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Candlestick Patterns – Popular Chart Indicator Explained
Trading simple candlestick formations with binary options is a simple yet effective trading strategy everyone can execute. We explain the strategy and how you can use it to make money with binary options.
In this article, you will learn:
- What Are Candlesticks?
- What Are Simple Candlestick Formations?
- Candlestick Strategy
With this information, you will immediately be able to start trading simple candlestick formations with binary options.
What Are Candlesticks?
Candlesticks are a way of displaying market movements. They are an improvement over the line charts that you see on TV and in the newspaper. To understand the purpose of candlesticks, let’s look at why they were developed.
Line charts display and asset’s price movement in a simple line, which has significant downsides. When you look at a chart that displays the price movements of an entire year, for example, a line chart is unable to include a dot for every single price during that year.
When you look at a price chart that is half the size of your hand, you are not seeing the millions of prices for which this asset traded during the year, you see 50 prices, if you are lucky. Maybe the chart selects one price for each week and connects them, or maybe it uses two prices for each week or only one for each month. In any case, you only see a fraction of what was going on.
Even on shorter time frames, you only see part of the picture. The price of most assets changes every second, and no line chart can display this information. Even in a chart that displays the price movements of the last hour, you only see a fraction of what was going on.
When you miss out on a lot of information, you can make bad decisions. To understand why, assume that an asset was in an upwards movement. Now the movement has stalled. During the last period, the price still began to rise, but eventually turned around and entered a fast decline. Now, at the end of the period, it has fallen to roughly the same level as in the beginning.
In a line chart, this period would be displayed as a simple sideways line. It would be indistinguishable from a period during which nothing happened, and the market has moved sideways. Similarly, a period that started with falling prices and ended with a strong upwards movement that took it back to its opening price would look the same, too. This is problematic because the implications of both periods are fundamentally different.
- In a period where the market moved upwards and then turned around, the market is now strongly moving downwards. It is likely that this movement will continue and that the next period will feature falling prices, too.
- In a period where nothing has happened, the market could have gathered new momentum. Such a period provides little reason to discard your previous predictions.
- In a period where the market started to fall but then turned around, the market is now strongly moving upwards. It is likely that this movement will continue and that the next period will feature rising prices, too.
The bottom line is: in a line chart, very different periods can look the same. This vagueness can lead to bad trading decisions, lost trades, and lost money.
Candlestick Patterns Show Extra Data
Candlesticks solve the vagueness problem by displaying every price of a period in a simple way. A candlestick consists of a thick body and two thin wicks to the top and the bottom.
- The body represents the price range from opening to closing price.
- The wicks represent the high and the low of each period.
- Candlesticks with rising prices are coloured differently than candlesticks with falling prices.
This simple system tells you everything you need to know about a period. The wicks represent the extremes that the market was unable to hold; the body represents the effective movement of each period.
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Candlestick charts consist of hundreds of candlesticks, each of which aggregating the market movements of a specific period.
Typical periods range from 30 seconds (each candlestick aggregates the market movements of 30 seconds) to 1 day (each candlestick aggregates the market movements of an entire day). By changing the period, you can zoom in and out and discover the layers of the market.
What Are Simple Candlestick Formations?
Simple candlestick formations are special candlesticks that allow you to predict future market movements.
Think of our earlier example: where a line chart would have shown you the same sideways for all three movements, candlesticks paint a clearer picture:
- When a candlestick has almost no body but a long wick to the top, you know that the market has moved upwards but then turned around. Currently, prices must be on the decline.
- When a candlestick has almost no body but a long wick to the bottom, you know that the market has moved downwards but then turned around. Currently, prices must be on the rise.
With these simple conclusions, you know what is happening and what will happen next. Take a look at the picture above, for example. At first, the market was falling. In 1980, we had a candlestick with a long wick to the bottom but an upwards body. Even if you look for nothing else, you can immediately conclude that the market fell significantly but turned around and rose again.
This momentum is likely to carry over to the next candlesticks. This is exactly what happened. Whenever you see a similar candlestick after a strong movement, you can conclude that the market will turn around with the next candlestick.
The candlestick in this example is called the hammer. There is also the inverted hammer, which is a sign of downwards momentum.
Here are more simple candlesticks you can use for your trading:
The big candle
The big candle has a large body than its surrounding candlesticks and a small or non-existent wick. It indicates that the market has strongly moved in one direction with little hesitation or doubt. This strong momentum is likely to carry over to the next candlestick. An upwards big candle is a sign of strong upwards momentum, a downwards big candle is a sign of a strong downwards momentum.
Dragonfly doji & gravestone doji
In a dragonfly doji, the opening and closing prices are at the top of the trading day and there is a long wick to the bottom. The gravestone doji is an inverted dragonfly doji with the opening and closing prices at the bottom and a long wick to the top. This candlestick is similar to the hammer: the market has obviously turned around during the period and is now pushing in the direction of the opening and closing prices, but it failed to push far enough to create a hammer.
Consequently, the dragonfly doji indicates an upwards momentum and the gravestone doji a downwards momentum, but these indications are weaker than a hammer.
