There are a lot of different candlestick patterns. Here we explain the most popular ones. The most reliable signals appear on daily. On H4 and H1 the reliability falls. On Weekly and Monthly the reliability of the general trend forecast increases, but the possibility of strong temporary deviations from the trend gets higher as well, for example, candles may have very long shadows.
Reversal patterns indicate the high odds that a trend will change direction. These patterns are helpful in identifying a possible entry points at the beginning of the new trend.
Note that for reversal patterns:
- The longer the trend is, the stronger the signal is.
- The steeper the trend is, the stronger the signal is.
- The signal is stronger if it appears near strong resistance/support level.
- The signal is stronger if there have been tweezers patterns formed in the recent trading sessions
Bearish reversal patterns appear at the end of an uptrend.
Shooting star. A 1-candle pattern. The candle’s body is small. The upper shadow is long and exceeds the body at least in 2 times. The long upper shadow implies that the market tried to find where resistance and supply were located, but the upside was rejected by bears. The candle may be any color, though if it’s bearish, the signal is stronger.
Evening star. A 3-candle pattern. After a long bullish candle, there’s a bullish gap up. The bulls are in control, but they don’t achieve much. The second candle is quite small and its color is not important. The third bearish candle opens with a gap down and fills the previous bullish gap. This candle is often longer than the first one.
Evening doji star. A 3-candle pattern. The pattern is similar to the Evening star, but is considered to be a stronger signal as the middle candle is doji.
Hanging man. A 1-candle pattern. Can signal an end of the bullish trend, a top or a support level. The candle has a long lower shadow, which should be at least twice the length of the real body. The candle may be any color, though if it’s bearish, the signal is stronger. Requires further bearish confirmation. The sell signal is confirmed when a bearish candlestick closes below the open of the candlestick on the left side of this pattern.
Dark cloud cover. A 2-candle pattern. The first candle is bullish and has a long body. The second candle should open significantly above the first one’s close and close below the 50% of first candle’s body. Its body should also be rather long.
Bearish engulfing pattern. A 3-candle pattern. The first candle is bullish. The second candle is bearish and should open higher than first candle’s high and should close above the first one’s low (completely engulf it). Moderately strong signal.
Bearish harami. A 2-candle pattern. The body of the second candle is completely contained within the body of the first one and has the opposite color.
Bearish harami cross. A 2-candle pattern similar to the Harami. The difference is that the last day is a Doji.
Three black crows. A 3-candle pattern. There’s a series of 3 bearish candles with long bodies. Each candle opens within the body of the previous one, better below its middle. Each candle closes at a new low, near its minimum. The reliability of this pattern is very high, but still, a confirmation in the form of a bearish candlestick with a lower close or a gap-down is suggested.
Bullish reversal patterns appear at the end of an uptrend.
Hammer. A 1-candle pattern. Can signal an end of the bearish trend, a bottom or a support level. The candle has a long lower shadow, which should be at least twice the length of the real body. The color of the hammer doesn’t matter, though if it’s bullish, the signal is stronger. Requires further bullish confirmation. The buy signal is confirmed when a candlestick closes above the opening price of the candlestick on the left side of the hammer.
Morning star. A 3-candle pattern. After a long bearish candle, there’s a bearish gap down. The bears are in control, but they don’t achieve much. The second candle is quite small and its color is not important. The third bullish candle opens with a gap up and fills the previous bearish gap. This candle is often longer than the first one.
Morning doji star. A 3-candle pattern. Almost the same as previous, but some traders consider it a stronger signal.
Inverted hammer. A 1-candle pattern. The candle has a small body and a long upper shadow, which is at least in 2 times longer than the real body. The color of the hammer doesn’t matter, though if it’s bullish, the signal is stronger. Requires further bullish confirmation.
Piercing line. A 2-candle pattern. The first candle is long and bearish. The second candle opens with a gap down, below the close of the first one. It’s a big bullish candle, which closes above the 50% of first candle’s body. Both bodies should be long enough. Moderately strong signal.
Bullish harami. A 2-candle pattern. The body of the second candle is completely contained within the body of the first one and has the opposite color.
Bullish harami cross. A 2-candle pattern similar to the Harami. The difference is that the last day is a Doji.
Bullish engulfing pattern. A 2-candle pattern appears at the end of the downtrend. The second (bullish) candle should open lower than first candle’s low and should close above first one’s high (completely engulf it). Moderately strong signal.
