If you’re new to trading, understanding candlestick patterns is like learning the language of the market itself. These patterns, developed over decades of watching how prices move, give us hints about where prices might go next. In this guide, we’ll explore the top 10 candlestick patterns that every beginner trader should know. Whether you’re curious about how markets work or eager to improve your trading skills, mastering these candlestick patterns for beginners will enable you to identify potential opportunities with confidence.
What Is a Candlestick?
A candlestick is a visual representation of an asset’s price movements in financial markets, particularly in technical analysis. Candlestick patterns are formed by analysing the arrangement and sequence of candlesticks over time. Traders use these patterns to identify potential changes in market sentiment, trend reversals, or the continuation of existing trends. Each pattern carries its own interpretation, which can range from indicating strong buying or selling pressure to market indecision or potential trend continuation or reversal.
Each candlestick comprises three main components:
- Body: This rectangular segment represents the price range between the opening and closing prices during the given time period. A filled (or solid) body typically signifies a price decrease (bearish sentiment), while an empty (or hollow) body indicates a price increase (bullish sentiment).
- Wicks (or Shadows): These lines extend from the top and bottom of the body, revealing the highest and lowest prices reached within the same period. They illustrate the full spectrum of trading activity during that timeframe.
- Colour: The colour of the body provides visual clarity regarding market movement direction. A green (or white) body indicates a price increase, while a red (or black) body signals a price decrease.
Candlestick Patterns for Beginners
1. Hammer Candlestick Pattern
This pattern features a short body with a long lower wick and typically appears at the bottom of a downtrend. It suggests that despite initial selling pressure, strong buying interest pushed prices higher. The colour of the body can vary, with green hammers indicating a stronger bullish market compared to red hammers.
An inverted hammer is a similar bullish pattern in which the upper wick is long, and the lower wick is short. It indicates an initial bout of selling pressure followed by buying interest that prevents the price from falling further. The inverted hammer suggests potential market control shifting to buyers in the near future.
Read More About Hammer Candlestick Pattern
2. Bullish Engulfing Pattern
The bullish engulfing pattern consists of two candlesticks. The first candle has a small red body that is entirely engulfed by a larger green candle in the next session.
Despite opening lower than the first candle, the bullish sentiment drives prices upward, signalling a clear victory for buyers.
3. Piercing Line Pattern
This pattern consists of two candles. First, there is a long red candle, followed by a long green candle.
Typically, there is a notable gap between the closing price of the first candle and the opening price of the green candle. This pattern suggests strong buying pressure, as the price is pushed up to or above the midpoint of the previous day’s range.
Read More About Piercing Line Pattern
4. Morning star Candlestick
The Morning star Candlestick pattern is seen as a hopeful sign during a market downtrend. It consists of three candles: a long red candle, a short-bodied candle in between, and a long green candle. Importantly, the ‘star’ does not overlap with the longer bodies, showing gaps both open and closed.
It indicates that the selling pressure from the first day is easing, suggesting a potential shift towards a bullish market trend.
5. Three White Soldiers
The Three White Soldiers pattern unfolds over three days, characterised by three consecutive long green (or white) candles with minimal wicks. Each candle opens and closes at progressively higher levels compared to the previous day.
This pattern is a robust bullish signal observed after a downtrend. It indicates a consistent increase in buying pressure and strong upward momentum in the market.
6. Hanging Man
The Hanging Man pattern is the bearish counterpart of a hammer, sharing a similar shape but appearing at the end of an uptrend.
This candlestick indicates a notable sell-off during the trading day, followed by a recovery where buyers manage to push the price back up. The substantial sell-off suggests a potential shift where bullish control over the market may be weakening.
7. Shooting Star
The Shooting Star pattern resembles the inverted hammer but appears during an uptrend. It is characterised by a small lower body and a long upper wick.
Typically, the market opens slightly higher with a small gap and reaches an intra-day high before closing just above the opening price. This formation is likened to a star falling from the sky, signaling a potential reversal in the uptrend.
8. Tweezer Bottom
The Tweezer Bottom pattern is typically observed at the bottom of a downtrend. It involves two candles with identical lows but different colors. A reliable reversal signal occurs when the first candle has a large body and the second has a small body.
This pattern indicates a strong bullish sentiment, suggesting that buyers have entered the market and are purchasing from the same price level, while sellers’ influence diminishes. Identifying a Tweezer Bottom on a price chart is straightforward when two or more candles share identical lows.
9. Dark Cloud Cover
This Dark Cloud Cover candlestick pattern signifies a bearish reversal, akin to a shadow cast over previous optimism. It consists of two candles: a red candle that opens above the prior green body and closes below its midpoint.
This pattern indicates a shift in market sentiment, with bears dominating, driving prices significantly lower. Short wicks on the candles suggest a strong and decisive downtrend during the session.
10. Three Black Crows
This Three Black Crows candlestick pattern consists of three consecutive long red candles with minimal or no wicks. Each session opens near the previous day’s closing price, but persistent selling pressure drives the price progressively lower at each close.
This pattern is interpreted by traders as the beginning of a bearish downtrend, indicating that sellers have gained control over buyers during three consecutive trading sessions.
Conclusion
Learning about Candlestick patterns for beginners is like picking up a new language of market signals. These patterns give valuable hints about where prices might go next. Whether it’s recognising bullish signals like the three white soldiers and bullish engulfing, or understanding cautionary signs such as the hanging man and dark cloud cover, each pattern tells a story about market feelings and possible trends. By mastering these candlestick patterns for beginners, traders can feel more confident in spotting opportunities and making smart trading choices.
FAQs
Why are candlestick patterns important for beginners?
Candlestick patterns provide valuable insights into market dynamics and potential price movements. Understanding them can help beginners make informed trading decisions and identify opportunities.
What do bullish and bearish candlestick patterns signify?
Bullish patterns suggest potential price increases, indicating buying pressure. Bearish patterns suggest potential price decreases, indicating selling pressure.
How can I use candlestick patterns in trading?
Traders use candlestick patterns to confirm entry and exit points, assess market sentiment, and manage risk. Patterns like hammers, engulfing patterns, and morning stars can guide trading decisions.
What should I do after identifying a candlestick pattern?
After identifying a pattern, traders typically look for confirmation from other technical indicators or market conditions before making trading decisions. It’s important to consider the overall market context and risk management strategies.
Disclaimer: Investments in securities market are subject to market risks, read all the related documents carefully before investing. This is for educational purpose only.