Doji & long legged doji
A doji is a candlestick with almost no body but a wick to the top and the bottom. Dojis indicate that the market is currently unsure where it wants to go. Dojis often happen near the end of the trading day, when most traders have stopped trading and volume is low. While a doji is a sign of a slow market, long legged dojis are signs of strong forces in balance. You can expect that one force will soon win over the other, pushing the market strongly in one direction.
Other simple candlestick formations
There are hundreds, if not thousands of simple candlestick formations – even the smallest variations have their own names. Instead of learning them all by heart, we recommend understanding the system behind them:
- Body: A long body indicates a strong momentum in the direction of the candlestick. A short body indicates a market with no clear direction.
- Wick: A long wick to one side indicates that the market has turned around. Long wicks to both sides indicate indecisiveness.
Combine these two indications, and you can interpret every single candlestick you see without having to learn any formation by heart. Try to understand the market’s direction and momentum, and you will immediately know what is going on.
Binary options traders can trade simple candlesticks in three ways:
- Trade single candlesticks.
- Paint a larger picture.
- Combine candlesticks with other indicators.
Let’s look at these strategies one by one.
How to trade single candlesticks
Single candlesticks allow for short-term predictions. Since they are based on only one candlestick, they only apply for the next one or two candlesticks. A big candle, for example, predicts that the next candlestick will feature rising prices, but after that, it lacks the ability to paint a clear picture.
If you want to trade a single candlestick, you have a few options:
- High/low options, short expiry: When you trade a single candlestick, you can invest in a high/low option in the direction of the candlestick’s momentum. Search for candlesticks with a clear momentum indication, for example a big candle, and keep your expiry short. You expiry should be no longer than the length of one period. In a 30 minute chart, keep your expiry at or under 30 minutes.
- One touch options: After simple candlestick formations that indicate a strong movement, for example a big candle, you can invest in a one touch option, predicting that the strong momentum will push the market far enough to trigger the target price. Ideally, you would use a target price that is less than one-third of the big candle’s size away from the current market price. Use the longest expiry that offers a target price within this distance.
- Boundary options: For binary options traders, dojis and long legged dojis offer the opportunity to win a trade. During these formations, the market was in the balance, unsure about where to go. This insecurity can’t last long. The market will soon break out of the doji. If you can find a boundary option, you can profit from this prediction. Search for a boundary option that offers target prices within the doji’s price range and use the longest expiry that you can get.
You can focus on a single of these strategies or combine them and pick the one that suits your current market environment.
How to trade the big picture with digital options
Instead of trading single candlesticks, you can also trade the sum of all candlesticks that you see. Typical prices charts have dozens of candlesticks, and their combination can tell you a lot about what is going on.
For example, assume that you see these candlesticks in a row: downwards big candle, upwards hammer, upwards big candle.
These three candlesticks create a vivid picture of what is going on: the market fell in the first period, then turned around in the second period, and continued to rise strongly in the third period.
Compare to trading just the big candle alone; this widened scope increases your ability to predict what will happen. You know that there has been a significant shift in market sentiment, making it likely that the new movement will continue for quite some time.
With this knowledge, you gain more investment possibilities. Since you can predict a longer movement than with a big candle alone, you can invest in a high/low option with a longer expiry. You can also use a one touch option with a target price up two times as far from the current market price as the size of the big candle. If your broker offers ladder options, you might even find a profitable opportunity to get a very high payout.
Of course, you can also combine this strategy with trading single candlesticks. The key is always to be honest about what you know.
- If you can only interpret the last candlestick, limit yourself to a short time investment.
- If the last three or four candlesticks all tell the same story, you can additionally invest in an option with a longer expiry or a higher payout.
- If you have already invested in a movement, won the option, and the next candlestick confirmed your prediction, you can invest again. In this way, a single movement can easily offer four or five chances to win a binary option.
Combine candlesticks with other indicators
Candlesticks can be a great way of finding the right way for trading other indicators. When you are trading trends, swings, or technical indicators, you often know that the market will change direction soon, but you might be unsure when. Candlesticks can be the tool to get your timing right.
When you expect than an upwards movement will soon weaken and turn around, for example, you can monitor the market for an inverted hammer. As soon as you find it, you invest in falling prices. In this way, you maximize your chances of winning a high/low option and even open the door to the possibility of trading a one touch option.
Conclusions On Candlesticks
Simple candlestick formations can help binary options traders find short-term trading opportunities in any market environment. Even newcomers can quickly learn the skills to interpret simple candlestick formations and invest based on their predictions. We recommend understanding the logic behind candlesticks, most importantly the relationship between body size to wick size and placement, and either trading single candlesticks with short expiries or a combination of candlesticks with a longer expiry.
Candlestick Patterns Explained With Examples – Ultimate Tutorial Guide for Beginners
It’s does not matter how you feel in the past, I am going to list and discuss the most commonly used 11 types of best candlestick patterns explained with examples which change your life completely. So that you never depended on any trading company or another person to execute your successful trade.
