💭 Japanese candlesticks are the most popular way to read price movement on charts.
The wide part of the candle is called the body. The body represents the price range of a trading session for a certain period of time, between the opening and closing prices.
🟥 A red body is formed if the closing price was less than the opening price of the candle.
🟩 A green body is formed if the closing price was higher than the opening price of the candle. Thin lines above and below the body are called shadows. The shadows indicate the price extremes of the trading session.
It is important to understand that the higher the time frame you look at, the higher the likelihood of the candlestick pattern working out.
📚 What are the most popular candlestick patterns?
Spinning tops are candles with a small body size that reflect the persistent struggle between bulls and bears. As a rule, this candlestick pattern is neutral in nature and occurs within a narrow trading corridor. Tops can be either green or red.
💭 Doji are variants of candles that have no body at all. The entire candle is one big shadow. This pattern occurs when in any trading session the opening and closing prices are the same or very close to each other. The length of the doji's shadows can be any length.
💭 Hammer and Hanging Man are one of the most popular reversal patterns, and the amazing thing about these candlesticks is that they can be either bullish or bearish depending on what phase of the market they occur.
The appearance of this candle during a downward trend indicates a weakening of the bears' strength - such a candle is usually called a hammer. If a candle of this type appears after an upward trend, then it is worth talking about the weakening of the strength of the bulls - such a candle is called a hanging man.
Hammer and hanged man can be easily identified by 3 main features:
The body is at the top of the price range
The lower shadow is twice as long as the body
The candle has no upper shadow or is very short
The longer the lower shadow and the shorter the body, the higher the potential for a bullish hammer or bearish hanging man.
💭 Absorption - this model is formed by two candles with contrasting colored bodies and is one of the most important signals of a market reversal.
The absorption model must satisfy the following 3 criteria:
There must be a clear upward or downward trend in the market.
Absorption is formed by two candles and the second candle must engulf the first.
The second body should be a contrasting color.
It is worth paying attention to the following factors that increase the likelihood of a trend change after the appearance of an engulfing pattern:
If the first candle of the pattern has a very short body, and the second one has a very long body. This indicates that the previous trend is weakening, and the new one is gaining strength.
If an engulfing pattern appears after a protracted or very rapid trend.
If the second candle is an engulfing pattern, there is a high trading volume.
If the second candle of the model absorbs several bodies at once.
💭 Dark Cloud Cover - This pattern consists of two candles appearing after an uptrend and is a signal of a reversal at the top.
The first candle should have a strong green body, and the next day the opening price of the candle exceeds the high of the previous candle, however, the closing price approaches the low and covers a significant part of the body of the green candle. The lower the closing price of the second candle, the greater the likelihood of a trend top forming.
There are several factors to consider that add to the significance of this model:
The closer the closing price of a red candle is to the opening price of the previous green candle, the higher the likelihood of a trend peak forming.
If, during a long uptrend, a candle with a long green body appears, the opening price of which is equal to the daily low, the closing price is equal to the daily high, and the next day a candle with a long red body appears, opening at the high and closing at the low, then it is said that " A black day with the top and bottom cut off."
If the second dark cloud cover candle opens above an important resistance level and then the price falls, this is proof that the bulls cannot control the market.
If the opening of the second trading day is accompanied by high trading volume, this may indicate the end of an uptrend.
💭 Clearance in the clouds is the opposite model to the curtain of clouds. It consists of two candles appearing in a falling market, and is a signal of a reversal at the bottom. The first candle has a red body, and the second one has a long green body. This formation is extremely bullish and close to a bullish engulfing pattern, and now you will understand why.
In Cloudbreak, the green body only partially covers the preceding red body, and the more of the red body that is covered by the green body, the greater the likelihood of a reversal at the bottom. In an ideal model, the green body should rise above the middle of the preceding red body.
There are 3 potentially bearish “clearance in the clouds” patterns, which differ in the degree of penetration of the green body into the previous red one:
At the bottom – the green candle closes near the minimum price of the previous trading day.
At the bottom – the closing price of the green candle is slightly higher than the closing price of the red candle.
Push – the closing price of the body of the green candle does not reach the middle of the red candle.
💭 Star is a reversal pattern, which is a candle with a small body that forms a price gap with the previous candle with a large body. In this case, the intersection of shadows is allowed.
Stars appear at the tops and at the base, and there are 4 types of the model:
The morning star is a bottom reversal pattern consisting of a candlestick with a long red body followed by a candlestick with a small body gapping downwards. On the third day, a green candle appears, the body of which covers a significant part of the red body of the first day. This model says that the bulls have seized the initiative.
