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12 Candlestick Patterns Every Trader Should Know

By Will Ellis
Last Updated on March 22, 2024
Edited by Adam Turner
Fact checked and reviewed

Whether you’re looking to put money into tech stocks, mining stocks, ETFs, or anything else, you need to know more than a thing or two about reading the market if you hope to become a talented, successful, and financially sound investor.

Reading your market isn’t just about knowing price values and at what price an asset opened and closed. You need to understand a whole lot more, including the overall market direction, patterns, and themes.

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In fact, if you really want to be a great investor, especially in this market, you need to look at all assets and their movements like you would a living, breathing creature. 

If you can do this, if you truly are able to read the market and the world around it, then you’ll be able to make the right moves before anyone else. If you can understand the market, you can then predict how it is going to react and move in the weeks ahead.

Table of Contents:

How To Read The Market 📑️


But how are you supposed to really rationalise and understand a market like the Australian and American stock market? Doesn’t that require years of expertise and experience? Well, that certainly does help.

However, even a novice investor can start to become a skilled professional if they dedicate some time to learning the tricks of the trade and adapting the rules and advice that other seasoned investors have given.

One of the things you should definitely know about if you are getting into the market is candlestick patterns. These are downright pivotal if you want to truly dig into a stock, its past, present, and possible future. 

A Candlestick Pattern? 🕯️


Yes, it might sound a bit weird to tell someone that they need to know about candlesticks when they are becoming an investor.

But you should be well aware that you’re not going to be studying the wax creations that light up your home and smell so nice. Instead, a candlestick pattern, or chart, is a very helpful and technical tool that packs a lot of data into a small amount of space. It can tell you an awful lot about a stock or asset in a short amount of time.

Essentially, a candlestick pattern is a visual representation of the fluctuations in the value of stocks and oter assets in the market. Candlestick patterns are easy to read and hold a lot of information that can be gleaned with just a glance. 

A History Of Candlestick Patterns


Did you know that traders have been using candlestick patterns for hundreds of years? In fact, Japanese rice traders were employing this unique form of charting all the way back in the 1700s.

Candlesticks were invented in Japan in the 17th century. For that reason, they are still referred to as Japanese candlesticks by some market experts to this day. 

Residents in Japan started using candlesticks when exchanging rice and then other goods. This concept was eventually embraced by many people from different nations, and it continued to improve.

A book called Japanese Candlestick Charting Techniques by Steve Nison is credited with introducing Japanese candlestick patterns to the rest of the world. Now all these years later, these unique types of charts are still used and they prove valuable again and again. 

Today’s stocks and the rice of Japanese residents hundreds of years ago are basically governed by the same rules. That is part of what makes candlestick patterns so great: they stand the test of time because of their simplicity, ease of use and ease of reading.  

In the 18th century, Munehisa Homma, a well-known rice trader from Sakata, Japan, participated in the Dojima market.

According to legend, Homma created candlestick charts by analysing a year’s worth of past data and contrasting it with the current weather. He was also better able to comprehend how sentiment affects the trading price.

So, why are these types of charts so valuable and still used by expert traders to this day? And how can you read them?

Most importantly, what are some of the candlestick patterns that you should be well aware of when you start to take your investing career seriously? You need to pay attention because there are actually quite a few of these types of charts that you’ll need to keep in mind in the days, weeks, months, and years ahead.

By reading candlestick patterns, you are understanding stocks, assets, and markets like few people can.

Explaining Candlestick Patterns 📊️


A candlestick pattern, or chart, depicts four key values: the OHLC (that stands for Opening, High, Low, and Closing) values in a marketplace over a given time period. A darker colour (typically red or black) indicates a decrease in price, while a lighter colour (green or white) indicates an increase in price. Wicks or tails, which are the streaks above and below the body, indicate the day’s highest and lowest points. 

When viewed combined, the four components of a candlestick often indicate shifts in market trends or reveal large prospective moves, which often need to be verified by the candle of the following day. 

The best way to look at a candle is as a competition involving both buyers and sellers. A bright candle indicates that the day was best for the buyers, whilst a dark candle indicates that the day belonged to the sellers. 

It is very important to be aware of the basic anatomy of a candlestick when reading it. It hasn’t changed in hundreds of years. In fact, if you don’t know about the pieces that make up a candlestick pattern then you can’t read one at all!

