The Japanese candlestick patterns chart is the most widely used chart form among forex traders. And you know why the chart tells a lot about what is happening in the market and where the price might go next ?
The information is contained in the color codes of the individual candlesticks and the visible shapes and patterns formed by the candlesticks.
Candlestick patterns are identifiable shapes formed by a single candlestick or group of candlesticks, which may indicate potential trade setups.
There are many candlestick patterns, and they can be classified in different ways. But before discussing the categories, let’s understand how a candlestick looks.
The anatomy of the Japanese candlestick
A candlestick is a representation of price movements in a trading session, which can be anything from one minute to one month.
As with the bar chart, a candlestick clearly shows the open, high, low, and close prices. The structure of a candlestick shows that it has an upper wick, a lower wick, and a body which is represented as the part between the open and close prices.
The body can be colored to show if it’s a bullish or bearish candlestick.
Bullish candlesticks
In a bullish candle, the price closes above the open price. The lower wick is between the session’s open price and low price, and the upper wick lies between the close price and the high price.
Bullish candles are usually colored white or green, but you can choose any color you want.
Bearish candlesticks
For a bearish candle, the close price is below the open price. Its upper wick is between the open price and high price, and the lower wick lies between the close price and the low price.
The candle is usually colored black or red. However, the color can be customized to any color you want.
Categories of candlestick patterns
Candlestick patterns can be classified based on the number of candlesticks that form the patterns.
But it’s more useful to categorize them based on the potential price movements associated with the patterns. And based on that, they can be grouped into :
Group-1
Group-2
Group-3
Group-4
Group-5
However, we will focus on the most common and reliable patterns, which are the bullish reversal, bearish reversal, and indecision patterns.
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Bullish reversal patterns
These patterns signal a potential upward reversal from the current downward price move.
So, while these candlestick setups can occur at any point in price movement, they are considered useful only when they occur after a downtrend, a pullback in an uptrend, or around the support level in a ranging market.
There are many Japanese candlestick patterns considered bullish reversal, but these are the common ones:
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Hammer :
The hammer is a single-candlestick pattern that occurs after a price swing down and may indicate a possible change in the price direction.
The candle has a small body at the upper end, which can be of any color. It may have little or no upper wick, but the lower wick is very long — about two to three times the size of the body.
This candlestick indicates that while the bears initially pushed the price down, the bulls took control later on in that trading session.
So the current bearish swing may be losing momentum, and the bulls are gaining more confidence.
Piercing Pattern
The piercing pattern is a 2-candlestick bullish reversal pattern seen after a bearish price swing.
The first candlestick is bearish, while the second one is a tall bullish candlestick that opened below the low of the first one and closed above its midpoint.
Moving up to a timeframe that captures the two candlesticks as one (for example, from 30 minutes to 1-hour timeframe), the piercing pattern would appear like a hammer with a bearish body.
The pattern shows that the bears were in control in the early session, but the bulls took control in the later session trying to force the price up.
Bullish Engulfing Pattern
The bullish engulfing pattern is another 2-candlestick reversal pattern that appears after a downward price swing.
The first candlestick has a bearish body, while the second one is tall and bullish, opening below the body of the first one and completely engulfing it.
In a higher timeframe that captures the two candlesticks as one, the bullish engulfing pattern would look like a hammer with a bullish body.
The pattern implies that after the early session, the bears are losing momentum, and the bulls are taking control, pushing the price higher than where the previous session opened. Thus, the downward move may have finished its course, giving way to an upward swing.
There is a special type of engulfing pattern where the body of the second candlestick consumes the entire range of the first candlestick.
It is called an outside bar or a reversal day (daily timeframe) and has more significance than the usual engulfing pattern.
Tweezer Bottom
The tweezer bottom pattern consists of two consecutive candlesticks with similar lows that occur after a downward price move.
The two candles may be of the same or different color, but their lower wicks end around the same level.
What is obvious from the pattern is that the price has been rejected at that low level twice, indicating that it’s a strong support level.
The buying pressure at that level is too strong for the bears to overcome, so the bulls may take over.
In a much lower timeframe, the tweezer bottom may appear as a double bottom chart pattern.
That is, a tweezer bottom on the daily timeframe may appear like a double bottom chart pattern on the hourly timeframe.
Bullish Harami
The bullish harami pattern is a 2-candlestick pattern that forms after a downward price swing.
The first candle is long and can be bullish or bearish, while the second candle is small, with its range lying within that of the first one.