Candlestick patterns or candlestick charts are used to track the movement of stocks or companies. Nowadays it’s so easy to read candlestick charts through Kite Zerodha app and other technical analysis platforms. I explained here eleven most popular candlestick patterns with perfect examples which make you profitable in the year 2020.
Table of Contents
Candlestick Patterns Explained With Examples For Beginners
Many types of candlesticks chart or candlestick patterns work for successful traders. Actually, these patterns are the basics of stock market trading. Today I only discuss a few of them which needs a beginner to understand the basic level of technical chart analysis.
1. Doji Candlestick Patterns
Doji is a type of candlesticks who have zero or almost zero difference between its open price and close price. Doji candlestick forms may vary according to the shape & length of the shadow. 5 types of Doji Candlesticks you can be seen here, which are the most valuable soldier of a candlestick chart.
Examples of Doji Candlesticks:
Doji appears in a candlestick chart at that time when the potential of buyers and sellers approximately equal ( i.e buying pressure and selling pressure will be same ). Now the time to set up your trade, because its the time to world wors between buyer and seller. If buyers win, stock market price going to high, otherwise sellers win the war and market price will be falling gradually.
Doji Candlestick is the clear sign of trend reversal. That means if Doji appears after a bullish trend, the Bearish trend going to start very soon.
2. Hammer Candlestick Patterns
A “Hammer Candlestick” is a candlestick with a small body, a small range from open to close price with a long shadow producing below the body, and little shadow or no shadow above.
Examples of Hammer Candlesticks
Example: When a hammer appears at the bottom of a downtrend, its long with a long shadow that means an unsuccessful effort by sellers to push the price down, and a corresponding effort by buyers to step in and push the price back up quickly before the period closed. So now the time for bullish candle next and may change the trend.
3. Hanging Man Candlestick Patterns
Hanging Man candlestick shape same as hammer candlestick, but it occurred in the uptrend. The neckline shadow appears downside and the visual body is like this,
Hanging Man candlestick is the first sign of top line of the uptrend and starting the downtrend. But for the confirmation, you should wait for next Bearish candle reach the neckline shadow.
4. Shooting Star Candlestick Patterns
Shooting Star candlestick is the simple inverted symbol of hanging man candlestick. In this case, the shadow or tell appears above the candle body. It’s also called inverted Hammer.
See the example here,
as a confirmation of downtrend, wait to reach the next bearish candle to the lowest price of the shooting star candlestick.
5. Checkmate Candlestick Patterns
Checkmates occur when the trading price range is locked within a small area with a long time like the image shown below. Checkmate candlesticks pattern is the great sign of the reversal in trend.
You must use any support level or resistance level to make sure about the trend reversal direction. Look at the pictures above for better understanding.
6. Evening Star Candlestick Patterns
Evening Star candlestick is same as a doji with a small body. It appears after a long bullish candle and will be a gap up opening. Evening Star candlestick pattern consists of 3 single candles,
- A long bullish candle.
- A small-bodied bearish candle.
- A long bearish candle that opens at or below the low point of the Evening Star Candlestick.
Examples of Evening Star Candlesticks:
If the Shooting Star Candlesticks pattern appears after an uptrend, it is the clear indication of the reversal of the trend, that means downtrend already started.
In the above figure, we have depicted how the evening star pattern looks like. At first, the huge green candle creates on the chart that indicates huge demand for the stock and still bulls are in control. After that, a new candle or the second candle creates on the chart that opens gap up and made a very small body with shadow. This indicates indecision mode. At last third candle open gap down and it is the huge red candle closes near the middle of the first huge green candle. And it is the indication of huge supply started in stock and bears are taken the control over the bulls. Such type of pattern always creates at the upper side of stock charts and once found on charts then it is the early indication of sell-off.
7. Morning Star Candlestick Patterns
Morning Star candlestick also same as a doji with a small body. It appears after a long bearish candle and will be a gap down opening. Morning Star candlestick pattern consists of 3 single candles,
- A long bearish candle.
- A small-bodied bullish candle.
- A long bullish candle that opens at or higher the high point of the middle Candlestick.
Examples of Morning Star Candlesticks:
If the Morning Star Candlesticks pattern appears after an downtrend, it is the clear indication of the reversal of the trend, that means uptrend already started.
Above figure depicts how morning star looks like. When we try to interpret the pattern then we can easily see that at first a big red candle appeared on stock charts that indicate huge selling. After that stock opens gap down and makes hammer type of pattern on stock charts. If the body is small then it is considered as indecision but if looks like hammer then we can consider bulls are greatly fighting with bears to close the price near to its open price. After that, the third candlestick created on the stock chart which is again a huge candlestick of green color. It indicates that finally the bulls are in control and they making the price of the stock higher and higher. So it is the indication of the up move. So generally when downtrend ends then morning start type of structure created on a stock chart and it is the indication of reversal and after completion of pattern the stock starts to fly from the current level.
8. Bullish Engulfing Candlestick Patterns
In bullish engulfing pattern, the real body (open to close) of a bearish candlestick is encompassed by the body of next bullish candle. This indicates an increase in activity from both bears and bulls, and a shift of overall market sentiment towards uptrend.
