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Candlestick charts have become integral to a trader’s toolkit to analyse price action and make informed trading decisions. However, with over 100 candlestick patterns, identifying the high-probability setups can get overwhelming.
This article solves that problem by picking the most powerful candlestick formations that predict potential trend reversals accurately. Read on to discover the top candlestick patterns every trader should know.
What are candlesticks?
A candlestick chart depicts the open, high, low, and close prices for a security over a specific timeframe. The thick rectangular part representing the difference between the open and closed prices is called the ‘real body.’ The lines above and below the real body are the ‘wicks’ or ‘shadows’ showing the high and low points.
If the close is higher than the open, the candlestick is hollow or white-coloured, indicating buying pressure. The candlestick is filled or black-colored if the close is lower than the open, indicating selling pressure.
The colour and shape give a quick visual summary of the price action. Candlestick patterns emerge when candlesticks combine in certain shapes.
Continuation patterns
These patterns signal that the ongoing trend is likely to continue. They act as signposts for traders to stay with the prevailing trend.
Bullish continuation patterns
1. Rising three methods
Formed when three long green (or white) candles occur consecutively. Each closing price is progressively higher than the previous one, showing strong buying pressure. This powerful pattern has a 75% accuracy in predicting bullish continuation.
2. Mat hold
A large white candle was followed by three small candles, with each closing slightly higher than the previous day. This shows the bulls are still in control. Its accuracy is 70%.
Bearish Continuation Patterns
1. Falling three methods
The bearish counterpart of the Rising Three Methods pattern. Three consecutive long red (or black) candles with lower closes indicate strong selling pressure ahead. Its accuracy is 70%.
2. Deliberation
Almost the reverse of Mat Hold. One large black candle was followed by three small candles with slightly lower closes. Bears remain in control, showing a downtrend continuation. Accuracy is 65%.
Reversal Patterns
These candlestick patterns signal a potential change or reversal in the existing trend. Trading reversals require precise timing but can result in quick profits if identified accurately.
I. Bullish reversal patterns
1. Piercing line
A black candle is followed by a long white candle that opens lower but rallies to close more than halfway above the centre of the black candle. This shows the bears losing control as bulls take charge. Its accuracy is 70%.
2. Morning star
The prototypical bullish reversal pattern consists of three candles – a large red candle, followed by a small-bodied candle, culminating with a long green candle. The middle candle shows market indecision, while the last candle confirms buyers have taken over. Accuracy rating is 72%.
3. Three white soldiers
A more powerful version of the Rising Three Methods pattern. Three long white candles with sequentially higher closes show aggressive buying. This pattern predicts bullish reversals with an accuracy of up to 84%.
II. Bearish reversal patterns
1. Dark cloud cover
Opposite of the Piercing Line. A long white candle is followed by a black candle that opens above the height of the white candle but closes below the midpoint. This shows bears seizing control back from the bulls. Its accuracy is 75%.
2. Evening star
The counterpart of the Morning Star pattern signals a bearish reversal. First, a tall white candle appears, showing buying pressure. The next candle has a small real body showing indecision. The last black candle confirms the selling momentum ahead. Accuracy is 70%.
3. Three black crows
The bearish equivalent of the Three White Soldiers pattern. Three consecutive long black candles with successively lower closes confirm the bears are overwhelming buyers. This pattern predicts bearish reversals with 78% accuracy.
Mastering the 35 most powerful candlestick patterns
Learning to recognise the powerful candlestick patterns above quickly can help traders better capitalise on upcoming opportunities. Traders should initially focus on the 12 major patterns with over 70% accuracy.
Combining candlestick analysis with other techniques like trend lines, indicators, and volume analysis results in a robust trading strategy. Backtesting candlestick strategies will build conviction for acting on high-probability reversal and continuation signals.
Integrating candlesticks into your trading plan
While powerful on their own, candlestick patterns should not be the sole reason for taking trades. They work best when combined with your trading system, confirming breakouts, reversals, and continuation plays.
Here are some tips for effectively integrating candlestick patterns:
- Identify overall market bias and trade direction using long-term moving averages. Candlestick signals should match the prevailing trend.
- Use other indicators like MACD and RSI to confirm oversold/overbought extremes signalling reversals.
- Monitor volume surges on candles for conviction on breakouts or reversals. Big bullish candles need expanding volumes.
- Use simple support and resistance alongside candlestick patterns. Many powerful formations occur around key technical levels.
- Implement initial stop loss below candle low in bullish trades (or above candle high in bearish trades). Trail stops higher to lock profits.
The beauty of candlestick patterns identifies trader psychology, which is revealed in the price action. Combining candlestick signals with sound money management delivers winning trades. Mastering the 35 most powerful candlestick patterns is vital for profitable trading.
Conclusion
Candlestick analysis offers a visual edge to analyse markets and time entry/exits technically. While no indicator is perfect, combining reversal candlestick signals with other tools can uncover high-probability breakout or breakdown situations. Mastering the top candlestick patterns is crucial to improving timing and confirming trades based on price action.
FAQs
Some of the most accurate candlestick patterns are the Three White Soldiers, Three Black Crows, Morning/Evening Stars, Dark Cloud Cover, Piercing Line, etc. These predict reversals 70-85% of the time when confirmed with other indicators.
Candlestick patterns compress the information on trader psychology and price action into colourful visual formations. They spotlight vital reversal and continuation signals, allowing rapid analysis. Patterns like Dojis, Engulfing and Harami stand out quickly against the background price action.
Volume adds conviction for acting on candlestick signals. Expanding volumes on bullish candles validate breakouts, while high volumes on bearish candles confirm reversals. The lack of volume indicates a lack of commitment to the pattern.
The ideal way is to combine patterns with indicators like moving averages, Fibonacci, etc., to spot reliable signals in the direction of the overall trend. Strict stop losses and disciplined profit-taking help maximise gains.
Beginners should focus on the 12 major reversal & continuation patterns with over 70% accuracy. Backtest strategies combining candles with simple indicators/support-resistance for practice. Over time, hands-on experience will build intuitive pattern recognition for profitable trading.