We had discussed in previous articles what Candlesticks are and why they’re so important in trading. We’ve also shown you how you can add them to your trading chart and explained some of the patterns that can evolve from these candlesticks. So, today, we’ll be tackling what the top 5 candlestick patterns are and what you can do to benefit from them.
There are a lot of patterns to go through, so we’ve narrowed them down to the top 5 candles that appear the most in trading and what they mean to you as a trader. It’s also very important to note that Candlestick patterns can be both Bullish and Bearish in nature to keep that in mind when looking at them.
Now without further ado, here are the top 5 Candlestick Patterns.
Evening Star & Morning Star
When you look up in the evening sky, it would most likely be packed with thousands of stars, so how can you predict what’s going to happen to the market from the stars? Quick answer; you don’t! These are the names of candlestick patterns that happen in the market and usually signify that there’s going to be a reversal happening. These types of patterns happen at the end of an upward or downward trend.
An Evening Star would look something like this:
This pattern identifies a bearish reversal pattern and is composed of a long upper wick, which usually means that the instrument attempted to move higher, but encountered heavy resistance and selling pressure forcing it back down and closing much lower than the high.
On the other side of the spectrum, there’s the Morning Star, which is very much like the Evening Star, except in the opposite direction. Take a look below to see how it looks and what it’s made up of. Now Morning Stars are actually bullish reversal patterns, indicating that the price will most likely go up.
Another important Reversal Pattern is the Engulfing Candle formation. These are divided into the Bullish Engulfing and Bearish Engulfing as they represent a Bullish reversal and Bearish reversal respectively as the names suggest.
Why are they called engulfing?
Well, it’s because the second candle completely overshadows the first as if eating it up, take a look at the below charts and you’ll see what we mean.
A bullish engulfing candlestick formation shows Bulls outweigh Bears. As the pattern above shows, the green body (Bulls) covers completely the first candlestick (Bears).
A bearish engulfing candlestick pattern is a small green (or bullish) candle followed by a larger red (bearish) candle immersing the small green candle.
The Doji candlestick chart pattern is associated with indecision in the market. This could mean potential reversal of the current trend or consolidation. This pattern can occur at the top of an uptrend, bottom of a downtrend, or in the middle of a trend. The candlestick itself has an extremely small body centered between a long upper and lower wick, just like in the below image.
This pattern looks exactly like a hammer, as it’s ready to be picked up by investors to knock some sense into the market. When this pattern happens, it’s usually significant of a bullish reversal that occurs at the bottom of a downward trend. This candle formation includes a small body whereby the open, high, low and close are roughly the same. There’s a long lower wick beneath the body which should be more than twice the length of the candle body. The body may be bullish or bearish, however bullish is considered more favorable.
The word “Harami” means “pregnant” in Japanese. While in Arabic it means “thief”, I know it's weird. Nevertheless, it’s a very common candlestick pattern that occurs in the market that traders look out for. The name Harami is given because the pattern resembles a pregnant woman, don’t believe me? Look at the below graph.
This type of pattern is a reversal pattern, and is usually formed when the second candle in the pattern is contained within the body of the first candle as seen in the above image. This holds true for both the bullish and bearish Harami.
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