Candlestick Patterns You Should Know ➡️


Knowledge

So, you want to become an investor. That’s great news and it can be the best choice you have ever made in your life.

But your desire to start investing won’t mean anything if you don’t take the time and spend the energy studying and understanding all the candlesticks and chart patterns out there. 

With that in mind, here are just some of the most common – and most important – candlestick charts that you will see as you enter the exciting and promising world of investing. Take note and pay attention because these patterns may lead you to great financial success. 

Remember that all of these candlestick patterns are a way to really understand the market and look at it in a new way. This will allow you to comprehend what is going on with each individual stock or asset, as well as the greater market at large.

Not enough investors put their time into knowing about these candlestick patterns. But those who do can really figure out a lot about the current and upcoming period for a market in just a few moments, because they know what to look for and what all of it means.

Without further ado, here are some candlestick patterns, what they mean and why you should be well aware of them. 

1. The Hammer

Right off the bat, we are introducing you to one of the most well-known and important patterns: the hammer. This is a big one. This is a candlestick pattern that you should truly take to heart and memorise. 

The hammer candlestick consists of a small body with a long wick at the bottom. As a rule, it is almost always found at the bottom of a downward trend in the market you are monitoring. 

This pattern informs investors that there were selling pressures during that trading period but a buying pressure made the price of the stock or asset go back up. The colour of this pattern varies but the green ones means a market that is bull and stronger than red hammers.

2. Inverse Hammer

An inverse hammer is similar to a standard hammer. The key difference here is that the upper wick is long and the lower one is short. Also note that an inverse hammer has a top shadow that is much, much longer than the regular hammer pattern. 

This pattern highlights buying pressure in the market, followed by selling pressure that was not powerful enough to alter the market price in a downward direction. An inverted hammer candlestick pattern usually means that the buyers in the market will soon have control of it. 

Like many other candlestick patterns, the inverse hammer is really telling savvy investors to be prepared for what comes next. So when you see an inverse hammer, you will then be able to adapt and change your investment plans to best solidify your earnings. 

3. Piercing Pattern

A series of candlestick chart patterns called a “piercing pattern” is created after a decline and signals a bullish turnaround. This is good news for investors as a bullish market is definitely the type that will most positively affect your investments. 

As for how it looks, it’s quite easy to spot. This well-known pattern consists of two candles, of which the first is a bearish candle that signals the uptrend will keep going down. 

A bullish reversal is about to occur because the second candle, which is bullish, covers more than 50% of the body of the preceding candle while opening the gap down. This action indicates that bulls have returned to the marketplace.

4. Morning Star

After a slump, the Morning Star candlestick pattern forms, and this signals a strong bullish reversal for the asset in question. 

It consists of three distinct candlesticks: a bearish candle is the first one, a Doji candle follows that – when the open and close of a candlestick are equal, or very close to equal – and then a bullish candle concludes the pattern. 

The first candle indicates that the downward trend is still in effect. A doji candle after that suggests market uncertainty. The market’s bulls are returning, and a reversal shall occur, according to the third bullish candle. 

The true heads of the initial and final candles ought to be entirely clear of the middle candle.

5. Three White Soldiers

Here is yet another candlestick pattern you should know and it’s yet another one that is actually made up of multiple patterns in one. As you can see, this is a common feature with many important candlestick charts. 

A decline is followed by the formation of the Three White Soldiers, a multi-candlestick formation that denotes a bullish turnaround. 

These candlestick charts are composed of three lengthy bullish bodies that are exposed within the previous candle’s true body and do not have extended shadows.

6. Piercing Line

Here is a pattern made of only two parts. The Piercing Line is composed of a long red candle and then a long green one that comes right after it.

Typically, there is a big gap between the first candlestick’s closing price and the green candlestick’s opening immediately after that. This means that a powerful buying pressure is in the market, as the value of the asset is pushed upward and then rises above the mid-price of the last day.

7. Hanging Man

The inverse of the hammer pattern is the hanging man. This is symbolised by a green or red candlestick with a small body and a lengthy lower shadow. It generally appears at the peak of an upward trend. What does a Hanging Man trend mean? Basically, it predicts a significant sell-off during a specific time period, but bulls might briefly drive prices upward before losing control.

