Seven Candlestick Patterns

Seven Candlestick Patterns

Seven Candlestick patterns describes seven of the 42 main, recognised candlestick patterns. the seven are all known as “simple” patterns, basically because they involve just one single candlestick. A perfect example of this is our first patterns known as the Doji.

Doji

The Doji is a commonly found pattern in a candlestick chart of financially traded assets (forex stocks, bonds, futures,). It is characterised by being small in length—meaning a small trading range—with an opening and closing price that are virtually equal.

The Doji represents indecision in the market. A Doji is not as significant if the market is not clearly trending, as non-trending markets are inherently indicative of indecision. If the Doji forms in an up trend or down trend, this is normally seen as significant, as it is a signal that the buyers are losing conviction when formed in an up trend and a signal that sellers are losing conviction if seen in a down trend.

There are four variants of the Doji candlestick as shown below:

4 Doji candlestick forms

4 forms of the Doji Candlestick

 

 

 

 

Neutral: Dojis form when the opening and closing prices are virtually equal. Alone, dojis are neutral patterns.

Long-Legged: This Doji reflects a great amount of indecision about the future direction of the underlying asset.

Gravestone: The long upper shadow suggests that the direction of the trend may be nearing a major turning point.

Dragonfly: The long lower shadow suggests that the direction of the trend may be nearing a major turning point.

A Doji is a key trend reversal indicator. This is particularly true when there is a high trading volume following an extended move in either direction. When a market has been in an up trend and trades to a higher high than the previous three trading days, fails to hold that high, and closes in the lower 10% of that day’s trading range, there is a high probability of a down trend in the ensuing days. Likewise, when the market has been in a down trend and trades to a new low that’s lower than the three previous trading days, fails to hold that low, and closes in the upper 10% of that day’s trading range, there is a high probability of an up trend in the ensuing days.

Hammer

A Hammer is a type of reversal candlestick pattern, made up of just one candle. The candle looks like a hammer, as it has a long lower wick and a short body at the top of the candlestick with little or no upper wick. In order for a candle to be a valid hammer most traders say the lower wick must be twice the length of the body portion of the candle, and the body of the candlestick must be at the upper end of the trading range.

When you see the hammer form in a down trend this is a sign of a potential reversal in the market as the long lower wick represents a period of trading where the sellers were initially in control but the buyers were a

ble to reverse that control and drive prices back up to close near the high for the day, thus the short body at the top of the candle. After seeing this chart pattern form in the market most traders will wait for the next period to open higher than the close of the previous period to confirm that the buyers are actually in control.

Two addition things that traders will look for to place more significance on the pattern are a long lower wick and an increase in volume for the time period that formed the hammer.  Note that the hammer may be formed with a rising or falling price indicating candlestick. The hammer may not always be perfect in that it may have a very short wick at the top of the candlestick.

he candle must be at the upper end of the trading range.

Hammer simple candlestick form

Hammer Candlestick Form

Hanging Man

This may look rather familiar! It is a hammer pattern but it becomes a hanging man because it occurs in an up trend. It has a long lower wick and a short body at the top of the candlestick with little or no upper wick. In order for a candle to be a valid hanging man most traders say the lower wick must be two times greater than the size of the body portion of the candle, and the body of the candle must be at the upper end of the trading range.

hanging Man candlestick form

Hanging Man Form

 

 

 

 

 

 

Inverted Hammer

The Inverted Hammer is a type of candlestick pattern found after a down trend and is usually taken to be a trend reversal signal. The Inverted Hammer looks like an upside down version of the hammer candlestick pattern.

The pattern is made up of a candle with a small lower body and a long upper wick which is at least twice as large as the short lower body. The body of the candle should be at the low end of the trading range and there should be little or no lower wick in the candle.

The long upper wick of the candlestick pattern indicates that the buyers drove prices up at some point during the period in which the candle was formed, but encountered selling pressure which drove prices back down to close near to where they opened. When encountering the Inverted Hammer traders often check for a higher open on the next period to validate it as a bullish signal.

The Inverted Hammer candlestick forms

Inverted Hammer form

 

 

 

 

 

 

The Shooting Star

The Shooting Star looks exactly the same as the Inverted hammer, but instead of being found in a down trend it is found in an up trend and thus has different implications. Like the Inverted hammer it is made up of a candle with a small lower body, little or no lower wick, and a long upper wick that is at least two times the size of the lower body.

The long upper wick of the candlestick pattern indicates that the buyers drove prices up at some point during the period in which the candle was formed but encountered selling pressure which drove prices back down for the period to close near to where they opened. As this occurred in an up trend the selling pressure is seen as a potential reversal sign. After encountering this pattern traders often check for a lower open on the next period before considering the sell signal valid.

As with the Inverted hammer most traders will see a longer wick as a sign of a greater potential reversal and like to see an increase in volume on the day the Shooting Star forms.

The Shooting Star candlestick form

Shooting Star form

 

 

 

 

 

 

Marubozu

Our next single candlestick pattern is the Marubozu. It indicates that a trading entity has traded strongly in one direction throughout the session and closed at its high or low price of the period covered by the candlestick.

A Marubozu candlestick is represented only by a body; it has no wick extending from the top or bottom. In the examples shown the white Marubozu candlestick shows a price rising throughout the trading session. It has a long white body and is formed when the open equals the low and the close equals the high price of the trading period.

The white Marubozu candle indicates that buyers controlled the price of the stock from the opening to the close of the period.

Again in the example shown, the black Marubozu candle has a long black body and is formed when the opening price equals the high and the close equals the low price of the period. This black Marubozu candlestick indicates that sellers controlled the price from the opening bell to the close of the day.

form of the Marubozu candlestick

Marubozu form

 

 

 

 

Spinning top

Our final example of a simple, single candlestick pattern is the Spinning Top pattern with a short body found in the middle of two long wicks. A Spinning Top is indicative of a situation where neither the buyers nor the sellers have won for that time period, as the market has closed.

This pattern shows a situation in which the price is relatively unchanged from where it opened; the market is indecisive regarding its trend. The upper and lower long wicks, however, tell us that both the buyers and the sellers had the upper hand at some point during the time period the candlestick represents. When a Spinning Top forms after a run up or run down in the market, it can be an indication of a pending reversal, as the indecision in the market is representative of the buyers losing momentum when this occurs after an up trend and the sellers losing momentum after a down trend.

form of the spinning top candlestick

Spinning top Form

 

 

About The Author

Jeff Fitzpatrick

Probably the UK's most successful home Forex trader