Candlestick Pattern

Candlestick charts are a technical tool that packs data for multiple time frames into single
price bars. This makes them more useful than traditional open, high, low, close (OHLC)
bars or simple lines that connect the dots of closing prices. Candlesticks build patterns that
may predict price direction once completed.

Candlestick charts were originated in Japan over 100 years before the West had developed
the bar charts and point-and-figure charts. In the 1700s, a Japanese man known as Homma
discovered that as there was a link between price and the supply and demand of rice, the
markets also were strongly influenced by the emotions of traders.
 How to Read a Candlestick Pattern
A daily candlestick represents a market’s opening, high, low, and closing (OHLC) prices. The
rectangular real body, or just body, is colored with a dark color (red or black) for a drop in price
and a light color (green or white) for a price increase. The lines above and below the body are
referred to as wicks or tails, and they represent the day’s maximum high and low. Taken together,
the parts of the candlestick can frequently signal changes in a market’s direction or highlight
significant potential moves that frequently must be confirmed by the next day’s candle.

The candlesticks are used to identify trading patterns that help technical analyst set up their
trades. These candlestick patterns are used for predicting the future direction of the price
movements. The candlestick patterns are formed by grouping two or more candlesticks in a
certain way. Sometimes powerful signals can also be given by just one candlestick.
 Types of Candlestick Patterns
The candlestick patterns can be divided into:-

Bullish Reversal Patterns

Bearish Reversal Patterns

Bullish Reversal candlestick patterns indicate that the ongoing downtrend is

Thus, the traders should be cautious about their short positions when the
bullish reversal candlestick chart patterns are formed.
 Hammer
Hammer is a single candlestick pattern that is formed at the end of a downtrend and signals a
bullish reversal.

The real body of this candle is small and is located at the top with a lower shadow which
should be more than twice the real body. This candlestick chart pattern has no or little upper
shadow.

The psychology behind this candle formation is that the prices opened, and sellers pushed
down the prices. Suddenly the buyers came into the market and pushed the prices up and
closed the trading session more than the opening price.

This resulted in the formation of bullish pattern and signifies that buyers are back in the
market and downtrend may end.

Traders can enter a long position if next day a bullish candle is formed and can place a stop-
loss at the low of Hammer.
 Inverted Hammer
An Inverted Hammer is formed at the end of the downtrend and gives a bullish reversal signal.
In this candlestick, the real body is located at the end and there is a long upper shadow. It is the
inverse of the Hammer Candlestick pattern.

This pattern is formed when the opening and closing prices are near to each other and the
upper shadow should be more than twice the real body.
 Dragonfly Doji
A dragonfly doji candlestick is a candlestick pattern with the open, close, and high prices of
an asset at the same level. A dragonfly doji pattern does not appear constantly. It is used
as a technical indicator that signals a potential reversal of the asset’s price.
 Bullish Engulfing
Bullish Engulfing is a multiple candlestick chart pattern that is formed after a downtrend
indicating a bullish reversal.

It is formed by two candles, the second candlestick engulfing the first candlestick. The first
candle is a bearish candle that indicates the continuation of the downtrend.

The second candlestick is a long bullish candle that completely engulfs the first candle and
shows that the bulls are back in the market.
 Morning Star or Morning Doji Star
The Morning Star is a multiple candlestick chart pattern which is formed after a
downtrend indicating a bullish reversal.
It is made of 3 candlesticks, the first being a bearish candle, the second a Doji and the
third being a bullish candle.
The first candle shows the continuation of the downtrend. The second candle being a
doji indicates indecision in the market. The third bullish candle shows that the bulls are
back in the market and reversal will take place.
The second candle should be completely out of the real bodies of the first and third
candles.
 Bullish Harami
The Bullish Harami is multiple candlestick chart pattern which is formed after a downtrend
indicating bullish reversal.

