Candlestick Patterns: How to Read Candlestick Charts

There are over 100 candlestick patterns to learn and recognize, making the whole analysis process very time-consuming. I would recommend using the power of modern stock charting software to recognize candlestick patterns for you. This in-depth article will explain candlestick charts, how to interpret them, and their importance in trading. We’ll also provide tips on spotting reliable patterns to help you make successful trades and avoid losses. To read candlesticks, you must interpret how the body and wick length translate into price action and trading psychology. Knowing which candles are reliable in bull and bear markets also helps.

How to Read Stock Candles: A Comprehensive Guide

The harami is a reversal pattern where the second candlestick is entirely contained within the first and is opposite in color. The Harami Cross has a second candlestick in a related pattern that’s a doji. The Spinning Top how to make a payment from a wallet correctly and safely candlestick pattern is formed by one single candle. The Gravestone Doji candlestick pattern is formed by one single candle. The Black Marubozu candlestick pattern is formed by one single candle.

• An engulfing candle pattern is one such indicator of a potential change in market trend.
• A bearish tweezer candlestick is formed, which looks like the continuation of the ongoing downtrend.
• By analyzing the collective behavior of multiple days, you can gain profound insights into the current mindset of market participants and a valuable glimpse into future price action.
• Note the long lower tail, which indicates that sellers made another attempt lower, but were rebuffed and the price erased most or all of the losses on the day.

An important consideration is the location of where these engulfing patterns are situated in the context of an overall price trend. In the illustration above, it becomes evident that when these patterns are situated at the extremes of a price trend, they tend to have a bearing on where price is likely to head next. The relationship of the first and second candlestick should be of the Bearish Engulfing candlestick pattern. Traders can enter a short position if next day a bearish candle is formed and can place a stop-loss at the high of the second candle.

Lengthy wicks signify failed extreme highs or how to buy people lows, foreshadowing short-term trend reversals. A dragonfly doji is a type of candlestick pattern which is formed when the open, close and high prices are the same, so it will look like a T shape. This suggests that the market could be struggling to continue in the current direction, as the candlestick opened and closed at the same level. Following a downward market move, a dragonfly doji could signal a market turn, with bullish movement ahead. Following an upward market move, it may signal the market is about to turn bearish.

Recognize Bullish Candlestick Patterns.

This substantial evidence solidifies the bullish nature of this pattern. After conducting 1,553 trades on 575 years of data, we confirm the win rate to be 0.65% per trade. A 0.65% win rate means that trading a Gravestone Doji long will net you an average of 0.65% profit per trade if you sell after ten days. Conversely, short-selling a Gravestone Doji, you should expect to lose -0.65% per trade.

White Marubozu

We perform original research and testing on charts, indicators, patterns, strategies, and tools. Our strategic partnerships with trusted companies support our mission to empower self-directed investors while sustaining our business operations. Candles that are more reliable can help traders make profitable trades with higher accuracy, while less reliable candles increase risk and may not yield any return on investment.

Other bullish patterns include the Bullish Harami and Bullish Marubozu, which indicate potential reversal signals after long bearish trends. The Hanging Man is a bearish reversal pattern that emerges after an uptrend and signals a potential exhaustion of buying power. The long lower wick shows sellers pushed the price substantially lower intraday. But by the close, buyers return and pushes the price back up while the selling pressure fades. Doji, or crosses, are usually made up of a single candlestick and they show that the opening and closing price of a candlestick is virtually the same.

We and our partners process data to provide:

By utilizing these tools and techniques, traders can gain insight into potential price direction and adjust their trading strategies accordingly. The formation of a candlestick requires the open, high, low and close prices of a specific period. For example, a trader would need the daily, open, high, low and close price to generate a daily candlestick. For the candlestick to be successfully evaluated, you would need to wait for the closing price of a session.

Candlestick vs. Bar Charts

Many candlestick patterns rely on price gaps as an integral part of their signaling power, and those gaps should be noted in all cases. As for FX candles, one needs to use a little imagination to spot a potential candlestick signal that may not exactly meet the traditional candlestick pattern. For example, in the figure below taken from an FX chart, the bearish engulfing line’s body does not exactly engulf the previous day’s body, but the upper wick does. With a little imagination, you’ll be able to spot certain patterns, although they might not be textbook in their formation. A daily candlestick represents a market’s opening, high, low, and closing (OHLC) prices.

On the next day, the second day’s bullish candle’s low indicates a support level. The Tweezer Bottom candlestick pattern is a bullish reversal candlestick pattern that is formed at the end of the downtrend. The Three Inside Up is a multiple candlestick pattern formed after a downtrend indicating bullish reversal.

Her expertise is in personal finance and investing, and real estate.

Doji candles are some of the easiest patterns to recognise on a trading chart, making them more reliable than others, although these can still be interpreted in different ways. Examples include the dragonfly, gravestone, long-legged, star, and hammer patterns, so learn more about doji candles. Candlestick charts can be displayed and customised through our online trading platform, Next Generation. We have several significant charting features, such as drawing tools and price projection tools, draw fib retracement ensuring that your trades are set up as clearly as possible.