Candlestick Patterns

Chart Patterns 3 min read Beginner

Imagine each candlestick on your chart is a tiny story. These stories, when read together in specific sequences, form what we call candlestick patterns. Originating in Japan, these patterns are powerful visual signals that can give traders insights into market sentiment (who's winning—buyers or sellers?) and potential future price movements. They act like quick "flashes" of information, often signaling reversals or continuations of trends.

Let's explore some of the most common and widely recognized candlestick patterns.

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Bullish Reversal Patterns: Signaling a Rise -

These patterns typically appear after a downtrend and suggest that buyers are gaining control, indicating a potential price increase.

Bearish Reversal Patterns: Signaling a Fall

These patterns typically appear after an uptrend and suggest that sellers are gaining control, indicating a potential price decline.

Hammer:

Appearance: A small body (green or red) at the upper end of the trading range, with a long lower wick (shadow) that is at least twice the length of the body. It has little to no upper wick.

Meaning: The price fell significantly during the period, but buyers pushed it back up near the open. This shows strong buying pressure overcoming selling pressure.

Signal: A potential reversal from a downtrend to an uptrend. The longer the lower wick, the more significant the rejection of lower prices.

Hanging Man:

Appearance: Looks identical to a Hammer, but appears after an uptrend. A small body (green or red) at the upper end of the trading range, with a long lower wick.

Meaning: Buyers initially pushed the price higher, but sellers then drove it significantly down, only for it to close near the open. This suggests that the buying pressure might be weakening, and sellers are testing the waters.

Signal: A potential reversal from an uptrend to a downtrend, especially if confirmed by a bearish candle in the next period.

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Bullish Engulfing:

Appearance: A small bearish (red) candle is completely "engulfed" or covered by a larger bullish (green) candle on the following period. The larger green body covers the entire range of the previous red body.

Meaning: Sellers were in control initially (small red candle), but then buyers took over with overwhelming force (large green candle), pushing prices significantly higher.

Signal: A strong indication of a potential trend reversal from bearish to bullish. It shows a significant shift in market sentiment.

Bearish Engulfing:

Appearance: A small bullish (green) candle is completely "engulfed" or covered by a larger bearish (red) candle on the following period.

Meaning: Buyers were in control initially (small green candle), but then sellers took over with overwhelming force (large red candle), pushing prices significantly lower.

Signal: A strong indication of a potential trend reversal from bullish to bearish. It shows a significant shift in market sentiment.

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Morning Star:

Appearance: A three-candle pattern:

1. A large bearish (red) candle (continuation of downtrend).

2. A small-bodied candle (could be green or red) that "gaps" down, showing indecision.

3. A large bullish (green) candle that closes well into the body of the first bearish candle.

Meaning: After a strong selling period, the market shows indecision, and then buyers step in powerfully, indicating a shift from pessimism to optimism.

Signal: A strong bullish reversal pattern.

Evening Star:

Appearance: A three-candle pattern:

1. A large bullish (green) candle (continuation of uptrend).

2. A small-bodied candle (could be green or red) that "gaps" up, showing indecision.

3. A large bearish (red) candle that closes well into the body of the first bullish candle.

Meaning: After a strong buying period, the market shows indecision, and then sellers step in powerfully, indicating a shift from optimism to pessimism.

Signal: A strong bearish reversal pattern.

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Here you can find much more information about candlestick patterns: https://thepatternsite.com/CandleEntry.html

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