Last week we put together our list for the best chart patterns that we like to trade here at Tiger Wolf Capital. For those of you who enjoyed the last chart guide and found it helpful with creating your own trend analysis, we are back this week with our top candlestick pattern picks. There are a lot of candlestick patterns, and if you have struggled to sift through the sea of information out there, let us do the heavy lifting for you and break each one down. Our goal is to help you all become better traders, and the best way to do that is by going back to the basics and building up from there. So stick with us as we work our way through our top 20, which will include both bearish and bullish patterns.
What are Candlesticks?
- Candlesticks show supply and demand by visually representing the size of price moves with different colors.
Traders use the candlesticks to make trading decisions based on regularly occurring patterns that help forecast the short-term direction of the price.
- Candlesticks provide traders with a visual representation status of the market during a trading period.
A trading period can be 1 min, 5 min, 15 min, 30 min, 1 hour, etc.
- Candles show you the true price action of a stock and they confirm volume, buying pressure, and selling pressure.
- There are 4 components to a candlestick; High, Low, Close, Open.
The high represents the highest price that the stock traded during this period.
The Low represents the lowest price that the stock traded during this period.
The Open represents what was the opening price at the beginning of the period.
The Close represents what was the closing price at the closing of the period.
Why do we care about candlesticks patterns? For the same reason, we care about chart patterns. Patterns in our charts help us identify how price is currently moving and helps better understand what we can anticipate is going to happen next. Now we all know that nothing the stock market is guaranteed to happen, but knowing what typically happens when we see certain things, helps us gain an edge in our trading.
So let’s dig in.
Candlestick patterns, here is the breakdown of bullish candlesticks vs bearish candlesticks patterns
- Inverted hammer
- Piercing Pattern
- Bullish Engulfing
- The Morning Star
- Three White Soldiers
- White Marubozu
- Three Inside Up
- Bullish Harami
- Tweezer Bottom
- Hanging man
- Dark cloud cover
- Bearish Engulfing
- The Evening Star
- Three Black Crows
- Black Marubozu
- Three Inside Down
- Bearish Harami
- Shooting Star
- Tweezer Top
To start off we have the “Hammer” pattern. This candlestick pattern will forms when prices for a set period of time move significantly lower after the open, but then rallies to close well above that period’s low. The candle will have a longer lower wick. If a hammer has formed after a downtrend, it can be a precursor to a potential reversal. Hammers are most effective when they are preceded by at least three or more declining candles. A declining candle is one that closes lower than the close of the candle before it. Hammer candlesticks indicate a potential price reversal to the upside. The price must start moving up following the hammer, this will be the confirmation you need.
When evaluating a chart, for us to consider the inverted hammer pattern we would need to see the following key marker. The Inverted Hammer also forms in a downtrend and represents a likely trend reversal or support. It’s identical to the Hammer except for the longer wick is the upper wick, rather the lower one. When this happens, it can be a signal for a reversal to occur and we would see an upward trend begin to form.
Here we have a more specific time frame when evaluating the chart. The piercing pattern is a 2-day reversal on the chart. We start on the first day with a long red candle in a downtrend, but on the second day, the candle starts off at a new low but sees buying pressure to close as a green candle above the previous day’s midline. For it to be considered a signal for a potential bullish reversal the 2nd-day candle must close above the midline, not below.
With the Bullish engulfing pattern, the chart is self-explanatory, but as with the piercing pattern, we have another 2 day time period to evaluate. The 1st day’s candle is a smaller red candle that on the 2nd day will be “engulfed” by a large green candle. The green candle to be considered a signal for a potential bullish reversal must be larger than the body of the red candle.
To evaluate the Morning star pattern we will have to look at the 3 day time frame on the chart. Here we will be looking for 3 separate candlesticks, 1 from each day in the trend. The first day we will see a long red candle that is continuing the downtrend, followed by another candle that opens lower than the previous day but closes slightly higher as a small green candle. These two should be followed by a large green candle that has to close above the midline of the red candle from the first day, signaling our potential reversal out of the downtrend.
Three white soldiers
The “three white soldiers’ ‘ pattern is one of the simpler patterns to observe but has a strict set of requirements to be considered ideal. First as the name implies, we need to see 3 consecutive green candles after a downward trend. Each consecutive candle will have to open higher than the previous time periods open, and preferably the opening price of each candle will be midway or higher of the previous candle’s body. The last stipulation that must be met to be considered an accurate representation of this pattern is that each green candle has to have a small to non-existent top wick. Once all of these are met, we can consider the signal for the trend reversal.
The white marubozu is a reversal of a downtrend signaled by a single candle, in this case we are looking for 1 candlestick that can lead to the upward trend. Since the candlestick is isolated, the requirements include strong buying pressure, which means that the candlestick will have a very large green body with no top wick. We want to see that buyers are exerting strong pressure that would signal a change in investor sentiment.
