The Candlestick Chart Cheat-Sheet: Everything You Need To Know

The Candlestick Chart Cheat-Sheet: Everything You Need To Know

If you recall, in the Technical Analysis article, we went over candlestick charts.

Candlestick charts make predicting trends in the market much easier, and therefore help you maximize your trading profits.

If you’ve read the article on types of charts, you already have some background information on using candlestick charts in technical analysis – but this article will give you an in-depth understanding.

Pejman Zwin

Content

Candlesticks and candlestick patterns are quite literally the most important thing for you to understand when trading in any financial market.

Without candlesticks, you can’t even read price – much less make accurate trading decisions based on what’s likely to happen next.

Trying to trade without understanding candlesticks would be like trying to read a book with a blindfold on.

Having a clear understanding of candlesticks is crucial, especially for beginners, to build a foundation for your portfolio.

Now that we are familiar with the basics of technical analysis, different types of charts, and different types of gaps, we have the background knowledge to learn about candlesticks and put them into practice.

You’ll know everything you need to use these charts to understand and benefit from the market.

First, let’s start with the history of candlesticks.

What is the origin of Candlesticks?

What is the origin of Candlesticks?

As I told you in the history of technical analysis, the origin of candlesticks comes from more than 400 years ago.

Candlestick charts were first developed in Japan for the purpose of tracking the prices in the rice industry.

That long history has formed how we use charts in our modern markets.

What is the origin of Candlesticks?

Munehisa Honma was a rice trader from Sakata, Japan who was sometimes called the God of Markets because of his work in the mid-1700s.

Many people believe he may have been the father of the modern candlestick chart.

In 1755, he wrote the first book on market psychology: “The Fountain of Gold – The Three Monkey Record of Money.”

In this book, he posits that traders’ emotions significantly affect rice prices and that the psychological side of the market is vital to their success.

Munehisa’s theory was that, if you know this, you can go against the market: “When everyone is bearish, there is a reason for prices to go up” (and vice versa).

Let’s take his theory and see how it works in practice.

Further reading

What is a candlestick?

What is a candlestick?

A candlestick is a way to show how the price of an asset has changed over time.

It’s one of the most popular forms of technical analysis.

With just a few price bars, traders can quickly determine what the prices mean.

What is a candlestick?

A candlestick contains three main parts:

  • The body, which shows the range from open to close.
  • The wick, or shadow, shows the high and low of the day.
  • The color shows the way the market is moving.
    • A green (or white) body means the price is going up.
    • A red (or black) body means the price is decreasing.

Over time, the shapes of each candlestick combine to make patterns that we can use to find significant levels of support and resistance, and therefore identify market opportunities.

Some charts show the balance between buying and selling pressures, while others show continuation patterns or an indecisive market.

Indecisive market

The “shadows” of the candlestick display the day’s high and low points and how they compare to the beginning and end of the day.

The shape of a candlestick depends on how the day’s high, low, opening, and closing prices fit together.

The bigger the body and shorter the shadows, the stronger the impact of that candle.

Candlesticks are great for at-a-glance measures of trade volumes.

Now that we know the concept of candles, let’s learn about Doji.

  • Doji:

When a market opens and closes at almost the same price, the candlestick looks like a cross or plus sign.

We should look for a short or nonexistent body and wicks of different lengths.

The shape of this Doji shows that buyers and sellers are fighting, but neither side ends up with a net gain.

Sellers are fighting

After identifying Doji, we will most probably have a ranging market.

I will talk about different types of markets in the following articles.

We have four different types of Doji, pictured below:

types of Doji

  • Neutral Doji:

This is the most common Doji pattern with candlesticks.

This pattern shows up when buying and selling are almost the same.

This Doji pattern shows that it’s not clear where the trend will go next.

  • Dragonfly Doji:

This pattern occurs when both supply and demand are in balance at the conclusion of a downtrend.

  • Gravestone Doji:

This pattern occurs when both supply and demand are equal at the end of an uptrend.

The candlestick opens and closes at the day’s lowest point.

The direction of the trend in the future is set by the previous trend and the Doji pattern.

  • Long-legged Doji:

As the name says, this is a candlestick pattern with long legs.

