Bullish Abandoned Baby is made of three candles; the first is a long red candle, followed by a Doji candle (where the opening price and closing price are nearly the same) that gaps completely below the first candle's body, and is then followed by a strong green, bullish candle that gaps up from the Doji and is longer than the first red candle.
The Bullish Abandoned Baby is the first sign of the market being in favour of the stock, and traders are now taking a buy position in it. This pattern is considered a reliable indicator of a market trend reversal and is often confirmed by a surge in buy volume. Its appearance most likely brings a bullish trend in the asset.
Check out the Abandoned Baby Pattern in detail here.
Upside Gap Two Crows
The Upside Gap Two Crows candlestick pattern indicates a trend reversal that appears in a bull trend. It is made up of three candles, starting with a green candle, followed by two red candles that open higher but close lower than the ones before it. The first bearish candle gaps up from the bullish one, while the second opens above the previous close and closes below the first bearish candle’s body.
Upside Gap Two Crows pattern is an early sign of market correction. Its formation represents sellers taking control over the stock while reducing buying pressure in the market. The confirmation of this downtrend is usually solidified by other candlestick patterns, helping traders determine market sentiment through the appearance of an upside gap two crows.
Bullish Harami
A simple, straightforward two-candle uptrend indicator, the Bullish Harami appears at the end of a bear run. The first red candle is typically long, after which a smaller green candle whose entire body fits within the length of the previous candle’s body. The structure of this candle pattern is a lot like a pregnant woman; the long candle denoted as the mother, and the baby is the smaller green candle, hence ‘harami’ in the name, which means pregnant in Japanese.
With the presence of the Bullish Harami candlestick pattern, traders can gauge the building of buyers' interest in the stock and the fading of sellers' pressure on that asset. A simple pattern to identify, the Bullish Harami is a sure sign of a bear trend ending and the stock price rising.
Dark Cloud Cover
Conclusion
Stock market candle patterns directly denote the current market sentiment in a stock and are visual analytical tools that help traders understand complex data at a glance. Patterns like Bullish Harami, Dark Cloud Cover, Rising Three Method are critical in letting traders know which way the market sentiment is moving at a particular time. It allows traders to make informed decisions and boost profitability.
Identifying candle patterns like Upside Gap Two Crows and Bullish Abandoned Baby helps traders prepare for a trend reversal and take positions accordingly. Evening Star, Hammer, and piercing line formations confirm the price action of the stock. Reading this data and implementing trading strategies based on candle pattern analysis can lead to profitable positions for the trader.
Simply put, trading candlestick patterns are powerful tools all traders must be able to decode, allowing them to make better trading decisions and timely risk management.