Examples of Bullish Engulffing:
It indicates that the demand for buying is increased so after a downtrend you can take it as trend reversal.
9. Bearish Engulfing Candlestick Patterns
In this pattern, the real body (open to close) of a bullish candlestick is encompassed by the body of next bearish candle. This indicates an increase in activity from both bears and bulls, and a shift of overall market sentiment towards downtrend.
Examples of Bearish Engulfing:
It indicates that the demand for selling is increased so after a uptrend you can take it as trend reversal.
These are enough for basic knowledge!
By the way, I will discuss so many candlestick patterns in the next blog post ( in part 2 ) which works for me.
So friends, don’t forget to comment your experience about the article candlestick patterns explained with examples.
10. Three White Soldiers Candlestick Pattern
In the above figure, we have shown how three white soldiers’ candlestick pattern looks like. The pattern created at the end of the downtrend. And as we see in figure first candle is green followed by the second candle as well green followed by the third candle as well green. One other point is every next candle is opening in the body of the previous candle and closing above the high of the previous candle. So it is indicating that for continuously three session’s bulls are having control over the bears and demand of the stock is now increasing. So if such type of pattern created on stock chart after the downtrend then it is the indication of the up move and we can take a position in such type of stock.
11. Three Black Crows Candlestick Pattern
Above figure shows how the pattern looks like. Firstly stock moves in an uptrend after that uptrend stock started to make red huge candles. It forms three huge red candles such that the first one is the red candle and the second one opens below the open of previous candle and again the third candle will open below the second candle open.
So it is forming the bearish bars consistently. When we interpret it then we can understand that bears are in control and consistently making the stock to move lower. And if such type of pattern created after the uptrend then it is the indication of a reversal. So we may come out from the stock earlier by making the profit.
Candlestick Patterns Explained FAQ
Dear traders, always I love to start from the beginning and wish to provide you all the basic knowledge which help you to understand how to analyze a candlestick pattern on a candlesticks chart with examples.
Keep reading this FAQ section to better understand the behavior of candlestick pattern. I promise, after learning the whole things about candlestick patterns, your mind & eyes become like the candlestick pattern indicator.
Also Read: How to track your profit & loss with Zerodha back office.
Investors and traders can use candlestick charts like a tool to technical analysis the stock market. Candlestick patterns working as the technical tool on stock trading analysis. A single candlestick patterns or candlestick charts formed by multiple candlesticks with a specific time frame. A candlestick chart represents the overall designed with whole candlesticks within a single time frame. As an example, a 15 minutes Candlestick chart represent the arrangement of multiple 15 minutes candle organized one by one in a manner. While Candlestick Pattern represent some specific types of patterns created by a single or multiple candlesticks.
Example: Doji is a type of candlestick pattern which is made by a single candlestick. Where the morning star candlestick created by 3 piece of single candlesticks back to back arranged with a specific manner.
A candlestick helps you to know the price variation over a time period. Also the strength of buyers and sellers within that time frame. When I was a beginner, at that time I refuse to learn candlestick pattern. Because I love the simplest things every time, so I was stack with line chart first 10 days. But line chart can’t help me anymore. So I started to learn the candlestick behavior then I entered to analyze technical chart through candlestick pattern.
Without a candlestick, you fail to imagine the sentiment and behavior of other traders, investors and smart money. A candlestick helps you to set up your trade with a logical pattern. If you learn candlesticks seriously, you became a money attracting magnet.
Also Read: Best Ways to Save Money in India only Smart People Knows.
The first candlestick can define the second and the second help you to determine the third candle. This property is called continuation pattern which informs us about the probabilities of price in the future. By using this property of candle stick chart, you can imagine future by analyzing previous day chart.
Also Read: How To Use Zerodha Kite App Like A Pro
A single candlestick looks like the figure below.
candlestick open close high low
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A candlestick provides you with four pieces of information:
- The open price.
- The close price.
- The high price.
- The low price.
The color of the candlestick is also significant in understanding whether the open price was higher or lower than the close price.
- If the candle is red this means that the open price is, lower than the close price.
- If the candle is green this means that the open price is, higher than the close price.
Green candlestick denoted as the Bullish Candle, and a Red candlestick denoted as the Bearish Candle.
Look at the above figure here we have taken the example of the bullish candlestick. Above candlestick shows us various information of stock for particular duration.
The information like open, close, high and low for particular duration. The candlestick is green it means that it open near low and close near high. And it is therefore called a bullish candlestick.
When this type of candlestick appeared on the stock chart then it is considered as something good is happening in stock in respective duration.
Bearish Candlestick Pattern
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Now, look at the above figure. Here we have taken the example of bearish candlestick. Here the open is near high and close is near the low. It means that stock open in the upper range but closed by coming down. So we can say that in that respective duration the stock has gone from some unavoidable circumstances and hence stock falls from upper region.
When this type of candlestick forms on the stock chart then it is the indication of people are selling stock in respective duration and consider as the negative for the stock.
