These are 5 candlestick patterns that you need to know to be able to elevate your technical analysis to the next level!
In the last post we covered what candlesticks are. In this post we will show you how can look at different groups of candlestick formations to determine whether there is bearish or bullish market sentiment. This will aid your technical analysis by helping you to identify and interpret what buyers and sellers are doing and where they think price will go in the future.
Before we get into the list, we want to remind our readers that each candlestick represents one time period. As a technical analyst looking at chart, you specify which time period you want to view. For example, if you want to view monthly or weekly candlesticks, each candlesticks will represent the price movement for that time period.
When determining overall trend of price it is better to look at these larger time periods (monthly, weekly, daily) rather than smaller time periods (hourly, minutes, seconds) because the larger time periods will cancel out any volatility & noise associated with sub hourly price volatility.
1. The Doji
The first candlestick pattern we will introduce is the called doji Candlestick pattern. The names of the candlestick patterns are not as important as what the patterns mean. While there are several variants of the doji, it is important to know that this pattern is characterized by long top and bottom wicks and a flat candle body. This means that price closed at the same place that it had opened.
This can be interpreted to mean that there was indecision in the markets and buying and selling pressure was equal to one another. It’s important to note here, you should never base buying and selling decision on any single indicator. Rather, look at multiple indications of where the market might be headed to build what is called confluence.
Confluence means that you have incorporated many different indicators and strategies into your trading decision and that they all agree to on another.
When looking at a doji candlestick formation that forms at the end of a bearish trend (down trend), this might indicate that sellers have lost steam to buyers and now both are exerting equal pressure on each other. Hence, why the opening and closing price are equal to one another. This could indicate a turn around in market trend. To validate this, you should always be on the look out for the candlesticks that form following a doji to get your confirmation.
The main take away for this candlestick formation is that regardless of which direction the market was moving prior to formation of the doji, the formation of a doji indicates market indecision in terms of where the market should go next. This could be a good opportunity for a market reversal.
2. Three Bullish/Bearish Soliders
While the names might differ depending on if you are looking at white, or clear, candlestick bodies (most charting software allows you to adjust the color of your candlesticks) the interpretation is the same.
The candlestick formation comes after a previous downtrend or uptrend and is a characterized by three candlesticks of increasing height in the opposite direction of the previous trend.
In the case of a previous downtrend followed by three green bullish soldiers, each candlestick is larger than the previous and indicates that buying pressure is increasing. That coupled with shorter wicks means that buyers are more confident in their positions and there is not much selling of positions occurring. The way to interpret this is that this can be viewed as a bullish signal and that price will likely continue to increase into the future.
3. Spinning Top
A spinning top formation is characterized as a square candle body with wicks that are longer then the body itself but equal to each other. You will usually see a spinning top candlestick at the top of a bullish trend or at the bottom of a bearish trend.
Similar to a doji, the spinning top can be interpreted to mean that buyers and sellers are exerting equal pressure on each other and that there is indecision in the market about the current price trend. This lends this formation be a good indicator of a possible reversal in trend.
The spinning top does not characterize a change in trend direction by itself so it is extremely important that you look for following movement in price for validation.
4. Bullish/Bearish Engulfing
A bearish or bullish engulfing pattern follows a previous bullish or bearish trend. In the case of a previous bullish trend (upward trend), a bearish engulfing candlestick would be one where the candlestick completely engulfs (or is larger then) the last bullish candlestick.
In the example of a previous bearish trend (downward trend), a bullish engulfing candlestick would be one where a green candlestick completely engulfs the last previous bearish candlestick (red candlestick).
This type of candlestick signifies a strong reversal of a previous trend. What this means is that if sellers were dominant in the previous market (a bearish market, for example), then a bullish engulfing pattern can be taken to mean that buyers have effectively “taken over”.
5. Three inside up/down
This candlestick formation is similar to a bullish/bearish engulfing pattern. The key difference is that it takes two candlestick of the opposite direction to indicate a previous reversal of trend.
For example, if the prior trend was bearish (a red candlestick), then it would take two green candlesticks to completely engulf the previous bearish candlestick, ultimately indicating a possible reversal in trend. In total you now have three candlesticks, the first representing the end of the previous trend and the last two predicting the possible future movement of the trend.
To reiterate the point made at the beginning of this post, you should never base your trading decision on one indicator. Rather look at multiple signs about what price has previously done, and what it might do in the future. It’s a good habit to validate your trading decision by building confluence – or looking at multiple price formations, price indicators, and volume indicators that agree with your position.
Thank you for taking the time to read this and we hope you learned something. You can always reach out to us directly at studyingcrypto.com with any questions you have.
Happy and safe trading!