Candle patterns in trading: description, features and recommendations

Candlestick patterns are one of the foundations in technical analysis. They are able to help predict the turn or continuation of the trend, as well as give a lot of other useful information. For example, to show how strong the uncertainty is at the moment and who of the market participants takes a leading position, namely, the preponderance of buyers or sellers. There are a lot of candle patterns, but they are all based on similar principles that reflect the behavior of traders.

What it is

When it comes to what are the patterns of candlestick analysis, then, most likely, Japanese candles are meant. This is a kind of chart used in trading. They are used regardless of the asset and instrument, whether it is a serious auction on the stock exchange, futures contracts or work on Forex with a small deposit from some little-known broker.

Japanese candles are probably the most popular way of displaying prices in the form of a graph. This is due to the high informativeness and at the same time the simplicity of this tool. In addition, many different indicators work on the basis of candles, which is part of the trading strategies of many traders around the world.

Building a candle

Before we begin to describe what candle patterns are, it is important to understand the very instrument in question. So, the candles are bullish - those that go up, and bear - going down. As a rule, they are drawn in different colors. The most popular color schemes are green or white for bovine candles and red (often black) for bearish. However, many platforms allow the trader to customize the color gamut.

The Japanese candle has a body in the form of a vertical strip on the graph. It can be different, for example short, long, square or very small. This is an important information about the current price momentum, the size of the price direction will depend on the size.

It is also important to note that candles have the same shape and principle of construction, regardless of the time period chosen for them. This is very convenient, for example, when analyzing trends and determining price levels. The chosen timeframe (time period) will depend on the speed of forming one candle, which means that on M1 it will be equal to a minute, and on H1 - the hour.

Shadows

This is a very important part of working with Japanese candles, in addition, from this moment you can begin to describe candle patterns. A shadow is a thin vertical strip that emerges from the body of a candle. It shows a small pullback of the price at the time of opening the candle, respectively, it can be both above and below. Such candles have separate names, for example, it can be pinball, doji, hammer and many others. Each carries in itself certain information, for example about the upcoming reversal, strong uncertainty or continuation of the current trend. The most significant signals will be described below.

Models

Candle patterns can be divided into two types: bearish and bullish. As is known, the former are related to the movement of prices to a smaller side, while the latter, on the contrary, predict the direction upwards. They are also called candlestick patterns of trend reversal. Despite the usefulness of such combinations, they do not guarantee a price change, and the trader should take into account many factors, for example, the current market situation, the chosen timeframe (the situation on the minute or five-minute chart can be very different from the situation on the hour or day). It is also recommended to use lines of support and resistance, a trend and follow the news. Below, the most popular and most effective patterns of candlestick analysis will be presented.

Bull absorption

One of the most powerful and at the same time simple combinations. It is a short bearish candle and a subsequent long bull. Evidence of the upcoming trend reversal. However, it is important to monitor the behavior of the price, if it is consolidation (undulating, lateral movement), then the effectiveness of this, and other patterns, will be rather doubtful.

Hammer

Candlestick reversal patterns can consist of only one candle, and this is an example. Usually, it appears after the trend down, at the moment of weakening of the "bears". This candle is really like a hammer due to its shadow at the bottom and a short enough body at the top. As a rule, this pattern predicts a subsequent uptrend.

Three stars

Very unusual candle pattern. It is three cruciform candles. It is a universal model, since it can mean a change in price both upward and downward. Apply depending on the previous trend. The efficiency of this model will be slightly lower than that of the previous ones, if only because it is rare enough because of strong market noise, but it is quite suitable for use.

Bearish absorption

The situation is the opposite of the bullish. After the candle goes up a longer bearish candle, indicating that sellers are strengthened in the market and a downward trend is expected. As well as in the case of bullish absorption, it is important to monitor the price and not to hurry, the appearance of the pattern does not give a 100% guarantee of a change in the situation.

Evening Star

Here we see two candles at the top, the second of which seems to "hang" with the help of its shadow, and after the price unfolds and changes direction. The model is very effective and indicates a reversal of the market down. It is especially effective if the price reaches a certain level, which has not been breached before that moment. There is also a variation called "morning star" - about the same principle, but the price goes up. A fairly effective pattern that often works.

Other combinations

In addition to these combinations, there are dozens of variations of candle patterns. For example, pinballs, which, as a rule, denote uncertainty with one or another bias regarding the direction of the trend. Also there are variations of the "evening star" model, with similar principles and construction. Combinations often have bizarre names, usually based on their appearance, for example, three soldiers (3 bull candles are the same size) or a veil of dark clouds (a variation of bearish absorption). By the way, it is not necessary to know all the models, it's better to hone the use of the most frequent and understandable ones to you. This will help to save time, as well as increase the efficiency of your trade or training. Strong candle patterns - this is not a guaranteed key to success, but an important step towards it.

Signals

A very controversial question: "Is it worthwhile to install and use various auxiliary indicators?" It all depends on the trader's experience, character and style of trading. Now we are not talking about conventional and popular indicators, such as the index of relative strength or Bollinger waves, but rather about specialized systems. These can be installed on the MetaTrader terminal - there are a lot of them on the Internet. For example, some indicator of candlestick patterns with an alert, which will signal to the trader that a particular combination has appeared. They can be based on various principles, for example, on the size of a candle, on their number, significance and many other factors.

Experienced traders create their own indicators that recognize candle patterns. "Forex", shares, futures or binary options - it does not matter, because the principle of building a price chart is the same everywhere.

If we return to the question of using indicators, then we can conclude that someone will suffer losses and make fewer correct entries, in the meantime another trader will increase the percentage of profitable trades. This is due primarily to the basics of trading, because the signal of the combination does not provide a guarantee that it will work properly.

Results

It is very important to remember that combinations of candles do not give any guarantee of successful transactions. The ability to determine them will give the trader an additional advantage, but trading based only on patterns is not a good idea. Technical analysis is a cumbersome and complex system that includes many components, for example, determining the trend, support and resistance lines, working with various indicators, oscillators and volumes. In addition, trading psychology is important, understanding that the market is primarily a reflection of the actions of other people, not just numbers and graphics.

If you go back to candle patterns, the ones described above are just a small part of what exists and can be used. There are specialized resources and literature related to candlestick analysis, where you can find a more detailed description of many other models.

It is important to note that it is better to practice on demo accounts or working with small amounts, honing the skills of entries in the transaction based on the use of candle patterns. Do not once again risk a deposit by checking this or that model. Even if something worked several times qualitatively, it still does not give any guarantees in the future. Remember: trade is first and foremost risk management and competent management in relation to equity used in the work.