Three white soldiers. A 3-candle pattern. There’s a series of 3 bullish candles with long bodies. Each candle should open within the previous body, better above its middle. Each candle closes at a new high, near its maximum. The reliability of this pattern is very high, but still, a confirmation in the form of a white candlestick with a higher close or a gap-up is suggested.
Most candlestick patterns are reversal ones, but there are certain trends that represent times of rest. Continuation patterns suggest that the market will maintain an existing trend after a pause. These patterns are helpful in identifying possible entry points, providing evidence for holding the already opened positions or adding to them.
Continuation of an uptrend
Upside Tasuki Gap. A bullish candle forms after a gap up from the previous white candle. The next candle opens lower and closes lower than the previous one. If the gap is not filled, the bulls have maintained control and one may open long. If the gap was filled, the bullish momentum has come to an end.
Rising three methods. After a long while candle, there’s a series of small bearish candles. The optimal number of pull-back candles should be 3, though 2, 4 or 5 pull-back candles can also be observed. It’s important that these bearish candles do not close below the open of the big bullish candle. Their shadows also shouldn’t go below the bullish candle’s open. The final candle of the formation should open up in the body of the last pull-back candle and close above the first big white candle.
Separating lines. There’s a long bearish candle followed by a bullish candle which opened at the same level when the bearish candle had opened.
Mat hold. After a large white candle, there’s a gap up followed by a series of small bearish candles. The second or the third one of them dips into the body of the large bullish candle. The final candle of this pattern gaps to the upside and it continues its upward movement to close above the trading range of any of the previous days. This is a good point to add to positions. The Mat hold candlestick pattern is a stronger continuation pattern than the Rising three methods. During the days of the correction unlike the Rising three methods, the price stays close to the top of the white (or green) candle’s upper range.
Three Line Strike (The fooling three soldiers). After the 3 bullish candles (3 white soldiers), which indicate that the uptrend continues, there is a candle which opens higher, but then pulls back to close below the open of the first bullish candle. The short-term pullback sentiment is out of the way and the uptrend continues on from this point.
Upside Gap Three Method. Similar to the Upside Tasuki Gap. The pattern occurs in a strong trending market. In an uptrend, a gap occurs between 2 bullish candles. The final day opens within the top bullish body and closes in the lower bullish body, filling the gap between them.
Continuation of a downtrend
Downside Tasuki Gap. A black candle forms after a gap down from the previous black candle. The next candle opens higher and closes higher than the previous one. If the gap is not filled, the Bears have maintained control and one may open short. If the gap was filled, then the bearish momentum has come to an end.
On neckline. The first bearish candle opens with a gap down and has a long body. The second candle is bullish and reaches only the low of the previous day, not its close level.
In neckline. The pattern is similar to the On neckline pattern except that it closes at the close or just slightly above the close of the previous day. The In Neck Line indicates some short covering, but not a change in trend direction.
Thrusting. This pattern resembles On neckline and In neckline patterns, except the bullish candle closes near, but slightly below the midpoint of the previous day’s black body.
Falling Three Method. After a long bearish candle, there’s a series of 2-5 small bullish candles. It’s important that these bullish candles do not close above the open of the big bearish candle. Their shadows also shouldn’t exceed the bearish candle’s open. The final candle of the formation should open in the body of the last bullish candle and close below the first big black candle’s close.
Have you ever felt like the universe is trying to communicate with you by sending various warning signs? Sometimes these signs from the unknown sources help you escape serious troubles or prevent irreparable damage to your belongings. Not every person has a gift to decode the cryptic messages the universe is sending him. Not necessarily because of his/hers nihilistic and non-superstitious character, but because of the “language barrier” that stands between him/her and the universe. Once you learn the lingo of the universe, you become better armed against potential pitfalls that await you on your life journey.
FX market also has its own language. Traders who refuse to learn it suffer substantial financial losses being unable to recognize its warning signals. One of the key elements of FX language is chart patterns. In the following tutorial, you will learn them, and become well protected from unexpected treacherous trend reversals, false breakouts, extreme swings, and troughs.
Chart patterns are the combination of support and resistance lines which help to determine whether the trend will reverse or continue. As a result, there are reversal and continuation patterns.
Reversal chart patterns
Head and shoulders
The head-and-shoulders pattern is usually formed at the end of an uptrend. While the bullish trend is seen as a period of successive rising peaks and rising troughs, the head-and-shoulders pattern illustrates a weakening in the trend.
The pattern consists of a head (the second and the highest peak) and 2 shoulders (lower peaks) and a neckline (the line which connects the lowest points of the two troughs and represents a support level). The neckline may be either horizontal or sloping up/down. The signal is more reliable when the slope is down rather than up.
