Technical Analysis

Candlestick Patterns

Japanese Candlestick charts are one of the oldest type of charts used for price prediction. They date back to the 1700s, when they were used for predicting rice prices. In this next section we’ll briefly look at some Japanese candlestick patterns, which are in wide use today.

Below I have provided a brief description and appearance of many candlestick patterns. I am sure there are many more but you have to drawn the line somewhere, right?

Candlesticks allow you to gain an insight into the interaction between buyers and sellers, and can therefore be used to analyse stocks, commodities, or forex.

Before we continue let’s quickly digress to the basics – candlesticks are constructed as follows:

The body of the candlestick is called the ‘real body’, and it represents the range between the open and closing prices. Notice how the open and the close can be at either end of the body of the candlestick. You need to know how your charting software displays the difference. Generally, a hollow candlestick body represents the close being higher than the open. Conversely, a shaded or solid candlestick body represents the close being lower than the open.

Often a hollow candlestick will be referred to as a ‘bullish candle(stick)’ and a solid candlestick as a ‘bearish candle(stick)’. These two terms are used often in the explanatory text below.

One more thing to note; above and below the body of a candlestick there are usually thin lines. These are known as shadows (or wicks). These represent the price extremes of a particular period i.e. the upper shadow represents the high for that period, while the lower shadow represents the low.


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A note about candlestick patterns. In my opinion, their application is limited to the short term (1 week or so). In other words, 1 pattern is not going to influence what happens to that price in 1 month’s time. Notwithstanding that, they can be quite effective – here they are below.

Candlestick Patterns

Bearish 3 Method Formation
A large black candlestick followed by three smaller candles that are within the range of the first candle. These are followed by another large black candle. This five period pattern is seen as a continuation pattern of the already bearish sentiment.

Bearish Harami
A large bullish candlestick engulfs a smaller black bodied candle. Its interpretation is similar to that of an inside day, in that it foreshadows an explosive move. Moreover, when preceded by an uptrend this pattern is bearish.
Bearish Harami Cross
A large bullish candlestick engulfs a doji (refer to doji below). This indicates indecision after a strong move and can precede a trend reversal.

Big Black Candle
A large bearish candlestick; where the close is lower than the open.
Big White Candle
A large bullish candlestick; where the close is higher than the open.

Black Body
Simply, a candlestick that has closed lower than it opened. This differs from that of a big black candlestick in that its length is unimportant.

Bullish 3 Method Formation
The inverse of the “Bearish 3 Method Formation”; where a large white candlestick is followed by three smaller candles. These candles are within the range of the first candlestick. This five period pattern is seen as a continuation pattern of the already bullish sentiment.

Bullish Harami
A large bearish candlestick engulfs a smaller white bodied candle. When preceded by a downtrend, this is considered a bullish pattern.
Bullish Harami Cross
A large bearish candlestick engulfs a doji (explained below). It’s important to note that when a pattern includes a doji its significance is increased. Therefore, its interpretation is similar to the Bullish Harami, only it’s considered more powerful.

Dark Cloud Cover
This is a two period pattern where a long white candlestick is followed by a black candle. The black candlestick opens higher than the close of the initial candle and penetrates 50% or more of its body. This is a bearish reversal pattern.
Doji
The open and close are the same, representing indecision. This indecision can be the precursor to an explosive move.

Doji Star
A doji that has gapped above or below the previous candlestick. This can be a potential reversal signal, since it too shows indecision.
Engulfing Bearish Line
This is considered to be a key reversal pattern; it’s where a small white candlestick is engulfed by a large bearish candle. This is seen as a top reversal signal.

Engulfing Bullish Line
This too is considered a key reversal pattern; it’s where a small black candlestick is engulfed by a large bullish candle. An ‘Engulfing Bullish Line’ is seen as a bottom reversal signal.
Evening Doji Star
A three period pattern where a large white candlestick is followed by a doji. This doji has gapped above the white candlestick. A third black candlestick follows and pierces the initial white candlestick. This is considered to be one of the most reliable key reversal patterns, especially at new highs.

Evening Star
A pattern similar to the ‘Evening Doji Star’, except the second candle isn’t a doji. Instead it can have a small body (white or black). This is seen as a key reversal signal however, its significance is decreased since it doesn’t involve a doji.


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Falling Window
This is effectively what is known as a gap down. Read more about gaps here.

