Identifying Candlestick Patterns and Momentum
By looking at continuation and reversal patterns on Candlestick charts a trader may identify bullish or bearish markets. Here are some of the more commonly found candlestick patterns and how to identify them.
The ‘momentum’ of a market is the rate of acceleration of its price or volume. As an oscillator it helps identify trend lines as it measures the rate at which the price moves up or down. Candlestick patterns may show signs of price direction and momentum. If price accelerates, a trader may consider taking a long position, whereas if price rate decelerates this may be a signal to short. Here are some of the more commonly found candlestick patterns and how to identify them. Remember, the below are based on price theory based on historical data which may not reflect future price performance, so always trade within you means and with good risk management in place.
Three Black Crows – bearish pattern
When we see three long-bodies candles in a row like in the image below, we get what is termed ‘three black crows’ which is considered a bearish pattern. Each candle would have closed for the day lower than the previous candle, and the next one would open within the body of the previous candle.
Evening Star – bearish pattern
This reversal pattern is made up from three candlesticks following this layout – the first candle is a large hollow up-trending one, the next candle is smaller (either hollow or solid) and closes at a higher level than the first candle. The last candle is a large-bodied red candle that opens below the second candle, closing somewhere around the middle of the first candle.
Three Line Strike – bearish pattern
This reversal pattern has three consecutive candles all of which are red and open lower than the previous candle. We may expect to see following these three candlesticks, a large-bodied hollow candle opening below the prior red (or third) candle’s close and closes above the first candles open.
Three Line Strike – bullish pattern
When you see three consecutive hollow candlesticks, you will recognise the bullish three line strike. Each candle will have closed higher than the candle before it. Following this pattern you may see a large red candle that opens higher and closes below the opening of the first candle.
Two Black Gapping – bearish pattern
The two black gapping pattern emerges during a downtrend and predicts a possible continuation of this trend. The first candle opens at a gap lower than the previous candle. The second of the two candles closes below the open price of the first.
Mat Hold – bearish pattern
We see this pattern when a large hollow candle is followed by a small red candle that has closed at a higher price. The third candle is also small (hollow or red). By the fourth day, a large hollow candlestick emerges and closes higher than the high of the previous ones.
Not all Candlesticks show clear patterns
Some candlestick patterns do not necessarily show continuation or reversal of trend but may instead show investor sentiment on prices. Here are some to be aware of and to familiarise yourself with terms you will hear while trading the markets.
Hammer – bullish pattern
This candlestick pattern occurs at the bottom of a downtrend.
Doji – neither bullish nor bearish
The Doji candlestick pattern can be found at both the top or at the bottom of trends and is neither a clearly bearish or bullish pattern.
A small-bodied candle appears at the peak of price movement and may signal indecision on behalf of buyers and sellers.
Hanging Man – bearish pattern
At the end of an uptrend you may see the hanging man pattern. It’s often seen when volatile sell-offs take place when the market open. However, as the trading day goes on, traders may buy the market with the price rising and closing close to the opening price.