The Top 10 Best Candlestick Patterns to Trade
There is a wealth of information available online and in
Bookstores that will teach you the details of using Candlesticks
as indicators. The following are 10 candlestick patterns that
have in my own experience produced consistent results. These will
work better when you understand what is happening in each
Candlesticks are not stand-alone indicators
they must be combined with other forms of technical analysis to
really be useful. For example, when you see one of these patterns
on the daily chart, move down to the hourly chart. Does the
hourly chart agree with your expectations on the daily chart? If
so, then the odds of a reversal increase.
The following patterns are divided into two parts: Bullish
patterns and bearish patterns. These are reversal patterns that
show up after a pullback (bullish patterns) or a rally (bearish
Bullish Candlestick Patterns
This pattern consists of two candles. The first day is a narrow
range candle that closes down for the day. The sellers are still
in control of the stock but because it is a narrow range candle
and volatility is low, the sellers are not very aggressive. The
second day is a wide range candle that "engulfs" the body of the
first candle and closes near the top of the range. The buyers
have overwhelmed the sellers (demand is greater than supply).
Buyers are ready to take control of this stock!
As discussed above, the stock opened, then at some point the
sellers took control of the stock and pushed it lower. By the end
of the day, the buyers won and had enough strength to close the
stock at the top of the range. Hammers can develop after a
cluster of stop loss orders are hit. That's when professional
traders come in to grab shares at a lower price.
When you see this pattern the first thing that comes to mind is
that the momentum preceding it has stopped. On the first day you
see a wide range candle that closes near the bottom of the range.
The sellers are still in control of this stock. Then on the
second day, there is only a narrow range candle that closes up
for the day. Note: Do not confuse this pattern with the engulfing
pattern. The candles are opposite!
This is also a two-candle reversal pattern where on the first day
you see a wide range candle that closes near the bottom of the
range. The sellers are in control. On the second day you see a
wide range candle that has to close at least halfway into the
prior candle. Those that shorted the stock on first day are now
sitting at a loss on the rally that happens on the second day.
This can set up a powerful reversal.
: The doji is probably the most popular candlestick pattern. The
stock opens up and goes nowhere throughout the day and closes
right at or near the opening price. Quite simply, it represents
indecision and causes traders to question the current trend. This
can often trigger reversals in the opposite direction.
Bearish Candlestick Patterns
Notice that all of these bearish patterns are the opposite of
the bullish patterns. These patterns come after a rally and
signify a possible reversal just like the bullish patterns.
There is one more pattern worthy of mention. A "kicker" is
sometimes referred to as the most powerful candlestick pattern of
You can see in the above graphic why this pattern is so
explosive. Like most candle patterns there is a bullish and
bearish version. In the bullish version, the stock is moving down
and the last red candle closes at the bottom of the range.
Then, on the next day, the stock gaps open above the previous
days high and close. This "shock event" forces short sellers to
cover and brings in new traders on the long side.
This is reversed in the bearish version.
Look for confirmation in at least 2 other indicators, RSI,
Moneyflow etc BEFORE hitting the buy/sell button.
Current Dow Futures Chart
Shayne Heffernan Shayne Heffernan oversees the management of
funds for institutions and high net worth individuals. Shayne
Heffernan holds a Ph.D. in Economics and brings with him over 25
years of trading experience in Asia and hands on experience in
Venture Capital, he has been involved in several start ups that
have seen market capitalization over $500m and 1 that reach a
peak market cap of $15b. He has managed and overseen start ups in
Mining, Shipping, Technology and Financial Services.