What is a candlestick?

A candlestick is a way of displaying information

about an asset’s price movement. Candlestick
charts are one of the most popular components of
technical analysis, enabling traders to interpret
price information quickly and from just a few price
bars.

This article focuses on a daily chart, wherein each

candlestick details a single day’s trading. It has
three basic features

The body, which represents the open-to-close

range

The wick, or shadow, that indicates the intra-day

high and low

The colour, which reveals the direction of market

movement – a green (or white) body indicates a
price increase, while a red (or black) body shows
a price decrease
Over time, individual candlesticks form
patterns that traders can use to recognise
major support and resistance levels. There are
a great many candlestick patterns that indicate
an opportunity within a market – some provide
insight into the balance between buying and
selling pressures, while others identify
continuation patterns or market indecision.

Six bullish candlestick

patterns
Bullish patterns may form after a market
downtrend, and signal a reversal of price
movement. They are an indicator for traders to
consider opening a long position to pro t from
any upward trajectory
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1. Hammer

The hammer candlestick pattern is formed of a

short body with a long lower wick, and is found at
the bottom of a downward trend.

A hammer shows that although there were selling

pressures during the day, ultimately a strong buying
pressure drove the price back up. The colour of the
body can vary, but green hammers indicate a
stronger bull market than red hammers.
2. Inverse hammer

A similarly bullish pattern is the inverted hammer.

The only difference being that the upper wick is
long, while the lower wick is short.

It indicates a buying pressure, followed by a selling

pressure that was not strong enough to drive the
market price down. The inverse hammer suggests
that buyers will soon have control of the market.
3. Bullish engul ng

The bullish engul ng pattern is formed of two

candlesticks. The rst candle is a short red body
that is completely engulfed by a larger green
candle.

Though the second day opens lower than the rst,

the bullish market pushes the price up, culminating
in an obvious win for buyers.
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 4. Piercing line

The piercing line is also a two-stick pattern, made

up of a long red candle, followed by a long green
candle.

There is usually a signi cant gap down between the

rst candlestick’s closing price, and the green
candlestick’s opening. It indicates a strong buying
pressure, as the price is pushed up to or above the
mid-price of the previous day.
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5. Morning star

The morning star candlestick pattern is considered

a sign of hope in a bleak market downtrend. It is a
three-stick pattern: one short-bodied candle
between a long red and a long green. Traditionally,
the ‘star’ will have no overlap with the longer
bodies, as the market gaps both on open and
close.

It signals that the selling pressure of the rst day is

subsiding, and a bull market is on the horizon.
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6. Three white soldiers

The three white soldiers pattern occurs over three

days. It consists of consecutive long green (or
white) candles with small wicks, which open and
close progressively higher than the previous day.

It is a very strong bullish signal that occurs after a

downtrend, and shows a steady advance of buying
pressure.
Six bearish candlestick
patterns

Bearish candlestic patterns

usually form after an uptrend, and

signal a point of resistance. Heavy
pessimism about the market price
often causes traders to close their long
positions, and open a short position to
take advantage of the falling price.
1. Hanging man

The hanging man is the bearish equivalent of a

hammer; it has the same shape but forms at the
end of an uptrend.

It indicates that there was a signi cant sell-off

during the day, but that buyers were able to push
the price up again. The large sell-off is often seen
as an indication that the bulls are losing control of
the market.
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2. Shooting star

The shooting star is the same shape as the

inverted hammer, but is formed in an uptrend: it has
a small lower body, and a long upper wick.

Usually, the market will gap slightly higher on

opening and rally to an intra-day high before
closing at a price just above the open – like a star
falling to the ground.
 3. Bearish engul ng

A bearish engul ng pattern occurs at the end of an

uptrend. The rst candle has a small green body
that is engulfed by a subsequent long red candle.

It signi es a peak or slowdown of price movement,

and is a sign of an impending market downturn.
The lower the second candle goes, the more
signi cant the trend is likely to be.
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4. Evening star

The evening star is a three-candlestick pattern that

is the equivalent of the bullish morning star. It is
formed of a short candle sandwiched between a
long green candle and a large red candlestick.

It indicates the reversal of an uptrend, and is

particularly strong when the third candlestick
erases the gains of the rst candle.
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5. Three black crows

The three black crows candlestick pattern

comprises of three consecutive long red candles
with short or non-existent wicks. Each session
opens at a similar price to the previous day, but
selling pressures push the price lower and lower
with each close.

Traders interpret this pattern as the start of a

bearish downtrend, as the sellers have overtaken
the buyers during three successive trading days.
6. Dark cloud cover

The dark cloud cover candlestick pattern indicates

a bearish reversal – a black cloud over the previous
day’s optimism. It comprises two candlesticks: a red
candlestick which opens above the previous green
body, and closes below its midpoint.

It signals that the bears have taken over the

session, pushing the price sharply lower. If the
wicks of the candles are short it suggests that the
downtrend was extremely decisive.
 Four continuation
candlestick patterns

If a candlestick pattern doesn’t indicate a

change in market direction, it is what is
known as a continuation pattern. These can
help traders to identify a period of rest in the
market, when there is market indecision or
neutral price movement
1. Doji

When a market’s open and close are almost at the

same price point, the candlestick resembles a cross
or plus sign – traders should look out for a short to
non-existent body, with wicks of varying length.

This doji’s pattern conveys a struggle between

buyers and sellers that results in no net gain for
either side. Alone a doji is neutral signal, but it can
be found in reversal patterns such as the bullish
morning star and bearish evening star.
2. Spinning top

The spinning top candlestick pattern has a short

body centred between wicks of equal length. The
pattern indicates indecision in the market, resulting
in no meaningful change in price: the bulls sent the
price higher, while the bears pushed it low again.
Spinning tops are often interpreted as a period of
consolidation, or rest, following a signi cant uptrend
or downtrend.

On its own the spinning top is a relatively benign

signal, but they can be interpreted as a sign of
things to come as it signi es that the current market
pressure is losing control.
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3. Falling three methods

Three-method formation patterns are used to

predict the continuation of a current trend, be it
bearish or bullish.

The bearish pattern is called the ‘falling three

methods’. It is formed of a long red body, followed
by three small green bodies, and another red body
– the green candles are all contained within the
range of the bearish bodies. It shows traders that
the bulls do not have enough strength to reverse
the trend.
4. Rising three methods

The opposite is true for the bullish pattern, called

the ‘rising three methods’ candlestick pattern. It
comprises of three short reds sandwiched within
the range of two long greens. The pattern shows
traders that, despite some selling pressure, buyers
are retaining control of the market.