One more important thing is that we have called the above candlestick is formed for a particular session but we have not mentioned the duration for respective candlestick or respective session. So keep in mind if candlestick is formed for 1-day duration then open, close, high and low is for the one-day duration only.
Similarly, the same type of candlestick can be formed for one week, one-month duration as well as longer duration. So the high, low, open and close created according to respective duration.
Candlestick chart analysis can defines the future candlestick behavior, that’s true! But not perfectly. If you want to know the accurate result, you need to learn the types of the candlestick which helps you to take your trade. I am not believing with a single Japanese candlestick, so I use the combination of the candlestick which called “Japanese candlestick patterns” which helps me to indicate buy signals and sale signals according to the behavior of candlestick chart patterns already formed.
But before going to learn candlestick pattern, allow your brain to put these types of candlesticks in your mind. These are the fundamentals of a candlestick chart.
- Read more about Japanese Candlestick Patterns from the book Japanese Candlestick Charting Techniques .
Here are the 11 types of Candlestick Patterns most commonly used by successful traders.
- Doji Candlestick
- Hammer Candlestick
- Hanging Man Candlestick
- Shooting Star Candlestick
- Checkmate Candlestick
- Evening Star Candlestick
- Morning Star Candlestick
- Bullish Engulfing Candlestick
- Bearish Engulfing Candlestick
- Three White Soldiers Candlestick Pattern
- Three Black Crows Candlestick Pattern
When we start to analyze the stock then we have various methods to follow. Every person selects their respective method to select a stock. Some are fundamental analyst and some are technical analyst. But most of the methods are using stock charts. Some follow the patterns mostly appeared on stock charts.
There are various types of charts are present for analysis like line chart, bar chart, candlestick chart. Every chart has their pros and cons. We need to choose the chart type according to its features and according to our need. When we look into the line chart then it will show us only the closing prices but not the other prices like high, low, open and close. It is also called as the close only chart. So we cannot manipulate the stock by using only closing prices of stock. We need more information to manipulate the stock.
According to me, the candlestick charts are the best type of chart that will give us more information on stock charts to manipulate the stock. And these types of charts are the best charts used for trading purpose. Because a single candle can show us most of the data hidden in stock itself.
Single Candlestick Methods
- Bullish Marubozu
- Bearish Marubozu
- Hammer Candlestick Pattern
- Hanging man Candlestick Pattern
Double Candlesticks Method
- Bullish Outside Bar Candlestick Pattern
- Bearish Outside Bar Candlestick Pattern
- Inside bar Candlestick Pattern
Three Candlesticks Method
- Morning Star Pattern
- Evening Star Pattern
- Three White Soldiers
- Three Black Crows
In this blog post, we have studied different methods and the patterns of candlesticks. As well we have discussed how to identify such type of patterns on the stock chart. And once we found them on the chart then how to analyze them and trade them. Generally, there are many more types of candlesticks patterns but here we have limited our discussion with only the most important candlestick patterns that mostly appeared on a stock chart and having success ration when traded properly.
Best Candlestick PDF Guide – Banker’s Favorite Fx Pattern
Best Candlestick PDF Guide – Banker’s Favorite Fx Pattern
The best candlestick PDF guide will teach you how to read a candlestick chart and what each candle is telling you. Candlestick trading is the most common and easiest form of trading to understand. The candlestick patterns strategy outlined in this guide will reveal to you the secrets of how bankers trade the Fx market.
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When you first start out on your trading journey, you will be bombarded left and right with new concepts. It can be daunting and confusing to assimilate everything. This trading tutorial will show you how to read candlestick charts for beginners.
We’re going to explain candlesticks in a way that you will remember. If you’re a more advanced trader, this candlestick PDF guide is for you as well. We’re going to share with you a powerful candlestick pattern strategy.
Stay tuned, because we’re going to show you some of the best candlestick patterns that only institutional traders know about.
Let’s first start with the basics of candlestick trading and how to properly read candlestick charts.
Understanding Candlestick Charts for Beginners
If you strip away everything you have on your charts, you’re left with a simple candlestick chart. What you’re seeing on the chart below is the raw price data that in Forex jargon is also referred to as the naked price action chart.
Note #1: Unlike Renko charts, which we have covered in our previous chart trading guide, candlestick charts incorporate the time element.
The most important pieces of information you need as a trader are current and historical prices. The candlestick price will tell you exactly what the price is doing at any given time. The candlestick price chart also gives you a unique insight into the market sentiment.
A candlestick price chart is made up of lots of individual candles that have different shapes, which form different candlestick patterns.
- Bullish candlestick – These are green candles and it shows that that the price has increased over the selected time period. In other words, the closing price is higher than the opening price.
- Bearish candlestick – These are red candles and it shows that the price has decreased over the selected time period. In other words, the closing price is lower than the opening price.
- Neutral candlesticks – These are candles without a body and the opening price is equal to the closing price.
Besides the opening and the closing price, the candlestick chart also gives us information about the highest and lowest price during the time period selected.
