Identifying candlestick patterns, and knowing which direction the trading candles are signaling moves could be one of the best lessons you learn when you are getting in to technical trading.
Candlestick Patterns in trading explained
When it comes to technical analysis, there are many different ways to skin the proverbial cat. When you boil things down however, most traders use some form of price action to make decisions. Price action is simply a way of looking at price data on a chart over time to identify patterns and make predictions about future price movements.
One of the most popular forms of price action analysis is candlestick charting. Whichever charting software you use, you will undoubtedly find a variety of different trading candles available. Trading candles displayed on a chart provides a clear visual representation of price data, and are one of the most common forms used by technical traders.
Pattern recognition is an important lesson in life in general, with many believing in cyclical momentum, and repetition in various ways over time. Technical trading is no different, and many traders will use past trends and patterns to help them in their decision making and extrapolating out various future possibilities. Within trading, you will find chart patterns, candle patterns, trading indicators, and trend analysis forming the bulk of your data. As such, no one topic can be overlooked.
Top 10 Trading Candles – Bullish & Bearish Reversal Candlestick Patterns
There are many different types of trading candles that can be used for trading, but some are more effective than others. Here are 10 of the most popular candlestick patterns that you might consider when trading financial markets :
1. The Hammer Candlestick Pattern – Bullish Reversal
The hammer candlestick pattern is a bullish reversal pattern that can be used to signal a change in trend from bearish to bullish. The pattern is composed of a small body with a long lower shadow and a short upper shadow. The long lower shadow indicates that there was significant selling pressure during the period, but the bulls were able to push prices back up towards the end of the period. This shows that there is still buying pressure present even though prices have fallen significantly.
2. The Inverted Hammer Candlestick Pattern – Bearish Reversal
The inverted hammer candlestick pattern is the bearish version of the hammer pattern. It is composed of a small body with a long upper shadow and a short lower shadow. This pattern indicates that there was significant buying pressure during the period, but the bears were able to push prices back down towards the end of the period. This shows that there is still selling pressure present even though prices have risen significantly.
3. The Bullish Engulfing Candlestick Pattern – Bullish Reversal
The bullish engulfing candlestick pattern is a two-candlestick pattern that can be used to signal a change in trend from bearish to bullish. The first candle in the pattern is a bearish candle with a small body and a long upper shadow. The second candle in the pattern is a bullish candle that completely engulfs the body of the first candle. This shows that the bulls are now in control and that a change in trend is likely.
4. The Bearish Engulfing Candlestick Pattern – Bearish Reversal
The bearish engulfing candlestick pattern is the bearish version of the bullish engulfing pattern. It is composed of a two-candlestick pattern with the first candle being a bullish candle with a small body and a long lower shadow. The second candle in the pattern is a bearish candle that completely engulfs the body of the first candle. This shows that the bears are now in control and that a change in trend is likely.
5. The Bullish Harami Candlestick Pattern – Bullish Reversal
The bullish harami candlestick pattern is a two-candlestick pattern that can be used to signal a potential change in trend from bearish to bullish. The first candle in the pattern is a bearish candle with a small body and a long upper shadow. The second candle in the pattern is a bullish candle with a small body that is completely contained within the range of the first candle. This shows that there is still some buying pressure present even though prices have fallen significantly.
6. The Bearish Harami Candlestick Pattern – Bearish Reversal
The bearish harami candlestick pattern is the bearish version of the bullish harami pattern. It is composed of a two-candlestick pattern with the first candle being a bullish candle with a small body and a long lower shadow. The second candle in the pattern is a bearish candle with a small body that is completely contained within the range of the first candle. This shows that there is still some selling pressure present even though prices have risen significantly.
7. The Morning Star Candlestick Pattern – Bullish Reversal
The morning star candlestick pattern is a three-candlestick pattern that can be used to signal a change in trend from bearish to bullish. The first candle in the pattern is a bearish candle with a small body and a long upper shadow. The second candle in the pattern is a bullish candle with a small body that is completely contained within the range of the first candle. The third candle in the pattern is another bullish candlestick that closes near or above the midway point of the first candle. This shows that the bulls are now in control and that a change in trend is likely.
8. The Evening Star Candlestick Pattern – Bearish Reversal
The evening star candlestick pattern is the bearish version of the morning star pattern. It is composed of a three-candlestick pattern with the first candle being a bullish candle with a small body and a long lower shadow. The second candle in the pattern is a bearish candle with a small body that is completely contained within the range of the first candle. The third candle in the pattern is another bearish candlestick that closes near or below the midway point of the first candle. This shows that the bears are now in control and that a change in trend is likely.
9. The Bullish Abandoned Baby Candlestick Pattern – Bullish Reversal
The bullish abandoned baby candlestick pattern is a three-candlestick pattern that can be used to signal a change in trend from bearish to bullish. The first candle in the pattern is a bearish candle with a small body and a long upper shadow. The second candle in the pattern is a doji candlestick that has opened and closed within the range of the first candle. The third candle in the pattern is a bullish candle that closes well above the midway point of the first candle. This shows that there is still some buying pressure present even though prices have fallen significantly.
10. The Bearish Abandoned Baby Candlestick Pattern – Bearish Reversal
The bearish abandoned baby candlestick pattern is the bearish version of the bullish abandoned baby pattern. It is composed of a three-candlestick pattern with the first candle being a bullish candle with a small body and a long lower shadow. The second candle in the pattern is a doji candlestick that has opened and closed within the range of the first candle. The third candle in the pattern is a bearish candle that closes well below the midway point of the first candle. This shows that there is still some selling pressure present even though prices have risen significantly
Trend Reversal Candlestick Patterns Summary
These are some of the most common reversal candlestick patterns that you will see when trading. By understanding how to identify these patterns, you will be able to make better-informed decisions about when to enter and exit your trades and also how other technical traders may be likely to react at certain points.
Whilst candlestick patterns will not always work out the way they intend, the signals they send are likely to have some kind of reaction from traders and act as points of decision. If trends continue strongly through what appears a significant technical reversal pattern, then you should consider checking other data points such as volume to see how heavily the move is being supported. This could potentially signify a stronger move in the original trending direction if various technical patterns are being ignored, or overwhelmed.
There are various charting software options you have to choose from; including some of the top names like TradingView, MetaTrader, cTrader, and proprietary offerings from your own broker. If you want to see our thoughts on the best charting software available, take a look here.