So, the harami is similar to the inside bar pattern seen in the bar chart. It is seen as a price consolidation that heralds a potential price reversal. When occurring in a swing low, the price is likely to turn upwards
Morning Star
The morning star pattern occurs after a downtrend or an extended pullback in an uptrend. It consists of three candlesticks:
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With the exhaustion gap and the subsequent small candlestick, the bears are showing weakness. It’s only natural that the bulls take the price higher and push for a reversal.
Bullish Hikkake
The bullish hikkake pattern occurs after a bearish price swing and can consist of a variable number of candlesticks depending on how many trading sessions it takes the price to breakout above the second candle.
It involves a harami pattern, a false attempt to break below the harami pattern, and a subsequent upward breakout of the harami pattern.
The pattern indicates that institutional traders were accumulating long positions, deliberately pushing the price lower to get more orders (hunting stop losses and inviting more sellers).
When they’ve filled enough orders, they pushed the price up as intended.
How to use bullish reversal candlestick setups to find a
good trading opportunity ?
01 Step
Look for a market that is trending up
02 Step
Wait for a pullback to a support level
03 Step
Look for a bullish reversal candlestick setup around the support level
04 Step
If you see one, go long on the next candlestick after the candlestick pattern appeared.
Another way to find good trades with candlestick setups is to look for the patterns around the support level of a ranging market.Look at the chart below :
In the GBPCHF chart above, the market is gradually trending up and broke through the resistance line, which later became a support level.
A bullish engulfing pattern appeared after the price pulled back to that support level, and the price subsequently turned upwards in the trend direction.
In this GBPUSD chart, the market is in range. After a false break below the support level, a hammer appeared around the support, with a sharp rejection below that support level.
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Bearish reversal patterns
The bearish reversal patterns indicate that the price may be about to turn downwards after it has been moving up for a while.
Although the patterns can occur anywhere, they assume a bearish significance when they occur after an upward swing.
Here are the common bearish Japanese candlestick patterns:
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Shooting Star
A single candlestick pattern, the shooting star is like the opposite of hammer and occurs after an upward price swing.
The candle has a small body at the lower end, with little or no lower wick. However, the upper wick is very long about two to three times the size of the body. The body can be of any color.
A shooting star signifies a potential end to the upward momentum. The candlestick shows that the bears are getting more confident and wrestling control away from the bulls, and a bearish move may be around the corner.
Dark Cloud Cover
The dark cloud cover is a 2-candlestick bearish reversal pattern seen after an upward price swing.
It consists of a bullish candlestick that is followed by a bearish one, which opened above the first candle but closed below its midpoint.
In a higher timeframe that captures the two candlesticks as one (say moving from an M30 to H1 timeframe), the pattern would appear like a shooting star with a bullish body.Look at the illustration below :
The pattern indicates that the bulls were in control in the first session, but the bears took over in the second session, forcing the price close to the pattern’s opening price
Bearish Engulfing Pattern
The bearish engulfing pattern is a 2-candlestick reversal pattern. It occurs after a sustained price rally.
The first candlestick is bullish, while the second one is bearish, opening above the body of the first one and closes below it .
The body of the second candlestick completely engulfs that of the first.
When checked in a higher timeframe that captures the two candlesticks as one (from M30 to H1 timeframe), the bearish engulfing pattern would look like a shooting star with a bearish body.
So, the pattern seems to have a more bearish significance than the dark cloud cover.Look at the illustration below :
The pattern indicates that while the momentum was with the bulls in the first trading session, the bears took control in the second session and pushed the price below the first candlestick’s opening price.
So, that may be the end of the uptrend and the beginning of a downward move.
Tweezer Top
The tweezer top pattern is made of two consecutive candlesticks with similar high prices.
Just as the name implies, the pattern occurs at the top of an upward swing. The two candles may be bullish, bearish, or different colors.
With the price strongly rejected at the same level twice, that ‘high level’ can be considered a strong resistance level. Since the bulls can’t push past the level, bears may be about to take over.
The tweezer top is a strong reversal sign in a much lower timeframe, it may appear as a double top chart pattern.
For example, a tweezer top on the D1 timeframe may appear like a double top chart pattern on the H1 or M30 timeframe.
Evening Star
The evening star pattern is a 3-candlestick pattern that occurs after an uptrend or a price rally in a downtrend.
It consists of a tall bullish candlestick, followed by small one that opened with a gap above the first one, and a tall bearish candlestick that closes below the midpoint of the first candlestick.
The pattern shows that the bullish momentum is waning, evidenced by the exhaustion gap and the subsequent small candlestick (second candle).
