Top 10 Candlestick Patterns To Trade the Markets

Candlestick patterns are an important tool in technical trading. Knowing them allows traders to interpret possible market trends and make decisions based on those conclusions. There are different types of candlestick patterns that can signal an upward or downward movement. This article will briefly discuss what candlestick patterns are and introduce the top 10 patterns that all traders should know in order to trade the markets with ease.

What are candlestick patterns?

A candlestick is a single bar that represents the price movement of a specific asset over a specific time period. The information displayed includes the opening, high, low and closing prices for the period.

Candlestick patterns consider one or more candlesticks to help technical traders make inferences about future movements and price patterns of the underlying asset. These are displayed graphically in charts used for market analysis. Our candlestick chart reading guide is a great place to start learning how to interpret candlesticks for trading.

Candlestick Patterns can be Bullish or Bearish

In order to identify the most commonly used candlestick patterns and apply them to trading strategies, traders need to understand how the slope of these patterns affects the market direction (trend). The table below summarizes the two main categories of price action that candlesticks can display. Many of these patterns are featured in our top 10 list below.

Bullish Candlestick Patterns:

Candlestick Pattern	Direction
Morning Star	Bullish (Reversal)
Bullish Engulfing	Bullish (Reversal)
Doji	Bullish/Bearish (Indecision)
Hammer	Bullish (Reversal)
Bullish Harami	Bullish (Reversal)
Piercing Pattern	Bullish (Reversal)
Inside Bars	Bullish (Continuation)
Long Wicks	Bullish/Bearish (Reversal)

Bearish Candlestick Patterns:

Candlestick Pattern	Direction
Evening Star	Bearish (Reversal)
Bearish Engulfing	Bearish (Reversal)
Doji	Bearish/Bullish (Indecision)
Bearish Harami	Bearish (Reversal)
Dark Cloud Cover	Bearish (Reversal)
Inside Bars	Bearish/Bullish (Continuation)
Long Wicks	Bearish/Bullish (Reversal)
Shooting Star	Bearish (Reversal)

Top 10 Candlestick Patterns Traders Should Know

1 – EVENING STAR AND MORNING STAR

• Evening Stars and Morning Stars candlestick patterns appear at the end of uptrends and downtrends, respectively, and tend to indicate reversal patterns.
• The name comes from the star arrangement of the arrangement.
• As shown in the chart below, the first candle points in the direction of the trend, followed by a bullish or bearish candle with a small body. The third candle looks in the reverse direction, ideally closing above the midpoint of the first candle.
• Trading this candlestick pattern requires a confirming candle on each reversal direction – for example, traders look for bearish candles after the evening star.

2 – BULLISH & BEARISH ENGULFING

• A bullish or bearish engulfing candlestick pattern can indicate a reversal pattern.
• The formation of a bullish engulfing candlestick indicates that the bulls are outnumbering the bears. As you can see in the chart below, the green body (bulls) completely covers the first candlestick (bears).
• A bearish engulfing candlestick pattern is a small green (or bullish) candle followed by a larger red (bearish) candle that submerges the small green candle.

3 – DOJI

• The Doji candlestick chart pattern is associated with indecision in the underlying asset market. This could indicate a potential trend reversal or consolidation.
• This pattern can appear at the top of an uptrend, the bottom of a downtrend, or in the middle of a trend.
• The candlestick itself has an extremely small body that sits between the longer upper and lower wicks.

4 – HAMMER

• A hammer candle is considered a bullish reversal and usually occurs at the end of a downtrend.
• This candlestick pattern consists of a small body with roughly equal open, high, low, and close prices. Below the body is a longer lower wick, which should be more than twice the length of the body. Reality can be bullish or bearish, but bullishness is considered more favorable.

5 – BULLISH & BEARISH HARAMI

• A bullish or bearish harami can indicate a reversal pattern.
• The word “Harami” means “pregnant” in Japanese, and this candlestick pattern got its name because it resembles a pregnant woman. The second candlestick in the pattern must be contained within the body of the first candlestick, as shown in the image below. This applies to bullish and bearish haramis.
• A downtrend precedes a bullish maternity, and an uptrend precedes a bearish maternity.

6 – DARK CLOUD COVER

• The dark cloud cover pattern is considered a bearish reversal pattern.
• This candlestick pattern must occur in an uptrend. As you can see in the chart below, bullish candles are followed by bearish candles.
• This bearish candlestick must meet certain criteria to validate the dark cloud cover pattern:

1. The opening price must be higher than the previous day’s closing price.

2. The close must be below the midpoint of the previous bullish candle.

• The dark cloud cover pattern is similar to a bearish engulfing pattern. The difference between the two is related to the second candle. In a bearish engulfing pattern, the second candle opens above the close of the first candle, while the dark cloud cover opens above the high of the first candle and closes below the midpoint of the body of the first candle.

7 – PIERCING PATTERN

• A piercing pattern is seen as a bullish candlestick reversal pattern at the end of a downtrend or within an uptrend or during a pullback from support.
• The perforation pattern is formed with two components:

1.

bearish candle

2. Bullish candlestick

A penetration pattern occurs when a bullish (second) candle closes above the middle of a bearish (first) candle in a

downtrending market.
The opening price of the second candle should fall when the market opens and closes above the midpoint of the

previous candle, as shown below.
The perforated and dark cloud cover modes have similar characteristics. The difference is that the above penetration line is a bullish reversal pattern, while the dark cloud cover pattern is a bearish reversal pattern.

8 – INSIDE BARS

• The inside bar pattern is used in trending markets where the highs and lows of the inside bar are within the parameters of the previous candle or “mother bar”.
• inside bars trade in the direction of the trend – when the market is in a downtrend, traders will try to continue short positions in the presence of inside bars. The same principle applies to an uptrend.
• A trade in the direction of the trend is not always a given, as key support/resistance levels may indicate a reversal. Traditionally, traders enter an entry above or below the high or low of the parent candle, depending on the direction of the trade.
• Inside candlesticks also resemble bullish or bearish harami candlestick patterns. The main difference is that for inside bars, the highs and lows are considered and the real body is ignored.

9 – LONG WICKS

• A long wick candlestick pattern usually indicates a trend reversal.
• Long wicks occur when prices are tested and then rejected. The wick indicates the price of rejection.
• Spotting trends is important for interpreting what a long wick means.
• Identifying key levels and price action is often used in conjunction with long wick patterns.

10 – SHOOTING STAR

• A shooting star is a bearish candlestick with a long upper wick, little or no lower wick, and a small body near the daily low. It occurs after an uptrend and may indicate a downward trend reversal.
• The distance between the candle’s high and open must be more than twice the distance of the meteoroid. The distance between the day’s low and the close must be very small or nonexistent.