The bars above and below the body are called shadows. In Forex jargon, they are also called ‘wicks’ or ‘tails’.
In technical analysis, the Japanese candlesticks can display different types of price formation that are at the base of many candlestick patterns strategy. If you want to explore the most popular chart patterns, please check out our step-by-step trading guide here: Chart Pattern Trading Strategy Step-by-Step Guide.
For now, we’re going to focus on the best candlestick patterns that many banks use against retail traders.
Candlestick Patterns Strategy
If you want to get the most out of what the candlesticks are showing, let’s explore the best candlestick patterns you can ever use. We’re going to show you some candlestick patterns explained with examples. If you understand the psychology behind what the candlesticks are showing, it can make your life as a trader a lot easier.
Not only that, you get a possible insight into the battle between the buyers and sellers. Chart patterns can also be used to trigger your trades.
In this best candlestick PDF guide, we’re going to reveal a secret candlestick pattern used among bank traders. This forex candlestick pattern we’re talking about is the ORB Nr4 pattern developed by hedge fund manager Toby Crabel.
Toby Crable is probably one of the less known profitable traders. Even though in 2005, Toby Crabel was described by the Financial Time as “the most well-known trader on the counter-trend side,” he still remains an unknown name in the retail industry.
The reason why we mention Toby Crabel work is because he is the father of the ORB pattern, aka the Opening Range Breakout pattern. The ORB pattern is regarded as being the most powerful trading tools in the last 25 years.
This powerful trading technique has helped legendary guru trader Larry Williams to turn $10,000 into $1 million in less than a year.
Step #1 How to Identify the ORB Nr4
The ORB pattern is defined as a trade taken at a fixed value of the opening range.
The Opening Range Breakout trade is more effective if taken after an inside day that has its daily range smaller than the previous 3 days. This is what the Nr4 stands for. You have three candles followed by another candle, with a daily range that’s narrower than the previous three days.
Note #2: The 4th day doesn’t necessarily need to be an inside day, it only needs to have its daily range smaller than the previous 3 days. However, inside days tend to produce higher success rates.
Here is how an actual ORB Nr4 pattern looks like on a Forex candlestick chart:
The ORB Nr4 pattern can be one of the best candlestick patterns for intraday trading too. You simply have to apply the same rules outlined in this guide on your favorite intraday chart
What if we told you that 40% of the time, the first trading hour can tell you the high and low of the day. Our candlestick patterns strategy incorporates this price behavior so you can better manage your risk and set your targets.
Basically, you can become a proficient trader.
Like with all our trading strategies, we’re going to give you first the trading rules by going through an actual live trade example that uses the best candlestick patterns mentioned through this PDF guide.
Step #2: Identify the best candlestick patterns and mark the high and the low of the 4th candle
When you search for the ORB Nr4 candlestick chart pattern keep in mind two things:
- The Daily range of the 4th candle needs to be narrow and smaller than the previous 3 candles.
- The 4th candle price range also needs to be inside the candle number 3.
The ORB Nr4 pattern in the chart above is a bullish candlestick pattern because it leads to a bullish move.
Narrow daily trading ranges suggest contraction. And contraction always leads to expansion. This is kind of a general rule because the markets do move from periods of contractions to periods of expansion.
This is the reason why this ORB Nr4 candlestick pattern is so powerful.
Step #3: Switch to 1h TF and Buy if we break the high, Sell if we break the low of the Nr4 candle.
Our trade is taken the next day after the Nr4 pattern showed up. In order to have a clear view of the short-term price action, we need to switch our focus to the one-hour time frame.
Note #3: Only Buy or Sell if the breakout happens during the first 5 hours of the new trading day.
We use the Opening Range Breakout technique to time the market and have an effective trade entry.
Trades based on the ORB – Nr4 candlestick chart pattern will show you a profit instantly.
Now, if the trade is not showing you a profit right away, then your trade becomes more vulnerable. As a general rule, if after the first trading hour your trade is not in the green, you can safely close the trade at the market.
Of course, you can only do that if your stop loss hasn’t been triggered in the meantime.
Now, let’s outline where to place our protective stop loss and where to exit our profitable trade.
Step #4: Place SL below NR4 day low, Take profit using a trailing SL below each 1h candle low
For buy trades, hide your stop loss below Nr4 day low. The ORB – Nr4 pattern tends to precede strong trend day activity, so your stop loss should be rarely hit.
Our take profit strategy is fairly easy and it’s slightly modified from the original strategy highlighted in the “Day Trading with Short Term Price Patterns and Opening Range Breakout” book written by Toby Crabel.
Even though the ORB nr4 pattern tends to lead to trend trading days, we’re more conservative and want to quickly take profits. We would rather trail our SL below each 1h candle low and wait for the market to reverse to take profits.
Conclusion – Best Candlestick Patterns
The best candlestick PDF guide is a result of a series of research that leads us to find tradable market tendencies The price of any market follows some mechanical laws that can be observed through candlestick chart patterns. Having some definable rules of entry based on candlestick patterns can really help the aspiring trader.