8. Shooting Star

The shooting star trend is recognisable because it is the exact opposite of the inverted hammer pattern. The shooting star candlestick pattern is made of a red candle that has a short, little body and a lengthy upper shadow on top. Typically, the market will be known to gap somewhat higher on the candlestick opening and then will somehow surge to a peak right before the markets close. 

The body of the shooting star is sometimes very, very small and that is what makes it stand out. In fact, it can appear to be completely invisible to the untrained eye. But seasoned investors will be able to find the small body. 

9. Evening Star

If you are aware of the shooting star candlestick pattern, you also have to know about the evening star one as well.

An evening star candlestick is known as the inversion of the morning star. 

It is made of three patterns and has a small body candle that sits right in the middle of a long green and red one as well. 

10. Three Black Crows

The three black crows pattern is made of three straight and long red markings with small – sometimes non-existent – shadows attached to them. The thing that you need to look out for with this pattern is that each successive candle opens at about the same place as the previous one.

However, each candle also goes much, much lower with each passing closing. 

Most people consider this candlestick pattern to be a very bearish signal for whatever market it is that you are monitoring.

11. Doji

If you study candlestick patterns for long, no matter which market you are looking into, you will hear about this pattern: the Doji.

It’s an interesting visual pattern which means that it will stand out quite strongly. It is known for its very small body and its wildly long shadow attached. The Doji pattern is usually seen as a continuation pattern, which means that any buyer or trade needs to tread lightly. That’s because it could signal a reversal, which could severely compromise and complicate your investments. 

Just to play it safe, it is usually recommended that you open a new investment a little while after the Doji passes, just to make sure that the market has stabilised and that you are not at risk of losing all of the money you just put into your investment. 

12. Dark Cloud Cover

Just the name of this candlestick pattern might strike fear into the hearts of investors, and that might not be a bad thing.

You can easily see a dark cloud cover pattern when you are looking at your marketplace because it comes with two very distinct markers: a pair of candlesticks, one that is red and opens above the previous green body that comes before it and closes below midpoint. 

What does this mean? It basically means that a bear market is now taking over and prices are going to be pushed down lower in the days and periods ahead. And if the shadows attached to the candles are very small then you can expect that the downward trend is going to be very strong. Look out and be prepared. 

But There Are More


Bull vs Bear

While the above candlestick patterns are some of the most well-known, most popular, and most consequential, there are just so many others that you should at least be aware of. We would be doing you a disservice unless you know about a few of these too.

Bullish Engulfing 🐂️

The bullish engulfing candlestick pattern comprises of two different candlesticks. The first is a small little red body that is surrounded by a green candle, which will always be larger. The second will open lower than the previous one.

As the buying pressures in the market continue to increase, the downward trend will reverse. As you can imagine, this is a great candlestick pattern to know because it suggests that good times are ahead in the market for investors. 

Bearish Engulfing 🐻️

If you are aware of a bullish engulfing then you also need to know about a bearish one too. A bearish engulfing is the inversion side of a bullish one. The first candle in this pattern is a tiny little green body and it is engulfed by a longer red one next to it. 

This candlestick pattern will appear at the peak of an upward trend and it also points to an upcoming reversal. Expect a downward trend coming up shortly when you see this pattern and plan your investments accordingly.  

How Can You Spot Candlestick Patterns? 👀️


Just knowing what a certain candlestick pattern looks like doesn’t mean you’ll easily be able to find them in any given market place at any given time. Instead, you need to keep in mind a few other tricks of the trade to find these patterns.

Again, the faster you can find these patterns, the faster you can understand the market and what may be about to happen within it. Think of how great that could be for your investments. You could be well ahead of the curve just by finding these candlestick patterns and then projecting what will come next.

To find these patterns, you need to be very familiar with watching the marketplace and charting changes. A smart way to do this is by finding certain candlestick patterns in your market and then analysing them and seeing what happens next after each one.

This means that you might need to spend some time really looking into the market before you embark on your first investment. But think of how much that will help you. By putting extra time into looking at the market and finding your candlestick patterns, you are laying the groundwork for finding them even faster in the future.

Soon, you will be spotting candlestick patterns and then seeing their immediate impact on the market and what they do to it. 