The evening star is the bearish counterpart of the morning star, which is a reversal signal at the top. The first two candles have a long green body followed by a star. After the star there should be a red candle, covering a significant part of the green body of the candle standing in front of the star.
The following are factors that increase the likelihood that an evening or morning star is a reversal signal:
The presence of gaps between the bodies of the first candle and the star, as well as between the bodies of the star and the third star.
The body of the third candle overlaps a significant part of the body of the first candle. ▪️Small trading volume during the first candle and large volume during the third candle.
💭 A doji star is a doji that forms an upward gap with the body of the previous candle in an upward trend or falls with a gap below the body of the previous candle in a downward trend. Doji stars are harbingers that the trend of movement is changing its direction. therefore, it is important to wait for the next candle after the doji to confirm the reversal.
Confirmation of a reversal at the top of an uptrend is a doji star followed by a long red body that overlaps a significant portion of the green body, a pattern called an Evening Doji Star.
It is worth noting that if a green candle appears immediately after the doji star, forming a price gap upward, the doji ceases to be a bearish signal.
If, during a downward trend, a doji appears after a candle with a red body, then confirmation of a reversal at the bottom will be a green candle, the body of which overlaps a significant part of the body of the red candle, and this pattern is called the Morning Doji candle.
But if, during a downward trend, a red body appears after the doji star, forming a downward price gap, then the doji ceases to be a bullish signal.
In rare cases, in an uptrend, a doji star may form a price gap up without crossing the shadows, followed by a red candlestick with a price gap down without crossing the shadows. This star is considered one of the strongest reversal signals at the top and this pattern is called the Abandoned Baby.
The situation is similar for a downward trend. If a doji candle appears with gaps before and after it without crossing the shadows, then the market has most likely reached a bottom, a pattern called an Abandoned Baby at the Bottom.
💭 Shooting star is a pattern of two candles that warns of the possible end of a price rise and is not one of the most important reversal signals.
The body of the shooting star is small and located at the bottom of the price range of the candle, and the upper shadow is long.
Like other stars, body color does not matter.
Ideally, the body of the shooting star should form a gap relative to the body of the previous candle, but this is not necessary.
The inverted hammer is a pattern similar in appearance to the shooting star pattern: it has a small body located at the bottom of the candle's range and a long upper shadow.
Unlike the previous pattern discussed, the inverted hammer indicates a possible reversal at the bottom and is a bullish signal if it formed after a downward trend.
It is important to wait for the next candle to confirm the bullish signal, i.e. when the opening price the next day is above the body of the inverted hammer, and the larger the price gap, the stronger the bullish signal.
Another confirmation signal can be a green candle with a higher closing price level.
💭 Harami is a candle with a small body that is located within the relatively long body of the previous candle. In harami translation, the model's name translates to "pregnant". The long candle is the “mother” and the small candle is the “child”.
The peculiarity of the model is that the small candle should be located in the middle of the previous candle, and the length of the shadows does not matter.
The smaller the “child” candle, the more significant it has.
Harami is not a significant reversal signal; it stops the market, ending the previous trend, and there is a pause in the market.
Harami cross – unlike the previous model, after a long candle a doji appears, rather than a candle with a small body. And the model itself is one of the most significant reversal signals.
💭 Belt Grab – This pattern is a long green candle that opens at the low of the previous candle and then moves higher. If we consider a bear grab by the belt, then everything is exactly the opposite.
The longer the belt grab candle, the more important it is for the subsequent development of the market.
If the subsequent closing price is higher than the bearish belt grab, then there is a high probability of a resumption of the upward trend.
If the subsequent closing price is below the bullish capture of the ha belt, then the selling pressure increases again.
💭 Two flying crows - this pattern forms a gap between the small body of the first red candle and the body of the previous candle, and 2 red candles are also formed.
This formation is bearish.
In an ideal pattern, the opening price of the second red candle is higher than the opening price of the first red candle, and the closing price is lower than the closing price of the first red candle.
💭 Tatami hold – the first three candles are similar to the candles in the “two crows flying” pattern, but they are followed by another red candle. If the next candle is green and its opening price gaps upward relative to the upper shadow of the last red candle, then you can buy.
This pattern occurs in a bull market and is a bullish trend continuation pattern.
A formation with two, three or four red candles is possible.
💭 Three black crows – this model consists of three sequentially decreasing red candles.
This formation foretells a fall in prices if it appears in an area of high prices or after a long upward trend, and the closing prices of these three candles should be at or near the minimum prices.
The opening price of each candle must be within the body of the previous candle.
The ideal option would be if the body of the first red candle in a series of three candles is below the high of the green candle of the previous trading session.
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