A candlestick pattern in trading refers to a specific arrangement of candlestick shapes on a price chart that helps traders predict future price movements. Each candlestick shows the open, close, high, and low prices of a security within a particular time frame. There are several popular candlestick patterns, broadly classified as bullish, bearish, or neutral, based on the expected price direction.
Here are some key candlestick patterns:
Bullish Patterns
1. Hammer: A small body with a long lower wick, indicating potential reversal after a downtrend.
2. Bullish Engulfing: A larger bullish candle fully "engulfs" the previous bearish candle, signaling a potential uptrend.
3. Morning Star: A three-candle pattern showing a shift from bearish to bullish momentum.
4. Piercing Line: When a bullish candle closes more than halfway up the previous bearish candle, indicating a possible reversal.
Bearish Patterns
1. Shooting Star: A small body with a long upper wick, often found at the top of an uptrend, signaling a possible downturn.
2. Bearish Engulfing: A large bearish candle engulfs a previous bullish candle, suggesting a potential decline.
3. Evening Star: A three-candle pattern showing a shift from bullish to bearish momentum.
4. Dark Cloud Cover: A bearish candle closes below the middle of the previous bullish candle, hinting at a potential downtrend.
Neutral/Reversal Patterns
1. Doji: When the open and close prices are almost equal, forming a cross shape, indicating indecision.
2. Harami: A small candle within the range of a larger preceding candle, signaling potential trend reversal.
3. Spinning Top: Small body with long wicks, showing indecision and a potential pause in the trend.
Each pattern's accuracy increases when paired with other indicators, like volume and
moving averages, to confirm potential trends.