So, with the bears making a strong statement in that tall third candle, the momentum may be shifting to the downside.
Bearish Harami
the harami pattern can occur anywhere.The first candlestick is long, while the second one is small.
Both can be of any color, but the second candlestick’s range lies within that of the first one. When the harami occurs at the end of an uptrend or a pullback in an uptrend, it carries a significant bearish implication and is called a bearish harami.
The bearish harami pattern is seen as a price consolidation that occurs after a rally, which may indicate a potential downward price reversal.
Bearish Hikkake
The bearish hikkake pattern is a multiple-candlestick pattern that can emerge from a bearish harami pattern. Thus, it is can be seen after an uptrend or a price rally in a downtrend.
It consists of a bearish harami pattern plus a variable number of other candlesticks depending on how long it takes to break below the harami candlestick after a false breakout move.
This pattern has a significant bearish implication because it involves a combination of price consolidation and a false breakout move.
It shows the activities of institutional traders as they accumulate positions they deliberately push the price higher to hunt stop losses and invite more buyers so as to fill more orders. After getting enough orders, they let the price fall.
How to use bearish reversal candlestick setups to find a good trading
opportunity ?
The best way to find high probability candlestick setups is to combine the candlestick patterns with other technical analysis tools and methods.
If you wish to find good trading opportunities with bearish reversal candlestick patterns, this is what you should do:
1.
Look for a market that is trending down
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Wait for the price to pullback to resistance level or a moving average that’s acting as a resistance
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Look for a bearish reversal candlestick setup around there
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If you see one, short on the next candlestick after the candlestick pattern appeared
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Another option is to look for the patterns around the resistance level of a ranging market.
Let me share with you a a real chart example below :
In the GBDUSD chart above, the market is trending down and formed a little consolidation. A bearish harami then appeared at the end of a short pullback Then The market dropped afterward.
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Indecision patterns
Indecision Japanese candlestick patterns are those candlesticks that show there is equilibrium in the market. Buying pressure from the bulls matches the selling momentum from the bears, so the price tends to close where it opened.
The popular indecision candlestick patterns include the following:
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Neutral Doji
The neutral doji shows that while the opening and closing price is the same, there was upward and downward price movement during the trading session.
It occurs very commonly in price charts and can be seen in both uptrends and downtrends.
The candlestick has small and equal upper and lower wicks, with no real body. Since the price closed where it opened, neither the bulls nor the bears could mount any sustained pressure during the session.
Gravestone doji
The gravestone doji is a type of doji candlestick, where the opening, low, and closing prices of the trading session are the same, but the price moved higher at some point.
It has a long upper wick, no real body, and no lower wick. Despite an initial bullish momentum, the bears brought the price down to close where it opened.
Dragonfly doji
Another type of the doji candlestick, the dragonfly doji has a long lower wick but no real body and upper wick.
The open, high, and close prices are at the same level, despite the price trading lower at some point. So, the initial bearish pressure was neutralized by the bulls later in the trading session.
Four-price doji
The four-price doji is represented with a horizontal line as the price remained where it opened all through the trading session. It is a rare pattern and occurs only in a market with very low volatility.
Spinning Top and High Wave
The spinning top is a candlestick that has a short real body at the center, with similarly sized upper and lower wicks.
The high wave is similar to the spinning top, but the wicks are much longer than the body. Both patterns show that neither the bulls nor the bears could establish significant dominance.
What to do with indecision candlestick patterns
Indecision candlestick patterns, as the name implies, shows a lack of direction in the price momentum. However, when interpreted together with other candlesticks around them, you may notice patterns with significant reversal signals.
For example, a doji candlestick may form the second candle in a morning star or evening star pattern, giving rise to a morning doji star or evening doji star respectively.
In a similar way, a doji can be the second candle in a harami pattern, forming a harami cross.
Moreover, when occurring at the end of a downswing, the dragonfly pattern may act as a version of the hammer.
Similarly, the gravestone patterns can act as a form of the shooting star pattern when occurring after an upswing.
The EURUSD chart above shows a dragonfly doji that formed part of a morning doji star. The setup occurred around a support .
I hope today’s introduction to candlestick patterns has been a helpful and enlightening lesson for you. No matter what strategy or system you end up trading with, having a solid understanding of candlestick patterns will only make you a better trader. If you’re like me, and you love simplicity and minimalism, you’ll want to become a “pure” price action trader and remove all unnecessary variables from your charts. If you’re interested in learning how I trade with bank trading strategies based on price action , checkout my chart patterns smart money course.