Top Powerful Candlestick Patterns Every Trader Must Know

If you know about trading and the stock market then you must have heard about candlestick patterns surely. These patterns are made of candles. Based on these patterns, some significant movements in the market can be traced.

So, first you should know about candles!

Candles are a way of displaying the movement of the market at a certain time. Before diving into the patterns and their uses. Let’s understand about its body and color. Candles are composed of three main features:

• Body: Body represents an open and close range of price.
• Wick: Wick represents Higher and lower point prices that have touched
• Color: Color represents the direction of movement. The green Candle indicates an increase in price whereas the Red Candle represents a price decrease.

Let’s discuss a bit more about candle color for more understanding. If the candle is green, It means the closing price will be greater than its opening price. If the candle is Red, It means the opening price will be greater than its closing price.

Candles signify two movements in the market:

1. Bullish Movement
2. Bearish Movement

So let’s discuss the important candlestick patterns of each movement.

Bullish Candlestick Patterns

Bullish candlestick patterns support bullish movement in the market. When it appears, it means the market can go upside down. Here, I will discuss a few of the most important bullish candlestick patterns which are used frequently.

• Hammer Candlestick Pattern

The Hammer Candlestick pattern is composed of a longer lower wick and negligible upper wick or no upper wick. It generally appears in a downward trend. It indicates a change in pattern from downside to upside.

Its longer lower wick indicates the market was in a downward trend then suddenly buyers entered the market and moved the price upside and close above its opening price. The accuracy of the hammer candle increases if it is displayed near the support zone.

In the above picture, we can see that the market was in a downside direction then a hammer pattern arose and we can see an upside momentum in the market.

• Bullish Engulfing Candlestick Pattern

The bullish Engulfing candlestick pattern is composed of two candles. The first candle has a shorter body and it is engulfed by the second candle. The first candle can be green or red but It should be covered by the Second candle.

This Pattern arises during a downward trend and it signifies the end of the bear movement and the beginning of Bullish movements. It has greater significance when it appears near support.

In the above picture, we can see the formation of a bullish engulfing pattern near the support level and after this formation, we can see a trend reversal and a good rally toward upside.

• Morning Star Candlestick Pattern

The Morning Star candle is a stick pattern. This is one of the best patterns I have noticed in Trading and equities. It is considered as potential signal of upside momentum. The first and last candles are large with shorter middle candles. The first candles should be Red and the Last candle should be Green.

The best pattern is formed when the middle candles do not overlap with the first and the last candles. The formation of the Morning Star pattern near the support area is the best signal of change in trend. If the middle candle is a hammer Candle or Doji candle then it increases the potential of the Morning Star candlestick Pattern.

All these three patterns are morning stars but the third is the best of all. We can see a long red then hammer and a long green candle near the support area which perfectly signify the change in trend. We see a good upside rally afterward.

I have used this three-candlestick pattern for assessing potential bullish trends. These candlestick patterns are popular and formed frequently in indexes, equity, and commodities.

Bearish Candlestick Patterns

• Shooting Star Candlestick Pattern

The shooting star pattern is similar to the “Inverted Hammer”. Its body is composed of a long upper wick and a short or negligible lower wick. This pattern formed after the uptrend and is considered a potential signal of trend reversal.

The market was going up but a sudden short covering started that pulled back the market and the price closed below its opening price. The longer upper wick indicates the entry of sellers.

In the picture below, after shooting star candle we can see a rally towards the downside.

• Evening Star Candlestick Pattern

Evening Star is a three-star bearish candlestick pattern and It is similar to the morning star pattern. Its structure is composed of a smaller candle in the middle of two larger candles. This pattern indicates the reversal of uptrend and this reversal is potentially strong when it is formed near Resistance.

Doji as the middle candle is considered as the formation of perfect Evening Star Candlestick Pattern.

In the picture below, After an uptrend evening star pattern is formed and a rally toward the downside is started.

• Hanging Man Candlestick Pattern

Hanging man as the name suggests a man hanging from a tower and going to fall. The same thing applies in the case of the market, the price going to fall soon. The hanging man pattern is similar to the hammer pattern but It is formed in an uptrend and displays the potential signal of trend reversal.

Hanging Man indicates that a significant selling is seen at that level but buyers pull the market up showing the presence of sellers at that particular price and bulls are losing control of the market.

Accuracy of Hanging Man pattern added if it formed near Resistance. Various other factors are responsible too for a trend reversal but it can be a potential signal for downward movement in the market.

In the above picture, we can see the potential of the Hanging Man Candlestick Pattern in the Intraday chart. We can plan for scalping based on the above price action.

• Bearish Engulfing Candlestick Pattern

Engulfing Patterns are my all-time favorite candlestick patterns. The bearish engulfing pattern indicated a possible downtrend after the upside momentum. The first candle is a small green engulfed by the next Red candle.

This candle is just the opposite of the Bullish Engulfing Candle. This pattern generates an uptrend and near resistance it can prove a potential signal of a trend reversal. You can confirm the signal by looking at the next candle of the Big Red candle. If it is Red, it means the seller entered into the market and pulled it down.

In the above picture, we can see the formation of Bearish engulfing after an upside rally, which leads to downward movement and a great pullback in the market afterward.

Conclusion

So these are some of the best and my favorite candlestick patterns that occur on per daily basis. There are some other patterns too but the above discussed provides more accurate results if added with Price Action. As I already discussed in every pattern accuracy will be doubled if patterns are forming near support or resistance level.