Types of Candlestick Patterns

Candlestick patterns are one of the most powerful technical analysis tools. It provides you with crucial insights into the market sentiment and potential price movements. Whether you are trading or investing, you can use the different types of patterns to make more accurate and well-informed decisions.

Key takeaways

• Candlestick patterns are technical indicators that help traders evaluate historical price patterns and anticipate future price movements.
• Bullish candlesticks are patterns that indicate a continuation of an upward trend, which is marked by a further increase in prices.
• Bearish candlesticks are patterns that signal a continuation of a downward trend, where prices may continue to fall.

• Reversal candlesticks are patterns that help traders prepare for a potential price reversal from a bullish to a bearish market or vice versa.

  
  

Wondering how many types of candlestick patterns there are? Currently, there are more than 40 candlestick patterns recognised and actively used by the trading and investing community. In this comprehensive guide, we are going to explore the different types of patterns and how to incorporate them into your trading strategy.

Candlesticks are visual representations of the price movement of a particular asset for a specific time frame, which can range from a minute to a month. They show the opening, highest, lowest, and closing prices for the chosen time frame.
Candlestick patterns, meanwhile, are a sequence of candlesticks arranged in a particular fashion. Traders often view the presence of these patterns in a candlestick price chart as an indication of a future price movement.
Candlestick patterns are usually classified into three categories based on the number of candles. These include single-candlestick patterns, double-candlestick patterns, and three-candlestick patterns. Additionally, the patterns can also be classified into various categories based on market sentiment (bullish, bearish, and neutral) and function (trend continuation and trend reversal).

Use the MMI Index to get real-time insight into investor mood.

Bearish candlestick patterns are unique candlestick formations that indicate a potential downward price movement in an asset. Here is a quick overview of a few of the most common bearish candlestick patterns.

• Bearish engulfing pattern

  The bearish engulfing pattern is another one of the common double candlestick patterns and is the direct inverse of the bullish engulfing pattern. It is characterised by a small bullish (green) candle followed by a larger bearish (red) candle. The bearish candle completely covers the body of the first bullish candle. The appearance of this pattern usually suggests a potential shift to a downtrend.
   

• Dark cloud cover

  Among the different types of patterns that indicate bearishness in an asset is the dark cloud cover. The pattern consists of a bullish candle succeeded by a bearish candle. The bearish candle opens above the high of the bullish candle but closes below its halfway point. The dark cloud cover pattern suggests an increase in the selling pressure, signalling a possible bearish trend.
   

• Three black crows

  The three black crows feature three bearish candlesticks with long bodies. The candles appear consecutively on the price chart, with each of them closing higher than the previous one. The pattern suggests a strong bearish sentiment and a potential continuation of a downtrend.

Bullish candlestick patterns are specific candlestick formations that signal a potential price appreciation in an asset. Some of the most common bullish candlestick patterns include the following:

• Hammer

  The hammer is a single candlestick pattern featuring a candle shaped in a form resembling a hammer. The pattern is characterised by a small body with a short or no upper wick and a lower wick that is twice the length of the body at the very least. The hammer is one of the many types of candlesticks that indicate a potential bullish trend.
   

• Bullish engulfing pattern

  One of the most well-known double candlestick patterns, the bullish engulfing pattern, consists of a small bearish (red) candle succeeded by a large bullish (green) candle. The bullish candle completely covers the body of the first bearish candle. The appearance of a bullish engulfing pattern on the price chart is usually succeeded by a bullish trend.
   

• Three white soldiers

  As the name implies, the three white soldiers are a three-candlestick pattern. It is characterised by three bullish candles with long bodies appearing consecutively on the price chart. Each of the three candles closes higher than the previous one. The pattern typically indicates strong bullish sentiment and a potential continuation of an uptrend.