Mastering Common Candlestick Patterns - A Detailed Guide

Overview

• Candlestick charts are an indispensable tool in technical analysis, helping traders identify potential entry/exit points in the market
• Patterns such as hammer, harami, hanging man, shooting star, and doji provide important signals about trend reversals or confirmation of ongoing trends
• To trade effectively, it is necessary to combine candlestick pattern analysis with trading volume, market psychology, and liquidity

What Is a Candlestick - Basic Knowledge

Originating from Japan in the 18th century, candlestick charting techniques have become widely used financial analysis tools for over 200 years. To this day, cryptocurrency traders still apply this method to study historical price data and forecast future price movements.

A candlestick is a way to represent the price movement of an asset over a specific period (which could be 1 hour, 1 day, or 1 week). When multiple candlesticks are combined, they form patterns that can indicate whether the price will continue to rise, fall, or remain uncertain. These patterns help traders gain deeper insight into market psychology and upcoming trading opportunities.

Structure of a Candlestick - How to Read

When tracking the price of an asset such as stocks or cryptocurrencies over a certain timeframe, the candlestick chart provides a visual representation. Each candlestick includes:

• Body: The area between the opening and closing prices. If the price increased, the body will be green; if decreased, it will be red
• Wicks / Shadows: The two lines above and below the body, representing the highest and lowest prices during that period

A red candlestick indicates a price decrease during this period, while a green candlestick (sometimes called a “bullish” candle) indicates a price increase.

Principles of Interpreting Candlestick Patterns

Candlestick patterns are formed by the arrangement of multiple candles in a specific sequence. Although there are many different patterns, each has its own interpretation. Some patterns reflect a balance between buying and selling pressure, while others signal reversals, continuations, or indecision.

Important note: Candlestick patterns are not automatic buy/sell signals. They are tools to observe current trends and identify potential opportunities ahead. Therefore, candlestick patterns should be considered within the context of the overall market.

To reduce risk, many traders combine candlestick pattern analysis with:

• Other analysis methods such as Wyckoff, Elliott Wave Theory, Dow Theory
• Technical indicators like trend lines, RSI, Stochastic RSI, Ichimoku Cloud, Parabolic SAR
• Support and resistance levels (price levels where buying/selling pressure is expected to be stronger)

Bullish Candlestick Patterns - What Do They Indicate?

( Hammer - Potential Reversal Signal

The hammer pattern appears at the bottom of a downtrend, characterized by a long lower wick )at least twice the height of the body(. This pattern indicates that despite strong selling pressure, buyers quickly reacted and pushed the price back near the opening level.

Hammers can be red or green, but a green hammer often indicates a stronger bullish reaction.

) Inverted Hammer - Trend Reversal Signal

Similar to the hammer but with a long upper wick. The upper wick must be at least twice the body height. The inverted hammer forms at the bottom of a downtrend and can signal a potential reversal upward.

The upper wick shows that the price has halted its decline. However, sellers pushed the price back down near the open. This suggests selling pressure is weakening and buyers may soon take control of the market.

Three White Soldiers - Bullish Continuation Signal

Consisting of three consecutive green candles, each opening within the body of the previous and closing above the previous high. These candles have small or no lower wicks.

This pattern indicates buyers overpower sellers, causing continuous price increases. The larger the body (the stronger the buying pressure), the more reliable the pattern.

Bullish Harami - Warning that Selling Pressure May End

A pattern with a long red candle followed by a small green candle, with the green body fully contained within the previous red body. This can occur over two days or longer.

It signals that selling momentum is weakening and the downtrend may be ending.

Bearish Candlestick Patterns - Warning Signs

Hanging Man - Warning After Uptrend

Similar to the hammer but indicating a downtrend. Usually forms at the end of an uptrend with a small body and a long lower wick.

The lower wick shows a strong sell-off after an uptrend, but buyers regained control (temporarily). This is an uncertain point where buyers try to maintain the uptrend while sellers enter, creating a warning signal. This pattern may indicate a potential reversal to a downtrend.

