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Candlestick Patterns Trader | Learn the Basics and Improve Your Trading Strategy

It's important for you to understand that there are several different types of Candlestick Patterns out there that you can use to help you predict future price movements. We will cover the basic candle patterns that can help you identify trading opportunities. You can subscribe to our education page to receive more information about different trading indicators and how to use them to improve your trading skills.

With those candles you can build a trading strategy and trade more efficiently, they will help you confirm a potential trend reversal using other indicators.

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What Are Chart Patterns and How Are They Used to Identify Trading Opportunities?

Chart Patterns are one of the most popular ways to identify a trading opportunity, they allow you to examine current movements to forecast future market movements.

There are multiple trading strategies you can use, regardless of your trading style, you can select from hundreds of technical indicators built in your trading platform, you can also add indicators from the market tab, but there is one more element that you will need to be successful and this is your ability to identify chart patterns.

Transitions between rising and falling trends are often signaled by price patterns, a price pattern is a recognizable configuration of price movement that is identified using a series of trendlines and/or curves.

In order to become a more successful trader you will need to easily spot these patterns on a graph chart; this will help you identify trading opportunities and also it will help you confirm or reject some of the signals you obtain from other technical indicators.

How Are Chart Patterns Classified?

Candles consist of a body, upper shadow and a lower shadow, then depending on the direction of the candle, where those shadows and bodies are we can determine what was the opening price, closing price, highest and lowest level reached by the candle. Depending on the shape of the candlestick we can determine different patterns and build a strategy around them.

candlestick patterns trader diagram with bearish and bullish trading opportunities

One Candlestick Patterns

Spinning Tops

Let’s start with Spinning Tops used by a candlestick patterns trader.

These are candlesticks that have a long upper and lower shadow, and small bodies. The Spinning Top candles indicate that the market is undecided about the direction of the pattern, buyers and sellers are fighting but no one is able to get a winning hand.

As a trader you can conclude that even though the candle opening and closing price did not change significantly during its period the price had high volatility.

  • When a spinning top forms during an uptrend, this usually means there aren’t many buyers left and a possible reversal in direction could occur. 
  • When a spinning top forms during a downtrend, this usually means there aren’t many sellers left and a possible reversal in direction could occur.

Doji

A rare candle is a Doji by a candlestick patterns trader.

If you see one you’ll know it’s a Dojo, these candles have extremely small bodies and in some cases the same opening and closing price which will make the candle body very flat.

Doji candles suggest an undecided market or a fight between buyers and sellers. Prices move above and below the opening price during the session, but it closes at or very near the same opening price. Neither buyers or sellers were able to gain control and the result is a tie.

There are FOUR special types of Doji candlesticks and each one can help you identify and predict the behavior of the following candles. 

The length of the shadows can vary and the resulting forex candlestick looks like a cross, inverted cross, or plus sign depending which shadow is longer.

When a Doji candle forms on your chart, make sure you check the previous candlesticks.

  • If a Doji forms after a few candles with long bodies and no shadows like an uptrend Marubozu, the Doji candle is likely telling us that the buyers are becoming exhausted and weakening. In order for the price to continue its uptrend, more buyers are needed but there is no drive from those buyers anymore. Sellers are likely to start driving the price down.
  • If a Doji forms after downtrend Marabozu the price is likely to start moving up.
Two Candlestick Patterns

The Harami Candlesticks

Let’s talk about Harami candlesticks. It’s a candle inside the previous candlestick, it helps you find potential trend reversals, the key to identifying this pattern is that the closing price of the second candle has to be within the previous candle range, there are two types of Harami; bullish and bearish.

  • On the Bearish Harami the first candle has to be moving upwards, it needs to be bigger than the second candle which will move in the opposite direction; this indicates that there is a possible trend reversal, the second candle indicates the direction of the reversal.
  • To identify a Bullish Harami you need to look for a big downtrend candle followed by a smaller one moving in the opposite direction and closing price inside the previous candle; this will indicate that there is a potential uptrend on the way.

Engulfing Candlestick

The way you identify  this pattern is by looking for a small candle followed by a bigger one that covers the full small candle (engulfing the whole previous range) and moves in the opposite direction. There are also two types of Engulfing candles you can identify; Bullish Engulfing and Bearish engulfing.

  • On the Bullish Engulfing Candle pattern the small candle is moving downwards and the second and bigger candle covering the previous needs to be upwards; this will indicate a reversal of previous trend.
  • The Bearish Engulfing candlestick can be identified as a smaller uptrend candle followed by a bigger one covering the whole range and moving downwards.

Dark Cloud Cover

These are staggered candles, they indicate a potential bearish signal and you can identify them as two candles about the same size and shape that are staggered, the first candle is moving upwards and the second candle moves downwards.

  • The second candle needs to have a closing price more than half way below the previous candle.
  • This is a good pattern to set a stop loss, usually this is set above the wick of the second candlestick.

Piercing Pattern

These are also staggered candles, and they indicate a bullish signal, and they can be identified as two candles of the same size staggered. The first candle needs to be downwards and the second one should be moving upwards.

  • The second candle needs to have a closing price more than halfway above the previous downwards candle.
  • It helps you identify possible bullish patterns.

Make sure that you are using these candlestick patterns in conjunction with other technical Indicators, use them as a confirmation with Relative Strength Index, Stochastic, Momentum or your preferred technical indicator.

Get Started With Your Trading

We hope that the information provided in this article was interesting to you and mostly that you can use this information to improve your trading skills. We strive to present this information in a way that is easy for you to digest. If you enjoyed this article make sure to visit our resources page to find more information that can help you become a better trader and test those strategies on a trading account.

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