Some of the best candlestick patterns are more predictable once you have a framework developed around these chart patterns. As a trader, your obligations are to apply these trading concepts inside your own understanding of the market. Be sure to read about our shooting star candle guide!
If you manage to combine the two things, you can develop a candlestick pattern strategy.
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The 5 Most Powerful Candlestick Patterns
Candlestick charts are a technical tool that packs data for multiple time frames into single price bars. This makes them more useful than traditional open-high, low-close bars or simple lines that connect the dots of closing prices. Candlesticks build patterns that predict price direction once completed. Proper color coding adds depth to this colorful technical tool, which dates back to 18th-century Japanese rice traders.
Steve Nison brought candlestick patterns to the Western world in his popular 1991 book, “Japanese Candlestick Charting Techniques.” Many traders can now identify dozens of these formations, which have colorful names like bearish dark cloud cover, evening star and three black crows. In addition, single bar patterns including the doji and hammer have been incorporated into dozens of long- and short-side trading strategies.
- Candlestick patterns, which are technical trading tools, have been used for centuries to predict price direction.
- There are various candlestick patterns used to determine price direction and momentum, including three line strike, two black gapping, three black crows, evening star, and abandoned baby.
- However, it’s worth noting that many signals emitted by these candlestick patterns might not work reliably in the modern electronic environment.
Candlestick Pattern Reliability
Not all candlestick patterns work equally well. Their huge popularity has lowered reliability because they’ve been deconstructed by hedge funds and their algorithms. These well-funded players rely on lightning-speed execution to trade against retail investors and traditional fund managers who execute technical analysis strategies found in popular texts.
In other words, hedge fund managers use software to trap participants looking for high-odds bullish or bearish outcomes. However, reliable patterns continue to appear, allowing for short- and long-term profit opportunities.
Here are five candlestick patterns that perform exceptionally well as precursors of price direction and momentum. Each works within the context of surrounding price bars in predicting higher or lower prices. They are also time sensitive in two ways:
- they only work within the limitations of the chart being reviewed, whether intraday, daily, weekly or monthly.
- their potency decreases rapidly three to five bars after the pattern has completed.
Top 5 Candlestick Patterns
This analysis relies on the work of Thomas Bulkowski, who built performance rankings for candlestick patterns in his 2008 book, “Encyclopedia of Candlestick Charts.” He offers statistics for two kinds of expected pattern outcomes:
- reversal – Candlestick reversal patterns predict a change in price direction
- continuation – while continuation patterns predict an extension in the current price direction.
In the following examples, the hollow white candlestick denotes a closing print higher than the opening print, while the black candlestick denotes a closing print lower than the opening print.
- Three Line Strike
The bullish three line strike reversal pattern carves out three black candles within a downtrend. Each bar posts a lower low and closes near the intrabar low. The fourth bar opens even lower but reverses in a wide-range outside bar that closes above the high of the first candle in the series. The opening print also marks the low of the fourth bar. According to Bulkowski, this reversal predicts higher prices with an 84% accuracy rate.
- Two Black Gapping
The bearish two black gapping continuation pattern appears after a notable top in an uptrend, with a gap down that yields two black bars posting lower lows. This pattern predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. According to Bulkowski, this pattern predicts lower prices with a 68% accuracy rate.
- Three Black Crows
The bearish three black crows reversal pattern starts at or near the high of an uptrend, with three black bars posting lower lows that close near intrabar lows. This pattern predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. The most bearish version starts at a new high (point A on the chart) because it traps buyers entering momentum plays. According to Bulkowski, this pattern predicts lower prices with a 78% accuracy rate.
- Evening Star
The bearish evening star reversal pattern starts with a tall white bar that carries an uptrend to a new high. The market gaps higher on the next bar, but fresh buyers fail to appear, yielding a narrow range candlestick. A gap down on the third bar completes the pattern, which predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. According to Bulkowski, this pattern predicts lower prices with a 72% accuracy rate.
- Abandoned Baby
The bullish abandoned baby reversal pattern appears at the low of a downtrend, after a series of black candles print lower lows. The market gaps lower on the next bar, but fresh sellers fail to appear, yielding a narrow range doji candlestick with opening and closing prints at the same price. A bullish gap on the third bar completes the pattern, which predicts that the recovery will continue to even higher highs, perhaps triggering a broader-scale uptrend. According to Bulkowski, this pattern predicts higher prices with a 70% accuracy rate.
The Bottom Line
Candlestick patterns capture the attention of market players, but many reversal and continuation signals emitted by these patterns don’t work reliably in the modern electronic environment. Fortunately, statistics by Thomas Bulkowski show unusual accuracy for a narrow selection of these patterns, offering traders actionable buy and sell signals.
Putting the insights gained from looking at candlestick patterns to use and investing in an asset based on them would require a brokerage account. To save some research time, Investopedia has put together a list of the best online brokers so you can find the right broker for your investment needs.
Understanding Basic Candlestick Charts
Candlestick charts originated in Japan over 100 years before the West developed the bar and point-and-figure charts. In the 1700s, a Japanese man named Homma discovered that, while there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of traders.