Three Inside Up
The Three Inside Up candlestick pattern as the name suggests involves 3 candles for the chart analysis. The first being a long red bearish candle, the second candlestick would be a small bullish green candle. The small green candle should be within the range or body of the first red candlestick. The 3rd candlestick should be a long green candlestick with strong buying volume which would signal a reversal may be occuring.
The bullish harami pattern will involve 2 candlesticks in the given time period. There should be a visible downtrend occuring before this pattern forms. When the first of the 2 candlesticks forms, it will be a very large red candle, and it will be followed by a small but green candlestick. This pattern will signal that buyers are back into the market for the stock, and a reversal may be coming if buying volume follows.
The tweezer bottom pattern involves 2 candlesticks and as the previous patterns, it begins with identifying the downward trend in the selected time period. The 2 candle candlesticks we are looking for here will be almost identical but with a key difference. The first will be a red bearish candle and the second will be a green bullish candle, but both will have the same low point. The same low point but opposite colors is how we would identify the tweezer bottom.
And now we switch over to Bearish Candlesticks Patterns
Now moving into the bearish candlestick patterns, we start off with the hanging man pattern. During an Upward trend we will see a candle with a steep selloff that rallies back but the candle will still close partially red at the end of the given time period.
Dark Cloud Cover
With the dark cloud cover candlestick, we are looking at analyzing two candles again. Both candlesticks here should have fairly large bodies and the shadows of each are usually small or nonexistent. Although this is not the main point to look for. The red candlestick must open above the previous green candlesticks close and then close below the midpoint of the green candlestick’s body to qualify as a signal for a potential reversal.
With the bearish engulfing candlestick pattern, we will be simply looking for the opposite of the bullish engulfing. This is a bearish reversal pattern that will involve 2 candles with a previous upward trend present. As before, this will be a 2 day time period we will be analyzing the candles for. The first candle will be a small green candle, followed by a longer red candle that completely engulfs the body of the smaller green bullish candle. It does not require the entire range (top wick to the bottom) of the candle to be engulfed, just the open and closing point on the candle.
The Evening Star
We had the morning star previously, so it’s safe to assume the evening star pattern will follow a similar concept. The Evening star will begin with a very strong uptrend and we will be looking at candles within a 3 day time frame here. The first day must be represented by a long green candle body to continue the uptrend. The second day must represent indecision with a Star candle formation, relaying that supply and demand for the security is fairly equal. The third day must have a long red candle body that closes down at least halfway into the body of the first day’s green candle. This will show strong selling pressure from bears, signaling a potential downtrend.
Three Black Crows
The three black crows will be the inverse of the Three white soldiers pattern we reviewed earlier. Here we will be evaluating 3 consecutive candles that should exhibit a steep downtrend. To start there should be a clear and visible upward trend before we see the first of the 3 long red candles. Each consecutive candle ideally will be longer than the previous but should at least close past the midline of the previous candle. If each of the 3 candles achieves this, then we can consider it a signal for increased selling and potential downtrend.
The black marubozu uses a single candlestick for the potential bearish reversal signal. Here we will have a very strong upward trend visible initially before the red bearish candle forms. For us to consider it to be a black marubozu pattern the lone red candle must be a long red candle that has strong selling pressure. So when we look at the candle we will see it closes at its lowest point, without rallying back upward. This may signal bears are re-entering the market
Three Inside Down
The three inside down pattern will include 3 candlesticks that we will be evaluating within our given time frame. With an upward trend present we will have 1 green candle followed by 2 red candles with increasing selling pressure. So the first candle we will need to see is the strong green candle, followed by a smaller red candle that fits within the body of the green candle. Finally the third candle will be a strong red bearish candle that will close lower than the first candle’s low price.
The bearish harami has a similar concept to the engulfing candles where we had a small candle followed by a larger “engulfing” candlestick. Although with the bearish harami, we will see a larger candle followed by a smaller candle. The large initial candle should be a strong large green candle, followed by a smaller red candle that fits within the first candle’s body. Although it is not a large red candle, the harami will signal the strong buying pressure has eased and sellers have entered the market.
The shooting star pattern will be a shorter time frame pattern, we will be looking for 1 candlestick here. During an upward trend a candle will form where the price will trade much higher than its open but will end up closing near the opening price. The sell off can be a signal the buying interest has settled and we will see a downtrend from that point on.
The tweezer top will be the inverse of the tweezer bottom pattern we saw earlier. Here we will be looking for 2 candles during a strong upward trend. They will both need to have identical top wicks and be symmetrical consecutive candles. The key difference will be that the first candle is a green bullish candle, but followed by an identical red bearish candle. If these criteria are met then we can consider this a bearish signal, where a potential downtrend can be forming.
For those of you who found this useful, I hope you guys and gals will keep checking back in with us. Our goal is to help everyone become better traders, and if you are just starting out and need a more personalized approach, discord can be a great option. In the discord, we offer in-depth analysis for our stock picks that week, 1 on 1 sessions to help identify strengths and weaknesses, and a supportive trading community.
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