It consists of two candlestick charts, the first candlestick being a tall bearish candle and second
being a small bullish candle which should be in the range of the first candlestick.
The first bearish candle shows the continuation of the bearish trend and the second candle
shows that the bulls are back in the market.
 Tweezer Bottom
The Tweezer Bottom candlestick pattern is a bullish reversal candlestick pattern that is
formed at the end of the downtrend.
It consists of two candlesticks, the first one being bearish and the second one being bullish
candlestick.
Both the candlesticks make almost or the same low. When the Tweezer Bottom candlestick
pattern is formed the prior trend is a downtrend.
 Bearish Reversal candlestick patterns

Bearish Reversal candlestick patterns indicate that the ongoing uptrend is going to reverse
to a downtrend.

Thus, the traders should be cautious about their long positions when the bearish reversal
candlestick patterns are formed.
 Hanging man
Hanging Man is a single candlestick pattern which is formed at the end of an uptrend and signals bearish reversal. The real
body of this candle is small and is located at the top with a lower shadow which should be more than the twice of the real
body. This candlestick pattern has no or little upper shadow.

The psychology behind this candle formation is that the prices opened and seller pushed down the prices.
Suddenly the buyers came into the market and pushed the prices up but were unsuccessful in doing so as the prices closed
below the opening price.

This resulted in the formation of bearish pattern and signifies that seller are back in the market and uptrend may end.
Traders can enter a short position if next day a bearish candle is formed and can place a stop-loss at the high of Hanging
Man.
 Shooting Star
Shooting Star is formed at the end of the uptrend and gives bearish reversal signal. In this
candlestick chart the real body is located at the end and there is long upper shadow. It is the
inverse of the Hanging Man Candlestick pattern.

This pattern is formed when the opening and closing prices are near to each other and the
upper shadow should be more than the twice of the real body.
 Gravestone Doji
The term gravestone doji refers to a bearish indicator commonly used in trading by technical
analysts. A gravestone doji is a bearish reversal candlestick pattern that is formed when the
open, low, and closing prices are all near each other with a long upper shadow.

The long upper shadow suggests that the bullish advance at the beginning of the session was
overcome by bears by the end of the session. This often comes just before a longer-term
bearish downtrend.
 Bearish Engulfing
Bearish Engulfing is a multiple candlestick pattern that is formed after an uptrend indicating
a bearish reversal.
It is formed by two candles, the second candlestick engulfing the first candlestick. The first
candle being a bullish candle indicates the continuation of the uptrend.
The second candlestick chart is a long bearish candle that completely engulfs the first candle
and shows that the bears are back in the market.
 The Evening Star or Evening Doji Star
The Evening Star is multiple candlestick pattern which is formed after the uptrend indicating
bearish reversal.
It is made of 3 candlesticks, first being a bullish candle, second a doji and third being a bearish
candle.
The first candle shows the continuation of the uptrend, the second candle being a doji
indicates indecision in the market, and the third bearish candle shows that the bears are back
in the market and reversal is going to take place.
 Bearish Harami
The Bearish Harami is multiple candlestick pattern which is formed after the uptrend
indicating bearish reversal.
It consists of two candlesticks, the first candlestick being a tall bullish candle and second being
a small bearish candle which should be in the range of the first candlestick chart.
The first bullish candle shows the continuation of the bullish trend and the second candle
shows that the bears are back in the market.
 Tweezer Top
The Tweezer Top pattern is a bearish reversal candlestick pattern that is formed at the end of
an uptrend.
It consists of two candlesticks, the first one being bullish and the second one being bearish
candlestick. Both the tweezer candlestick make almost or the same high.
When the Tweezer Top candlestick pattern is formed the prior trend is an uptrend. A bullish
candlestick is formed which looks like the continuation of the ongoing uptrend.
On the next day, the high of the second day’s bearish candle’s high indicates a resistance level.
Bulls seem to raise the price upward, but now they are not willing to buy at higher prices.