Candlesticks show that emotion by visually representing the size of price moves with different colors. Traders use the candlesticks to make trading decisions based on regularly occurring patterns that help forecast the short-term direction of the price.
- Candlestick charts are used by traders to determine possible price movement based on past patterns.
- Candlesticks are useful when trading as they show four price points (open, close, high, and low) throughout the period of time the trader specifies.
- Many algorithms are based on the same price information shown in candlestick charts.
- Trading is often dictated by emotion, which can be read in candlestick charts.
Just like a bar chart, a daily candlestick shows the market’s open, high, low, and close price for the day. The candlestick has a wide part, which is called the “real body.”
This real body represents the price range between the open and close of that day’s trading. When the real body is filled in or black, it means the close was lower than the open. If the real body is empty, it means the close was higher than the open.
Traders can alter these colors in their trading platform. For example, a down candle is often shaded red instead of black, and up candles are often shaded green instead of white.
Candlestick vs. Bar Charts
Just above and below the real body are the “shadows” or “wicks.” The shadows show the high and low prices of that day’s trading. If the upper shadow on a down candle is short, it indicates that the open that day was near the high of the day.
A short upper shadow on an up day dictates that the close was near the high. The relationship between the days open, high, low, and close determines the look of the daily candlestick. Real bodies can be long or short and black or white. Shadows can be long or short.
Bar charts and candlestick charts show the same information, just in a different way. Candlestick charts are more visual, due to the color coding of the price bars and thicker real bodies, which are better at highlighting the difference between the open and the close.
The above chart shows the same exchange-traded fund (ETF) over the same time period. The lower chart uses colored bars, while the upper uses colored candlesticks. Some traders prefer to see the thickness of the real bodies, while others prefer the clean look of bar charts.
Basic Candlestick Patterns
Candlesticks are created by up and down movements in the price. While these price movements sometimes appear random, at other times they form patterns that traders use for analysis or trading purposes. There are many candlestick patterns. Here a sampling to get you started.
Patterns are separated into bullish and bearish. Bullish patterns indicate that the price is likely to rise, while bearish patterns indicate that the price is likely to fall. No pattern works all the time, as candlestick patterns represent tendencies in price movement, not guarantees.
Bearish Engulfing Pattern
A bearish engulfing pattern develops in an uptrend when sellers outnumber buyers. This action is reflected by a long red real body engulfing a small green real body. The pattern indicates that sellers are back in control and that the price could continue to decline.
Bullish Engulfing Pattern
An engulfing pattern on the bullish side of the market takes place when buyers outpace sellers. This is reflected in the chart by a long green real body engulfing a small red real body. With bulls having established some control, the price could head higher.
Bearish Evening Star
An evening star is a topping pattern. It is identified by the last candle in the pattern opening below the previous day’s small real body. The small real body can be either red or green. The last candle closes deep into the real body of the candle two days prior. The pattern shows a stalling of the buyers and then the sellers taking control. More selling could develop.
A bearish harami is a small real body (red) completely inside the previous day’s real body. This is not so much a pattern to act on, but it could be one to watch. The pattern shows indecision on the part of the buyers. If the price continues higher afterward, all may still be well with the uptrend, but a down candle following this pattern indicates a further slide.
The bullish harami is the opposite or the upside down bearish harami. A downtrend is in play, and a small real body (green) occurs inside the large real body (red) of the previous day. This tells the technician that the trend is pausing. If it is followed by another up day, more upside could be forthcoming.
Bearish Harami Cross
A bearish harami cross occurs in an uptrend, where an up candle is followed by a doji—the session where the candlestick has a virtually equal open and close. The doji is within the real body of the prior session. The implications are the same as the bearish harami.
Bullish Harami Cross
A bullish harami cross occurs in a downtrend, where a down candle is followed by a doji. The doji is within the real body of the prior session. The implications are the same as the bullish harami.
Let’s look at a few more patterns in black and white, which are also common colors for candlestick charts.
Bullish Rising Three
This pattern starts out with what is called a “long white day.” Then, on the second, third, and fourth trading sessions, small real bodies move the price lower, but they still stay within the price range of the long white day (day one in the pattern). The fifth and last day of the pattern is another long white day.
Even though the pattern shows us that the price is falling for three straight days, a new low is not seen, and the bull traders prepare for the next move up.
A slight variation of this pattern is when the second day gaps up slightly following the first long up day. Everything else about the pattern is the same; it just looks a little different. When that variation occurs, it’s called a “bullish mat hold.”
Bearish Falling Three
The pattern starts out with a strong down day. This is followed by three small real bodies that make upward progress but stay within the range of the first big down day. The pattern completes when the fifth day makes another large downward move. It shows that sellers are back in control and that the price could head lower.
The Bottom Line
As Japanese rice traders discovered centuries ago, investors’ emotions surrounding the trading of an asset have a major impact on that asset’s movement. Candlesticks help traders to gauge the emotions surrounding a stock, or other assets, helping them make better predictions about where that stock might be headed.
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