The pattern is confirmed when the prices broke below the neckline after forming the second shoulder. Once it happens, the currency pair should start a downtrend. So, a sell order is put below the neckline. To get the target measure the distance between the highest point of the head and the neckline. This distance is approximately how far the price will move after it breaks the neckline.
Note that prices often returns to the neckline after the initial breach (a “throwback” move). In this case, the neckline, which used to be a support, acts as resistance.
Inverse Head and Shoulders
The inverse head-and-shoulders pattern is the exact opposite of the head-and-shoulders. It occurs at the end of a downtrend and indicated a bullish reversal.
The double top is also usually formed at the end of an uptrend. It’s one of the most common formations. The pattern consists of two consecutive peaks of similar (or almost) height with a moderate trough between them. The neckline is drawn horizontally through the lowest point of a trough.
The pattern is confirmed when the prices break below the neckline after forming the second shoulder. Once it happens, the currency pair should start a downtrend. Put a sell order below the neckline. To get the target measure the distance between the peaks and the neckline. This distance is approximately how far the price will move after it breaks the neckline. Once breached, the neckline starts acting as resistance. Throwback move is also possible here.
The double bottom is the exact opposite of the head-and-shoulders. It occurs at the end of a downtrend and indicated a bullish reversal.
The similar patterns with 3 peaks/3 troughs are called Triple top/bottom. Trading should be the same.
Continuation chart patterns
Continuation chart patterns occur during a pause in the current trend and indicate that it will resume.
Triangle patterns are easily recognized. The best way to trade them is to trade the breakouts. Trading inside the triangle is riskier and requires experience.
There are 3 types of triangle patterns. Ascending triangle is considered to be a bullish pattern, descending triangle – a bearish pattern, while symmetrical – a neutral one.
In the case of a symmetrical triangle, neither bull nor bears dominate the market. Support line slopes upwards and resistance line slopes downward at approximately one angle. The breakout may be in any direction. One sure thing is that it will eventually happen. As a result, one may place entry orders above the lower highs and below the higher lows. When one of the orders is hit, cancel the other.
The ascending triangle shows that the bulls are getting stronger as they manage to push the prices up to one level, while the Bears are weakening and allow the prices to form higher lows. Resistance line is relatively flat or horizontal and support line is sloping upwards. In most cases, but now always, the price will break out past the resistance. Set entry order above the resistance line and below the higher lows.
The descending triangle shows that the bears are getting stronger as they manage to pull the prices down to one level, while the Bulls are weakening and allow the prices to form lower highs. Resistance line is sloping downwards and a line of support that is relatively flat or horizontal. In most cases, but now always, the price will break out past the support. Set entry order below the support line and above the lower highs.
Flags and pennants
Pennants and Flags are short-term continuation patterns of which they are among the most reliable.
These patterns are formed when there is a sharp price movement followed by a consolidation phase. A flag consists of 2 parallel trendlines (support and resistance) that slope against the previous trend. A Pennant consists of two converging trend lines that begins wide and converges and is a very short term Symmetrical triangle.
Always trade Flag and Pennants in the direction of the previous trend placing orders above the resistance line (for uptrends) or support line (for downtrends).
Wedges are much similar to triangles. The difference is that wedges have a significant slope against the previous trend.
A rising wedge is formed when price consolidates between upward sloping support and resistance lines. If the rising wedge forms after an uptrend, it’s usually a bearish reversal pattern. If it forms during a downtrend, it could signal a continuation of the down move.
A falling wedge is formed when price consolidates between downward sloping resistance and support lines. If the falling wedge forms after a downtrend, it’s usually a bullish reversal pattern. If it forms during an uptrend, it could signal a continuation of the up move.
Rectangle describes a price pattern where supply and demand seem evenly balanced for an extended period of time. The currency pair moves in a tight range, finding support at the rectangle's bottom and hitting resistance at the rectangle’s top. The prices will eventually break out of this sideways trade. The breakout will most likely be to the upside if the previous trend was bullish, and to the downside, if the previous trend was bearish. However, the rectangle can become a reversal pattern.
Other articles in this section
- Uncovering Gann indicators
- How to create your own trading strategy?
- Trend trading
- Trend trading
- Carry trade
- Swing trading
- Position trading
- Day trading
- Trading styles and strategies
- Fibonacci tools
- Trader's psychology
- Identifying market’s reversal
- Japanese Candlesticks
- Market conditions: trends and ranges