Candlesticks pack a lot of data. They show how an asset’s price moved, which highs and lows the price hit, as well as how strongly it reacted to a support or resistance level. While some traders use candlesticks to discover chart patterns by connecting multiple candlesticks, others trade by watching individual candlesticks.
In this article I’m going to show you 4 powerful candlestick patterns that every trader should know. I’ll explain how to trade the hammer, engulfing patterns, the three white soldiers, and doji patterns. You’ll also have the chance to learn about both bearish and bullish candlestick patterns.
What are Candlestick Patterns?
Individual candlesticks provide indications of bullish or bearish moves similarly to how groups of candlesticks forming a chart pattern do. Traders identify candlestick patterns to determine one of two outcomes: continuation or reversal.
Continuation implies that the price will extend in the direction that it moves towards.
Reversal implies that the trend has come to a halt and that the price will reverse its direction.
Some analysts believe that the advance of technology and algorithmic trading ruined the prospects of candlestick patterns. Institutional investors who trade big sizes and use algorithms front-run traders before the moment a pattern forms. However, a few patterns have stayed relevant due to their accuracy.
Note that certain patterns require multiple candlesticks (e.g. white soldier) while some require only one, such as doji variations.
When trading candlestick patterns, make sure to apply a level of importance depending on the time frame you’re trading. Patterns at HTFs are more likely to have long-term effects on the asset. The effects of LTF patterns last shortly and the trend can reverse its direction at any moment.
How to Read Candlestick Patterns: 4 Examples
The following section features four examples of the most powerful candlestick patterns that every crypto trader should know. You’ll get to see both bullish and bearish variants of candlestick patterns. By the end of this section, you should be able to trade cryptocurrencies much more effectively and have the capacity to spot trading opportunities.
The hammer is a one-candlestick pattern that indicates bullish reversal. The body of a hammer has a long lower shadow and a closing price above its opening price. The hammer pattern occurs when traders defend the price during a downtrend by buying the asset, hence the long lower shadow.
For confirmation, make sure that the hammer is followed by at least three candlesticks closed above it. Hammers are the perfect patterns for longing, but if you are in doubt, place a stop loss right at the lower end of the hammer.
Candlesticks that engulf their previous candle indicate a trend reversal. Both bearish and bullish engulfing candlestick patterns exist. Like with hammers, engulfing candles are followed by several candlesticks moving in the new trend. You can trade the pattern by opening a long or short and placing a stop loss near the engulfed candle.
Three White Soldiers
The Three White Soldiers is a three-candle pattern formed after a downtrend. It consists of three candles making higher highs and higher lows. The candles within this pattern rarely have long shadows and open inside the real body of the previous candle. This is a bullish pattern that leads to a trend reversal. We call the bearish variation of this pattern the three black crows.
Crypto candlestick chart
Dojis are popular and rare one-candle patterns. The standard Doji has long shadows to the upper and lower sides. The opening and closing prices are nearly identical. Such a configuration signifies indecision by both bulls and bears. But although the price can head in either direction, the Doji pattern is more commonly a reversal pattern when played out during a long trend
The Morning Star is a bullish variation made of one bearish candle, one doji, and one bullish candle. The doji represents indecisiveness in this downtrending setup. As long as the third candle closes green, the trader will confirm the pattern.
The Evening Star is a bearish variation that plays out similarly to the Morning Star. The only difference is that the Evening Star occurs during an uptrend.
Are Candlestick Patterns Reliable?
Candlestick patterns are as reliable as any other technical indicator. They show you how an asset might react under certain circumstances. However, that does not mean that the pattern has to play out correctly every time. It’s possible for candlestick patterns to form but for the price to head in the opposite direction.
I recommend treating candlestick patterns as tools that show you the likelihood of a bullish or bearish price action to occur. Don’t treat candlestick patterns as confirmations of price trends. Simply view them as indicators that reveal in which direction the market might be leaning.
If you want to learn more about trading cryptocurrencies, I recommend giving my free ebook a chance. In “A Beginner’s Handbook to Technical Analysis,” you get to learn about the fundamentals of cryptocurrency trading. Reading this handbook requires no prior trading experience. It also doesn’t require any understanding of cryptocurrencies or their underlying technology. You can download the ebook for free at this link.
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Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.