Top 5 Candlestick Patterns Every Trader Should Know

Here, we will describe the top five candlestick patterns: bullish engulfing, bearish engulfing, doji, morning star, evening star, dark cloud cover, and piercing pattern.

Bullish Engulfing

This signals a possible end to a downward trend and the start of an upward Trend.

Here's how you recognize it:

A larger bullish (white or green) candle follows a smaller bearish (black or red) candle.

The bullish candle 'engulfs' the bearish candle, indicating an increase in buying interest.

The bullish engulfing pattern signals a bullish rise ahead."
Bearish Engulfing: Just as the bullish engulfing pattern signals a bullish trend, the bearish engulfing pattern flags a potential bearish trend ahead. It can be identified by:
e.g,

diagram showing bullish/bearish engulfing candlestick pattren

Bearish Engulfing: Just as the bullish engulfing pattern signals a bullish trend, the bearish engulfing pattern flags a potential bearish trend ahead. It can be identified by:

A larger bearish candle (black or red) follows a smaller bullish candle (white or green).

The bearish candle 'engulfs' the bullish candle, indicating an increase in selling interest.

Bearish engulfing represents the bulls losing control as the bears step in to take the reins.


Doji: The doji candlestick indicates market indecision.
Traders should look for the following characteristics:

The opening and closing prices are nearly identical, resulting in a small body.

The shadows/wicks can vary in length.

The pattern is typically associated with indecision between
the bulls and bears.

The presence of a Doji can signal a pause in the prevailing trend, denoting a potential reversal. It essentially suggests that the bulls and bears are in a stalemate.

diagram showing doji family candlestick pattren

Types of Doji

Doji is a candlestick pattern commonly used in technical analysis to help traders identify potential trend reversals or indecision in the market. here we will also discuss its types:

Gravestone Doji:Appearance: The gravestone doji is characterized by a small, thin candlestick with a long upper shadow and little to no lower shadow. The open and close are typically near the bottom of the candle's range.

Interpretation: The gravestone doji suggests a potential reversal of an uptrend. It indicates that the bears (sellers) have managed to push prices lower during the trading session, but the bulls (buyers) have brought the price back up by the close. This pattern can signal weakness in an ongoing uptrend, and traders often look for confirmation in the form of a bearish follow-through on the next candlestick.

Long-Legged Doji:

Appearance: The long-legged doji has a small body with upper and lower shadows that are roughly equal in length, making it look like a cross or plus sign. The open and close are typically very close to each other and situated in the middle of the candlestick's range.

Interpretation: The long-legged doji represents a significant level of indecision in the market. It suggests that neither the bulls nor the bears have been able to gain control during the trading session, resulting in a standoff. Traders often view the long-legged doji as a signal of a potential trend reversal, especially when it occurs after a strong price move, indicating that the prevailing trend may be losing momentum. However, like other doji patterns, traders typically seek confirmation from subsequent price action.

Dragonfly Doji:

Appearance: The Dragonfly Doji is characterized by a small, thin candlestick with a long lower shadow and little to no upper shadow. The open and close are typically near the top of the candle's range.

Interpretation: This pattern suggests a potential reversal of a downtrend. It indicates that the bears (sellers) have pushed prices lower during the trading session, but the bulls (buyers) have managed to bring the price back up by the close. It signals that the bears are losing control, and buyers might be gaining strength, potentially leading to a trend reversal. However, traders often seek confirmation from subsequent candlestick patterns or technical indicators.

Morning Star

This three-candle bullish reversal pattern suggests the dawn of a new uptrend after a downtrend. It includes:

 A long bearish candle (Day 1).

 

Followed by a short candle or doji that 'gaps down' from the prior bearish candle (Day 2).

 And a bullish candle that gaps up from the doji (Day 3).

A morning star's light signals the beginning of a new day - or a new bullish trend in the context of trading."

Evening Star

The evening star pattern, contrary to the morning star, is a bearish reversal pattern, indicating the end of a bullish trend. Traders must observe:

A long bullish candle (Day 1)

 Followed by a short candle or doji that 'gaps up' from the Day 1 candle (Day 2).

 And finally, a bearish candle that 'gaps down' from the Day 2 candle (Day 3).

The 'evening star' indicates that the light is fading on a bullish trend.

 Dark Cloud Cover

The dark cloud cover is a bearish reversal pattern that can be spotted using these parameters:

A long bullish candle (Day 1).

 Followed by a bearish candle that opens above the high of Day 1 (Day 2).

 The bearish candle then closes within, but not below the midpoint of the Day 1 candle's body.

Dark cloud cover presents an ominous signal for bullish investors.

Piercing Pattern

A piercing pattern is the bullish equivalent to the dark cloud cover. It suggests a potential bullish reversal. Check these patterns to recognize them:

 A long bearish candle (Day 1).

 Followed by a bullish candle (Day 2) that opens lower than Day 1's low.

 Day 2's candle closes above the midpoint of Day 1's body.

The piercing pattern may suggest a potential light at the end of the tunnel marking the end of a bearish trend.

 Conclusion

In assessing the market situation, mastery of candlestick patterns can provide traders a distinct advantage. Bear in mind, though, that while these patterns offer insights, they should not be used alone to predict market trends. Use them as tools to supplement your comprehensive analysis of various factors. After all, candlestick patterns are not a magic wand but merely colorful strokes that paint the larger picture of market conditions. Always take time to hone your skills, and may your journey in the financial markets be a successful and enlightening one. Happy trading!