Gravestone Doji
A doji where the open and close are at the low of the period. Its appearance is similar to that of a gravestone, hence it’s name. Moreover, as a gravestone is seen as sombre, so too is its interpretation. It’s a bearish top reversal pattern.
Hammer
A small body (white or black) that closes near its high with a long lower shadow. There is typically no upper shadow, or a very small one. This is a reversal pattern that can be either bullish or bearish, depending on its placement.

Hanging Man
This formation is similar to that of the “Hammer”, however, the difference being the length of the lower shadow. The hanging man exhibits a shadow, two or three times the height of the main body of the candlestick. This length gives it greater significance as a reversal pattern.
Inverted Black Hammer
A small black body that closes near its low with a long upper shadow. There is typically no lower shadow, or a very small one. This is a reversal pattern that can be either bullish or bearish, depending on its placement.

Inverted Hammer
As the name indicates this is the inverse of the “Hammer.” A small body (white or black) is near the low with a long upper shadow. There is typically no lower shadow, or a very small one. This is a reversal pattern that can be either bullish or bearish, depending on its placement.
Long Legged Doji
A Doji pattern with very long upper and lower shadows. This indicates market indecision.

Long Lower Shadow
A candlestick (black or white) where its lower shadow is two-thirds or more of the total candle’s range. This indicates rejection of lower prices and is therefore seen as a bullish signal.
Long Upper Shadow
A candlestick (black or white) where its uppper shadow is two-thirds or more of the total candle’s range. Opposite to the “Long Lower Shadow”, this shows rejection of higher prices and is therefore seen as a bearish signal.

Morning Doji Star
The inverse of the Evening Doji Star; the Morning Doji Star is a three period pattern where a large black candlestick is followed by a doji. This doji has gapped below the black candlestick. A third white candlestick follows and pierces the initial black candlestick. This is considered to be one of the most reliable key reversal patterns, especially at new lows.
Morning Star
This formation is not as powerful as the “Morning Doji Star” however it is still a key reversal signal. It’s where a black candlestick is followed by a candle, of either colour, that has gapped below it. A third white candlestick follows and pierces the initial black candlestick. This is similar to an island pattern on standard bar charts.

On Neck-Line
A black candlestick is followed by a small white candle. The small white candlestick’s close is near the low of the black candlestick. This indicates a continuation of an already bearish sentiment.
Piercing Line
A two period pattern where a long black candlestick is followed by a white candlestick. The white candlestick opens lower than the close of the initial candlestick and penetrates 50% or more of its body. If the low of the white candlestick is broken, in subsequent periods, the market usually continues to move downward.

Rising Window
This the same as a gap up. Read more about gaps here.

Separating Lines
In an uptrend, a black candlestick is followed by a white candle with the same opening price. In a downtrend, a white candlestick is followed by a black candle with the same opening price. Both these situations are seen as continuation patterns.

Shaven Bottom
A candlestick, of either colour, with no lower shadow. This is a reversal pattern that can be either bullish or bearish, depending on its placement.

Shaven Head
A candlestick, of either colour, with no upper shadow. This is a reversal pattern that can be either bullish or bearish, depending on its placement.
Shooting Star
A small bodied candlestick with a long upper shadow and little or no lower shadow. Usually this is a top reversal signal, however, this depends on its placement.

Spinning Top
This pattern is similar to the doji however there is a greater range from the opening to the closing price. Additionally, the candlestick can be of either colour and it indicates market indecision.
Three Black Crows
Three long black candlesticks with consecutively lower closes that close near or at their low prices. Obviously numerous large black candlesticks have bearish implications.

Three White Soldiers
The inverse of the “Three Black Crows”; exhibits three white candlesticks with consecutively higher closes that close near or at their high prices. Obviously numerous large white candlesticks have bullish implications.
Tweezer Bottoms
The lower shadows of two or more candlesticks at the same price level. The size and colour of these candles are insignificant. This indicates support and can be used as a spring board to higher prices; on the other hand, if this spring board is broken (the low is breached) this can kick start a downtrend.

Tweezer Tops
The highs of two or more candlesticks are at the same price level. This indicates rejection of higher prices and is therefore seen as a top reversal.
White Body
A candlestick that has closed higher than it opened. This differs from that of a big white candlestick in that its length is unimportant. This is a bullish signal.