When the factors of supply and demand are in balance, this pattern shows up.

The direction of the trend in the future is set by the previous trend and the Doji pattern.

It may seem a bit confusing, but don’t worry!

You will be able to confidently distinguish them by the end of this article.

Further reading

What are the different types of candlesticks?

What are the different types of candlesticks?

We have a lot of candlesticks, but many of them are not practical.

I have chosen the most important ones that are more common and used in the market – seven bullish, seven bearish, and three continuation candlestick patterns.

Let’s begin!

Bullish patterns of candlesticks:

After a market downtrend, bullish patterns can show a change in price direction.

They are a sign for traders that they should think about opening a long position to profit from any move up.

Here are the seven most useful bullish patterns to watch out for:

1. Hammer

The hammer candlestick pattern has a short body and a long wick at the bottom.

It appears at the bottom of a downward trend.

A hammer shows that the price went down during the day but then went back up because there was a strong demand to buy.

The body can be any color, but green hammers are a stronger sign of a bull market than red ones.

Hammer

2. Inverted Hammer

The inverted hammer is another pattern that is also bullish.

The only difference is that the wick at the top is long, and the wick at the bottom is short.

It shows that there was a push to buy, followed by a push to sell that wasn’t strong enough to make the market price go down.

The hammer pointing down means buyers will soon be in the market.

Inverted Hammer

3. Bullish Engulfing:

Two candlesticks make up the bullish engulfing pattern.

The first candle is short and red.

A larger green candle completely covers it.

Even though the price opens lower on the second day than it did on the first, the bullish market drives the price up, making it clear that buyers have won.

Bullish Engulfing

4. Piercing Line:

The piercing line is also made up of two sticks: a long red candle and a long green candle.

Most of the time, the price at the end of the first candlestick and the price at the start of the green candlestick are very different.

It shows intense buying pressure because the price goes up to or above the middle price of the day before.

Piercing Line

5. Bullish Harami:

The bullish harami candle pattern signals the impending reversal of a bullish trend.

The pattern includes two consecutive candles, with the second bullish candle having a small body and the first bearish candle having a long body and short wicks.

There is another structure where the second candle is a Doji, called a “Bullish Harami Cross.”

This pattern has less validity compared to the hammer and bullish engulfing pattern.

If there is a gap between the ending price of the first candle and the opening price of the second candle, however, we can consider this pattern a valid one.

Bullish Harami

6. Morning Star:

In a market downtrend, the morning star candlestick pattern is seen as a sign of hope.

It is a three-stick pattern, with a short candle in the middle of a long red and a long green candle.

The closing price of the third candle should cover at least half of the first candle.

We’re especially keeping an eye on the third candle; the higher the ending price, the better.

If there is a gap between the ending price of the first candle and the opening price of the second candle, we can consider this pattern a valid one.

A gap between the second and the third candle makes it even better!

If the second candle’s structure is like a Doji, then we call it Morning Doji Star.

Usually, the “star” won’t overlap with the longer bodies because the market gaps both when it opens and when it closes.

It means that people aren’t selling as much as they were on the first day, and a bull market is coming.

Morning Star

7. Three White Soldiers:

The pattern of the three white soldiers repeats over three days.

It is made up of a series of long green (or white) candles with small wicks.

Each day, the candles open and close higher than the day before.

It is a huge indicator that the price will go up, because it happens after a downward trend and shows that buying pressure is getting stronger over time.

Three White Soldiers

Bearish patterns of candlesticks:

Generally, bearish candlestick patterns show a point of resistance after an uptrend.

When traders are very concerned about the market price, they frequently close their long positions and open short positions to profit from the price going down.

Let’s look at seven types of bearish patterns to keep in mind.

1. Hanging Man:

The hanging man is not like a hammer at all. It looks the same, but it shapes at the end of a rising trend.

This means that a lot of people sold their shares during the day, but buyers were able to raise the price again.

People often think that the big drop in prices shows that the bulls are losing control of the market.

Hanging Man

2. Shooting Star:

The shooting star has the exact same structure as an upside-down hammer, but it is flipped.

The body is short, and the wick at the top is long.

