Candlestick Pattern Complete Guide: How to Use It

What Are Candlesticks?

Candlesticks provide a wealth of information for traders to understand about the price movement of a certain asset class. Within a candlestick, there are four pieces of information a trader can derive from.

  1. Open
  2. Close
  3. High
  4. Low

Figure 1 – Anatomy of a Candlestick

On the daily chart, each candle represents 24 hours’ worth of information. When looking at one daily candle, the candle’s open and close represents the price of the asset when market opens (12AM) and the price of the same asset when market closes (11 PM).  The high and low represents the highest and lowest price of the asset within the 24 hours.

An additional point to note is the colour of the candle. A green (bullish) candle means the asset is trading higher than its opening price. A red (bearish) candle means that the close is lower than its opening price.

With all this information derived from one humble candlestick, you shall not underestimate the value of using candlesticks in your trading routine as each candlestick tells a certain story.

Why Use Candlesticks?

If a singular candlestick can provide so much information, imagine a group of them together. A group of candlesticks together form critical patterns that traders use to make trading decisions. Simple candlestick patterns can involve one or two candles while more complex patterns involve three.

How Reliable Are Candlestick Patterns?

Steve Nison also known as Mr. Candlestick, widely considered the pioneer of modern-day Candlestick charts, who highlighted the value of candlesticks to the west by learning it from a Japanese broker. For years, he studied and wrote books revolving around this topic, and candlesticks ultimately gained global popularity in the 1990s [1].

Since then, candlesticks have become widely discussed and candlestick patterns began to form. The reliability of the candlesticks has also slowly been improving. It is most useful when used in tandem with other technical analysis techniques.

Types of Candlestick Patterns

No matter what candlestick pattern a trader uses, it is always advisable to use it in conjunction with other tools. For the case studies below, the candlestick patterns will be used in tandem with the concept of support and resistance.

Famous One-Candlestick Patterns – Hammer & Shooting Star Doji

In this segment, one candle stick pattern will be the focus. Note that both the Shooting Star and the Hammer Doji share a common feature in which the candles have a prominent wick and a relatively small candle body.

Both patterns serve to illustrate market indecision and hint at a potential reversal in the market.

(Case Study 1 – Hammer Doji)

In figure 3, the formation of the Hammer Doji at a support level provides traders with insight that markets could turn from bearish to bullish.

(Case Study 2 – Shooting Star Doji)

Chart, bar chart

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Figure 4 – GBPCAD H4 Shooting Star Doji (https://www.tradingview.com/x/SBKDcOD2/)

Figure 4 depicts a Shooting Star Doji forming at a critical resistance level. This should hint traders that the market could turn from bullish to bearish.

Famous Two-Candlestick Patterns – Bullish & Bearish Engulfing

Engulfing patterns involve two candlesticks of opposite colours. The second candle’s body must be bigger than the first candle; hence the term “engulfing”. Bullish and bearish engulfing patterns are popular because they can be spotted easily and traded. When such patterns occur at a bottom or the top of a trend, it signals a potential reversal.

Figure 5 – Diagram of Bullish & Bearish Engulfing Pattern

(Case Study 3 – Bullish Engulfing)

Chart

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Figure 6 – EURGBP D1 Bullish Engulfing Pattern (https://www.tradingview.com/x/TUmh2YhU/)

Figure 6 shows the bullish engulfing pattern in action. At a significant support, a bullish engulfing on EURGBP led to a shift from bearish to bullish market structure.

(Case Study 4 – Bearish Engulfing)

Chart

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Figure 7 – EURJPY H1 Bearish Engulfing Pattern (https://www.tradingview.com/x/cR9Rl96x/)

In figure 7, a prominent resistance can be seen and at the 3rd tap of the resistance line, market prints a bearish engulfing pattern. What follows suit is a strong bearish push to the downside.

Famous Three-Candlestick Patterns – 3 white soldiers & 3 black crows

Three candlesticks are the maximum number for a candlestick pattern.

Figure 8 – Diagram of Three White Soldiers & Three Black Crows

(Case Study 5 – 3 White Knights)

Chart

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Figure 9 – USDCAD H1 Three White Soldiers Pattern (https://www.tradingview.com/x/ZkLuq0vF/)

Figure 9 shows the 3-White Knight pattern forming at support. The three candles involved progressively become larger, signifying a potential emergence of a bull market.

(Case Study 6 – 3 Black Crows)

Chart, line chart, histogram

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Figure 10 – GBPUSD D1 Three Black Crows Pattern (https://www.tradingview.com/x/jzvNPiWS/)

The formation of 3-Black Crows at a resistance in figure 10 highlights a high possibility of a incoming bearish market.

Summary of Candlestick Patterns

Table 1 showcases the basic characteristics of each candlestick pattern and the theoretical market direction that follows.

PatternCharacteristicMarket direction after
HammerOne candle pattern
Small bullish body with long bottom wick
Appears at support
Bullish
Shooting StarOne candle pattern
Small bearish body with long top wick
Appears at resistance
Bearish
Bullish EngulfingTwo candle patterns
Second bullish candle body engulfs first candle body
Appears at support
Bullish
Bearish EngulfingTwo candle patterns
Second bearish candle body engulfs first candle body
Appears at resistance
Bearish
Three White SoldiersThree candle patterns
All three candles are bullish
Candle body size increases
Appears at support
Bullish
Three Black CrowsThree candle patterns
All three candles are bearish
Candle body size increases
Appears at resistance
Bearish
Table 1 – Candlestick Pattern Help Sheet

Candlestick Pattern Tools

Apart from the patterns mentioned, there are other candlestick patterns that may be of tremendous use for traders.

(Vantage’s Indicator – Adaptive Candlesticks)

Candlestick patterns that illustrate important changes in supply and demand, the Adaptive Candlesticks scans for 16 trusted candlestick patterns on any chart. A combination of unique technical and quantitative analysis helps traders to make informed decision based on current context.

Figure 11 – Adaptive Candlestick Indicator on MT4

(Vantage’s Protrader Tools – Technical Insights)

The Technical Insights function offered by Vantage Protrader Tools highlights key price action patterns on major & minor Forex pairs, and commodities.

Figure 12 – Vantage Technical Insights Alerts

Figure 13 – Vantage Technical Insights (XAGJPY)

Interested to gain access to advanced candlestick patterns at your fingertips? Sign up for Vantage Live Account!

Conclusion

Candlestick patterns have withstood the test of time and have proven to be effective in financial trading. However, such patterns appear more frequently than not and should be used in conjunction with other technical concepts such as support & resistance.

Can’t wait to turn your learning of candlestick patterns into practice? Sign up for your own Forex Demo Account and try it out now!


References

1. BabyPips.com. (2022, July 29). What is a Japanese Candlestick in Forex Trading? https://www.babypips.com/learn/forex/what-is-a-japanese-candlestick

Disclaimer
Vantage does not represent or warrant that the material provided here is accurate, current, or complete, and therefore should not be relied upon as such. The information provided here, whether from a third party or not, is not to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any financial instruments; or to participate in any specific trading strategy. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. We advise any readers of this content to seek their own advice. Past performance is not an indication of future results whereas reference to examples and/or charts is solely made for illustration and/or educational purposes. Without the approval of Vantage, reproduction or redistribution of this information is not permitted.

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