What To Keep In Mind With Candlestick Patterns 🔎️


So now you are much more familiar with candlestick patterns, how to find them, what they mean, and what they could do for your investments and, therefore, your bottom line.

But you need to know more than just how certain patterns look when examining the market. You also need a solid understanding of the popular terms and phrases that are used by investors in the know.

Why? Because one of the smartest things you can do as an investor is read a lot. You should find someone you can trust who will give you the sort of information that you can rely on and learn from.

Many of the best analysts across the world who are studying the markets will not hold your hand and teach you the most common phrases used. Therefore, you should educate yourself before you dive headfirst into investing.

The Most Common Phrases

Here are just a few of the terms that you will see a lot when you start to read and absorb the financial news and information about the markets around you. 

Open: This one is quite simple. As you can imagine, “open” refers to the opening price of a candlestick and its initial value. 

Close: As you guessed, “close” is a reference to the closing price of the same candlestick pattern.

Emerging Patterns: These are the charts or patterns that haven’t yet formed but are in the process of doing just that. Like a snowball rolling down a hill and accumulating more mass and weight, they are growing into something that is definitely worth keeping an eye on. 

Completed Patterns: Completed patterns are simply those that have been developed and can now be considered either bullish or bearish signals of what’s to come. Obviously, these are the sort of patterns that you will want to pay the most attention to because they are fully formed and, therefore, able to give you the most amount of information.

High: The highest level of any candlestick’s price point during the period that is being examined.

Low: Of course, this will be the lowest level of any candlestick’s price point during that same period. Both the high and the low will have to be studied and understood to really get a true handle on the candlestick pattern and what it is saying about the market at that time. 

What To Keep In Mind When Investing


Candlestick Trading

Knowing about candlestick patterns is just one of the many things you need to be familiar with when you start your investing journey. There are plenty of other things that should be fresh in your mind as you start this exciting and potentially financially successful part of your life. 

Stay Confident 

You need to remain confident when you are investing. This is perhaps the most important thing to keep in mind – and one of the things that too many people forget. Why is confidence so important? Because not being 100% confident when investing is a very bad idea. You need to be fully committed.

Full commitment means confidence. You should believe in the choices you make and the studying of the candlestick patterns you’ve done and the success you will find. If you aren’t confident in what you are doing, then why do it?

Stay Measured

You should also always be measured in your actions and the choices you make while investing. This is easier said than done and perhaps that is why it’s so vital for you if you want to find success in your market. 

Being measured means being smart and it not moving too quickly when you get a good thing. Some people will learn about candlestick patterns, find them in their charts, and then invest accordingly. 

That’s very good, but if you put in too much money at one time, you are opening yourself up for a huge downfall if the markets turn south quickly. Far too many investors suffer from the fear of missing out, or FOMO. They think that unless they put up a lot of money really quickly, they will miss the chance to make good gains.

Don’t put all your eggs in one basket when it comes to investing. Don’t invest a huge amount, invest a smart amount. Trust the candlestick patterns that you have learned about, but don’t make a silly choice because of them.

Candlesticks Aren’t Always Right

That leads us to our last point which is that candlestick patterns are not always 100% accurate. Yes, they have been known to be quite good at predicting markets and their turning points but they don’t have a perfect success rate. There are times when they are wrong. 

If you happen to think they are always right and pour your money into the market because of that, you will face serious consequences if they end up being wrong. 

Conclusion 💡️


Trading Tips

Some people think that candlestick patterns are a key to knowing the market better than anyone else. That is not the total truth. They are not cheat codes that will help you outsmart the market.

However, they will do a lot for you if you know what you are looking for, know what they mean, and know how to act accordingly when you find them in your market. 

Investing isn’t always easy. It comes with a lot of challenges and it has a very steep learning curve. Knowing about candlestick patterns is just one aspect of the wild world of investing. 

When you have a handle on these patterns, or charts, and know what they are suggesting and telling you about the upcoming trends, whether good or bad, you can take out a lot of the guesswork that usually comes with investing.  

Don’t ever stop being careful, mindful, and measured when you are putting your money into the market. And don’t expect the candlesticks patterns to ensure anything. The markets are often unpredictable, even when multiple signifiers are suggesting certain things are upcoming. There is no such thing as a sure thing when it comes to investing.


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