Top 10 Candlestick Patterns to Trade the Markets

Candlestick patterns are important tools in technical trading. By understanding them, traders can interpret possible market trends and form decisions from those inferences. There are different types of candlestick patterns that can indicate bullish or bearish movements. This article will briefly touch on what candlestick patterns are and introduce the top 10 formations that all traders should know in order to trade the markets with ease.

Try our interactive trading quiz on forex patterns !

What are candlestick patterns?

A candlestick is a single bar that represents the price movement of a specific asset for a specific period of time. The information it displays includes the open, high, low and close for that period.

Candlestick patterns consider one or more candlesticks to help technical traders in developing inferences about future movements and price patterns of the underlying asset. It is displayed graphically on a chart, which is used for market analysis. Our guide to read candlestick charts is a good place to start to learn how to interpret candlesticks for trading.

Candlestick patterns can be Bullish or Bearish

To recognize and apply the most commonly used candlestick patterns to a trading strategy, traders need to understand how the trend of these patterns can affect the market direction (trend). The tables below summarize the two main categories of price action that candlesticks can indicate. Many of these patterns appear in our top 10 list below.

Bullish Candlestick Patterns:

Candlestick patternDirectionMorning StarBullish (Reversal)Bullish EngulfingBullish (Reversal)DojiBullish/Bearish (Indecision)HammerBullish (Reversal)Bullish HaramiBullish (Reversal)Prince PatternBullish (Reversal)Inner Bars Bullish (Continued)Bullish (Reversal)Bullish (Reversal)Prince PatternBullish (Reversal)Inner Bars Bullish (Continued) )Bullish (Reverse)

Bearish candlestick patterns:

Candlestick patternDirectionEvening StarBearish (Reversal)Bearish EngulfingBearish (Reversal)DojiBearish/Bullish (Indecision)Bearish HaramiBearish (Reversal)Dark Cloud CoverBearish (Reversal)Inside BarsBearish/Bullish (Continuation)Long WicksBearish/Bullish (Reversal)Shooting Reversal

Top 10 Candlestick Patterns Traders Need to Know

1 – EVENING STAR AND MORNING STAR

The Evening and Morning Star candlestick patterns occur at the end of up/downtrends respectively and tend to indicate reversal patterns.The names come from the star-shaped formation of the arrangement. As you can see from the image below, the first candlestick is in the direction of the trend, followed by a bullish or bearish candle with a small body. The third candlestick is seen in the direction of the reversal, ideally closing past the halfway point of the first candlestick. Trading this candlestick pattern will require a confirmation candle in the direction of the respective reversal – for example, traders will look for a bearish candle after the evening star.

2 – BULLISH & BEARISH CIRCULATION

A bullish or clumsy engulfing candlestick pattern can indicate reversal patterns.A bullish engulfing candlestick formation shows bulls outweigh bears. As the pattern below shows, the green body (bulls) completely covers the first candlestick (bears). A bearish engulfing candlestick pattern is small green (or bullish) candle followed by a larger red (bearish) candle that submerges the small green candle.

3 – DOJI

The Doji candlestick chart pattern is associated with indecision in the market of the underlying asset. This could mean potential reversal of the current trend or consolidation. This pattern can occur at the top of an uptrend, bottom of a downtrend, or in the middle of a trend. The candlestick itself has an extremely small body centered between a long upper and lower wick.

4 – HAMMER

The Hammer candle is considered a bullish reversal that usually occurs at the bottom of a downward trend.This candle formation includes a small body whereby the open, high, low and close are more or less the same. There is a long lower wick below the body that should be more than twice the length of the candle body. The body can be bullish or bearish, but bullish is considered more favorable.

5 – BULLISH & BEARISH HARAMI

A Bullish or Bearish Harami can indicate reversal patterns.The word “Harami” means “pregnant” in Japanese, and the name was given to this candlestick pattern because it resembles a pregnant woman. The second candle in the pattern should be contained within the body of the first candle, as seen in the images below. This applies to both bullish and bearish Haramis. A downtrend precedes a Bullish Harami and an uptrend precedes that of a bearish Harami.

6 – DARK CLOUD CAPTURE

The Dark Cloud Cover pattern is seen as a bearish reversal pattern.This candlestick pattern should occur during an uptrend. As seen in the image below, the bullish candle is followed by a bearish candle. This bearish candle must confirm certain criteria to validate the Dark Cloud Cover pattern:

1. The opening price must be higher than the previous days close.

2. The closing price must close below the midpoint of the previous bullish candle.

The Dark Cloud Cover pattern looks similar to that of the Bearish Enulfing pattern. The difference between the two relates to the second candlestick. Bearish Enulfing pattern has the second candlestick opening above the end of the first, while the Dark Cloud Cover opens above the high of the first candle and closes below the center of the first candlestick body.

7 – PIERCING PATTERN

The Piercing Pattern is considered a bullish candlestick reversal pattern, at the end of a downtrend or during a pullback within an uptrend, or at the support. There are two components to a Piercing Pattern formation:

1. Clumsy candle

2. Bullish candle

A piercing pattern occurs when a bullish candle (second) closes above the middle of a bearish candle (first) in a downtrend market. The open price of the second candle should gap off at the market open and follow by closing above the midpoint of the previous candle as indicated below. Both the Piercing and Dark Cloud Cover patterns have similar characteristics. The difference is that the dashed line is a bullish reversal pattern as mentioned above, while the Dark Cloud Cover pattern is a bearish reversal pattern.

8 – INSIDE TRUCKS

The inner bar pattern is used in trending markets where the high and low of the inner bar are within the parameters of the previous candle or “mother bar”. Inner bars are trade within the direction of the trend – if the market is in a downward trend, the trader will try to continue with a short position with the presence of an inner bar. The same principal is applied in an upward trend. Trading in the direction of the trend is not always a given as key levels of support/resistance can signal a reversal. Classically, the entry points for traders are placed above or below the high or low of the mother bar, depending on the direction of the trade. An inside bar is also similar to a bullish or a bearish harami candlestick pattern. The main difference is that with an inner beam, the highs and lows are considered while the real body is ignored.

9 – LONG WEEKS

Long Wicks candlestick patterns often indicate a reversal in trend.Long Wicks occur when prices are tested and then rejected. The fuse indicates rejected prices. Identifying the trend is important to interpreting the meaning of the Long Wick. Identifying key levels and price action are often used in conjunction with Long Wick patterns.

10 – SHOOTING STAR

A shooting star is a bearish candle with a long upper wick, little or no lower wick and a small real body near the day’s low. This comes after an uptrend, and possibly indicates a trend reversal to the downside.The distance between the high and opening price of the candle should be more than twice the size of the Shooting Star’s body. The distance between the lowest price for the day and the closing price should be very small or non-existent.

Further tips for trading using candlestick patterns

Understanding the basics of candlestick charts is essential before using more complex candlestick patterns. Our guide up ‘How to Read a Candlestick Chart’ provides great insight into these fundamentals. For more information on using candlestick charts to trade forex, check us out Trade Candlesticks article. Tune in to us Live webinars for live access to our DailyFX experts who discuss trading strategies, tips, news and forecasts on many different markets.