Candlestick Patterns Every Trader Should Recognize

Price charts are eloquent and candlestick patterns are one of the most direct expressions of that language. Every candle represents the emotional game of tug of war between buyers and sellers during a particular time frame, and it leaves a visual record that can be read with a fair amount of accuracy by trained eyes. Those traders who take the time to learn these structures build a fluent reading that makes it less an analysis and more a conversation the market has been having all along.

One of the earliest patterns that traders come across and for good reason is the hammer. It is found at the bottom of a down trend, with a short body at the top of the candle, and a long lower wick indicating a sharp rejection of lower prices. It was an aggressive price downward session by sellers; buyers conquered them before the end. A single hammer itself does not have much weight yet at a well-established level of support and above-average volume behind it, the likelihood of a significant bounce grows significantly.

Image Source: Pixabay

It is these engulfing patterns that are likely to create such strong responses, since they are the embodiment of a decisive change of control. The engulfing bullish candle entirely covers the body of the last bearish candle, proving that buying pressure had decisively overtaken selling. Mexican and Brazilian equity market traders have observed engulfing formations that follow multi-session declines around round-number prices have exceptionally good follow-through, presumably because the round-number prices concentrate a cluster of pending orders that drive the reversal momentum.

The doji family deserves more attention than new traders typically give it. A typical doji, where the open and close are nearly the same, signals genuine indecision rather than directional intent. On its own it is a pause signal, not a directional warning. The dragonfly doji and gravestone doji are more particular in the meanings they imply: the dragonfly with its long lower wick, and closing near the high, is the bulls have absorbed all the selling pressure, whereas the gravestone, with its long upper wick, and closing near the low tells the same story the other way round. Their significance depends entirely on where they appear on the chart.

By contrast, morning and evening star patterns require three candles to complete and carry more structural weight. The evening star is created at the resistance point following an uptrend and starts with a bullish strong candle, a small-bodied candle which gaps or trends sideways, and a bearish candle that closes deep into the body of the first. The three-session sequence is a tale of dwindling momentum, indecision, and the actual selling that follows. Traders using TradingView charts tend to place alerts on the major resistance areas with the specific aim of capturing these structures as they form throughout the second and third sessions.

Shooting stars are commonplace occurrences at the top of rallies and are frequently misread when encountered out of context. The pattern must have an upper wick at least twice as long as the body, and little or no lower wick, and cannot be seen before a meaningful advance has been made. A shooting star that occurs in mid-range or a consolidation phase has virtually no signal value. Once it occurs following price push into a previous swing high or Fibonacci extension level, the narrative shifts completely and the pattern becomes a subset of an overall reversal argument.

Pattern recognition is refined significantly when traders go beyond memorizing patterns and start learning the logic behind the supply and demand of each pattern. TradingView charts support this learning process because the historical playback and multi-timeframe analysis can enable the trader to apply their pattern reading to actual market performance, rather than theoretical examples. Being a candlestick expert does not happen in a day, but with practice against real price movements, the patterns start becoming less rule-like and more instinctive.