Shooting Star - Top Reversal Signal

Represented by a candle with a long upper wick, little or no lower wick, and a small body at the bottom. Although similar to an inverted hammer, the shooting star appears at the end of an uptrend.

This pattern indicates a local market top, but sellers take control afterward and push the price down. Some traders sell immediately when the shooting star forms, while others wait for confirmation from the next candle.

( Dark Cloud Cover - Reversal Signal

A pattern with a long red candle following a green candle, opening above the previous close but closing below the midpoint of the green candle’s body.

This pattern is more reliable when accompanied by high trading volume, suggesting the upward momentum may be about to reverse downward. Some traders wait for a third red candle to confirm.

Three Continuation Candlestick Patterns

) Three Advancing Steps - Confirming Uptrend

Appears in an uptrend with three small red candles followed by a continuation of the uptrend. Ideally, the red candles do not overlap with the previous candles’ bodies.

The continuation is confirmed by a large green candle, indicating buyers have regained control.

Three Declining Steps - Downtrend Continuation

The reverse of the three advancing steps, indicating the continuation of a downtrend.

( Doji - Indecision Candle

Forms when opening and closing prices are equal or very close. The price may move above or below but ultimately closes near the open.

A doji signals market indecision between buyers and sellers. Its interpretation depends heavily on the market context. Based on the position of the open/close, doji can be classified as:

)# Gravestone Doji - Reversal to Downtrend

A candle with a long upper wick and close/open near the lowest price.

Long-Legged Doji - Clear Indecision

Has both upper and lower wicks, with close/open near the middle. Shows clear uncertainty.

Shooting Star Doji - Context-Dependent

Can signal either bullish or bearish, depending on context, with a long lower wick and close/open near the highest price.

Note: According to the original definition, open/close must be exactly the same. If only “very close,” the pattern is called a reversal candle. Due to high volatility in crypto markets, exact doji is rare, so reversal candles are often used as substitutes.

Price Gap Patterns

Price gaps occur when the opening price is above or below the previous close, creating a gap between two candles. However, these are not common in cryptocurrency markets because they operate 24/7.

Gaps can still occur in illiquid markets but are less useful, mainly indicating low liquidity and high bid-ask spreads.

Practical Guide - How to Use Candlestick Patterns in Cryptocurrency Trading

1. Build a Solid Knowledge Foundation

Before using candlestick patterns for trading, traders must understand basic concepts thoroughly. Including how to read candlestick charts, different patterns, and how they form. Do not take risks if unfamiliar.

( 2. Combine Multiple Indicators

Candlestick patterns provide detailed information but should be combined with other technical indicators for comprehensive predictions. For example: moving averages, RSI, MACD.

) 3. Multi-Timeframe Analysis

Traders should analyze candlestick patterns across multiple timeframes to gain deeper market insights. For example: analyze daily, hourly, and 15-minute charts simultaneously to see different patterns across timeframes.

4. Practice Strict Risk Management

Using candlestick patterns carries risks like any strategy. Always practice risk management: set stop-loss orders to protect capital, avoid overtrading, and only participate in trades with favorable reward/risk ratios.

Conclusion

Any trader can benefit from familiarizing themselves with candlestick patterns and their meanings, whether or not they incorporate them into their strategy. Although useful in market analysis, remember that candlestick patterns can also be completely false.

They are indicators that convey the final buying/selling forces that will drive the market. However, it is advisable to use them in conjunction with other tools and proper risk management to minimize potential losses.

Disclaimer: This article is for educational and informational purposes only. The content is presented on an “as-is” basis and does not constitute any guarantee or warranty. It should not be interpreted as financial, legal, or professional advice, nor as an endorsement to buy/sell any products. You should consult appropriate professional advisors before making investment decisions. Digital asset prices can be highly volatile; investment values may increase or decrease, and you may lose your entire investment. You are solely responsible for your trading decisions.