Candlestick patterns have been an essential part of traders’ toolkit for centuries. Originating in Japan in the 18th century, they offer a visually intuitive way to interpret price data, providing clues about market psychology and potential reversals in the market. Here, we’ll look at the top 5 candlestick patterns that traders should know.
The Top 5 Candlestick Patterns
## 1. Hammer and Inverted Hammer
The Hammer and Inverted Hammer are bullish reversal patterns that can signify the end of a downtrend. They consist of a single candlestick where the lower shadow is at least twice the length of the body, while the upper shadow is relatively small or nonexistent.
In the case of the Hammer, the body is at the upper end of the trading range, indicating that the market rejected lower prices. The Inverted Hammer, on the other hand, has its body at the lower end of the trading range. While it also signifies potential bullish reversal, it requires confirmation from the next candle.
## 2. Engulfing Pattern
The Engulfing Pattern is a powerful two-candle reversal pattern. The first candle is a short one that is completely covered by a larger opposite-colored candle. A bullish engulfing pattern occurs at the end of a downtrend when a green candle completely engulfs the preceding red candle, indicating strong buying pressure. Conversely, a bearish engulfing pattern appears at the end of an uptrend when a red candle completely engulfs the preceding green candle, indicating strong selling pressure.
## 3. Doji
The Doji is a candlestick pattern where the opening and closing prices are almost identical, resulting in a very small body. It represents indecision in the market as neither the buyers nor the sellers could gain control. There are several types of Doji patterns, including the neutral Doji, long-legged Doji, dragonfly Doji, and gravestone Doji. While the Doji can indicate a potential price reversal, it is usually used in conjunction with other indicators or patterns for confirmation.
## 4. Shooting Star
The Shooting Star is a bearish reversal pattern that consists of a single candlestick with a small body at the lower end of the trading range and a long upper shadow. The pattern suggests that buyers drove prices up during the session, but sellers stepped in and pushed the price back down, indicating a potential reversal of the uptrend.
## 5. Morning Star and Evening Star
The Morning Star and Evening Star are three-candle patterns that signal reversals in the market.
The Morning Star pattern occurs at the end of a downtrend. It starts with a long red candle, followed by a small-bodied candle that gapped lower at the opening (the “star”), and then a long green candle that closes well into the first session’s red body. This pattern signals a potential bullish reversal.
The Evening Star is the bearish counterpart of the Morning Star. It appears at the end of an uptrend, consisting of a long green candle, followed by a small-bodied candle that gapped higher at the opening, and then a long red candle that closes well into the first session’s green body. It suggests a potential bearish reversal.
In conclusion, understanding these candlestick patterns can provide valuable insights into market sentiment and potential reversals. However, it’s important to remember that no single pattern guarantees success. It’s always wise to use these patterns in conjunction with other forms of technical analysis to confirm signals and reduce the risk of false alarms. Happy trading!
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