Usually, when the market opens, it will gap a little bit higher and then rise to a high point during the day before closing at a price just above where it started.

This is like a falling star.

Shooting Star

3. Bearish Engulfing:

At the end of an uptrend, a bearish engulfing pattern can be seen.

The first candle is small and green, while the second candle is long and red.

It means that price changes have stopped or slowed down, and it is a sign that the market is about to go down.

The trend is more likely to be important if the second candle goes down.

Bearish Engulfing

4. Bearish Harami:

When compared to the bullish Harami, the bearish Harami pattern has the opposite setup and behavior.

Typically, a bearish Harami signals a potential reversal at the end of bullish periods.

A smaller bearish candle that is completely enveloped by the first candle makes up the second half of a bearish Harami, which begins with a long bullish candle.

Bearish Harami

5. Evening Star:

The bullish morning star is the same as the three-candlestick pattern called the “evening star.”

It looks like a small candle between a long green candle and a big red candlestick.

It shows that an uptrend is ending, especially when the third candlestick wipes out the gains made by the first candle.

If there is a gap between the ending price of the first candle and the opening price of the second candle, we can consider this pattern a valid one.

The gap between the second and the third candle is an even better sign.

Evening Star

6. Three Black Crows:

The three black crows candlestick pattern is easy to spot and is obviously not a good sign for the market.

It is made up of three long red (or black, on some charts) candles next to each other that have short or no wicks.

This pattern looks like steps leading down.

The three black crows are formed when the session starts at the same price as the day before, but sellers keep pushing the price down as each day ends.

Traders see this pattern as the beginning of a bearish downtrend because buyers have been overtaken by sellers for three days in a row.

Three Black Crows

7. Dark cloud cover:

The dark cloud cover candlestick structure is an even more telling sign of a market downturn.

It’s like a dark cloud is hanging over the good feelings from the day before.

It has a place for two candles.

First one is green, the second one is red.

The red one begins above the green one and ends below the middle of the green one.

It shows that the whales are in charge of the session and are driving the price down sharply.

If the wicks on the candlesticks are short, that indicates a drastic downtrend.

Dark cloud cover

Next, let’s illustrate the three most important continual candlestick patterns.

Continuation patterns of candlesticks:

A candlestick pattern is called a “continuation pattern” if it doesn’t show a change in the market’s direction.

These candlesticks can help us figure out when the market is standing still or when prices aren’t fluctuating much.

1. Bullish and Bearish Marubozu:

A Marubozu candlestick has a large, lengthy body and hardly any shadows, making it difficult to miss.

This sturdy body denotes a powerful movement in either an upward or downward direction.

When a bullish (green/white) Marubozu forms, it means that the price rose steadily from the time it opened until it closed, trying to rise even higher.

In basic terms, the day’s low is established at the starting price, and the day’s high is established at the close of trading.

Similar to the Bullish (Red or Black) version, the closing price in the Bearish (Red or Black) version happens at the end of the trading day.

If Marubozu agrees with the market’s trend, there is an important point that many forget to pay attention to.

You should pay attention to the last two or three candle’s colors in particular.

Bullish and Bearish Marubozu

 

2. Falling Three Methods:

We use three-way formation patterns to figure out if a current trend, whether it’s up or down, will continue.

The “falling three methods” is the name for the bearish pattern.

It has a long red body, three small green bodies, and another long red body.

All of the green candles are inside the range of the bearish bodies.

It tells traders that the bulls aren’t strong enough to change the trend.

Falling Three Methods

3. Rising Three Methods:

The “rising three methods” candlestick pattern, which is bullish, is the opposite.

It has five candles: three short candles (at least two of them should be red) between two long greens.

Even though there is some pressure to sell, the pattern shows that buyers are still in charge of the market.Falling Three Methods

Wrap up:

Now that we’ve discussed how to identify some candlestick patterns to pay attention to, you should practice identifying them next time you’re perusing market charts.

These can help you understand the patterns’ roles in opening and closing our positions in the market.

We might see a number of these patterns in the support and resistance zone (which will be explained in upcoming articles) which shows the validity of these patterns.

In the following articles, stay tuned for some ideas of how we can use these candlesticks to inform our trades.

Further reading