💭 Japanese candlesticks – the most popular way to read price movement on charts.
The wide part of the candle is called the body. The body represents the price range of the trading session over a certain period of time, between the opening and closing prices.
🟥 A red body forms if the closing price was lower than the opening price of the candle.
🟩 A green body forms if the closing price was higher than the opening price of the candle. The thin lines above and below the body are called shadows. Shadows indicate the extremes of price during the trading session.
It is important to understand that the higher the timeframe you are looking at, the higher the likelihood of the candlestick pattern playing out.
📚 What are the most popular candlestick patterns?
Spinning tops – candles with small body sizes reflecting a stubborn struggle between bulls and bears. Generally, this candlestick model carries a neutral character and they arise within a narrow trading corridor. Spinning tops can be both green and red.
💭 Dojis – variations of candles that have no body at all. The entire candle represents one large shadow. This model appears when, in a trading session, the opening and closing prices coincide or are very close to each other. The length of the shadows in a doji can be anything.
💭 Hammer and hanging man – one of the most popular reversal models, and the remarkable property of these candles is that they can be either bullish or bearish depending on the phase of the market in which they occur.
The appearance of this candle during a downward trend indicates a weakening of the bears' strength – such a candle is commonly referred to as a hammer. If a candle of this type appears after an upward trend, then it indicates a weakening of the bulls' strength – such a candle is called a hanging man.
Hammer and hanging man are easily identified by 3 main signs:
The body is located in the upper part of the price range
The lower shadow is twice as long as the body
The candle has no upper shadow or it is very short
The longer the lower shadow and the shorter the body, the higher the potential of a bullish hammer or a bearish hanging man.
💭 Engulfing – this model is formed by two candles with contrasting colors of bodies and is one of the most important reversal signals in the market.
The engulfing model must meet the following 3 criteria:
There must be a clearly defined upward or downward trend in the market.
Engulfing is formed by two candles, and the second candle must engulf the first.
The second body must be contrasting in color.
It is worth paying attention to the following factors that enhance the likelihood of a trend change after the appearance of the engulfing model:
If the first candle of the model has a very short body and the second has a very long one, this indicates that the preceding trend is weakening and a new one is gaining strength.
If an engulfing model appears after a prolonged or very rapid trend.
If the second candle of the engulfing model corresponds to high trading volume.
If the second candle of the model engulfs several bodies at once.
💭 Dark cloud cover – this model consists of two candles appearing after an upward trend and is a reversal signal at the top.
The first candle must have a strong green body, and the next day the opening price of the candle exceeds the maximum of the previous candle; however, the closing price approaches the minimum and overlaps a significant part of the body of the green candle. The lower the closing price of the second candle, the higher the probability of a trend peak formation.
Several factors should be considered that enhance the significance of this model:
The closer the closing price of the red candle is to the opening price of the preceding green candle, the higher the probability of a trend peak formation.
If, during a prolonged upward trend, a candle with a long green body appears, with the opening price equal to the daily minimum, the closing price at the daily maximum, and the next day a candle with a long red body appears, opening at the maximum and closing at the minimum, it is said that a "Black Day with a Cut Top and Base" has occurred.
If the second candle of the dark cloud cover opens above a significant resistance level and then the price drops, this serves as evidence that the bulls cannot control the market.
If the opening of the second trading day is accompanied by a large trading volume, this may indicate the end of the upward trend.
💭 Piercing Line – a model opposite to the dark cloud cover. It consists of two candles appearing in a falling market and is a reversal signal at the bottom. The first candle's body is red, and the second is long green. This formation has an exclusively bullish character and is close to the bullish engulfing model, and now you will understand why.
In the "Piercing Line" model, the green body only partially covers the preceding red body, and the larger the part of the red body that is covered by the green body, the higher the likelihood of a reversal at the bottom. In the ideal model, the green body should rise above the middle of the preceding red body.
There are 3 potentially bearish models of "piercing line" that differ in the degree of penetration of the green body into the preceding red:
At the base – the green candle closes near the minimum price of the preceding trading day.
At the base – the closing price of the green candle is slightly above the closing price of the red candle.
Push – the closing price of the green candle does not reach the midpoint of the red candle.
💭 Star – a reversal model representing a candle with a small body that creates a price gap with the preceding candle that has a larger body. Intersection of shadows is allowed.
Stars appear at tops and bottoms, and there are a total of 4 varieties of the model:
Morning star – a reversal model at the bottom, consisting of a candle with a long red body, followed by a candle with a small body that gaps downward. On the third day, a green candle appears whose body overlaps a significant part of the red body of the first day. This model indicates that the bulls have taken the initiative.
Evening star – a bearish twin of the morning star, which is a reversal signal at the top. The first two candles have long green bodies, followed by a star. After the star, there should be a red candle that overlaps a significant part of the green body of the candle preceding the star.
The following factors increase the likelihood that evening or morning stars are reversal signals:
The presence of gaps between the bodies of the first candle and the star, as well as between the bodies of the star and the third star.
The body of the third candle overlaps a significant part of the body of the first candle. ▪️ Small trading volume during the first candle and large volume during the third candle.
💭 Doji star – a doji that creates a gap upward with the body of the preceding candle during an upward trend or falls with a gap below the body of the preceding candle during a downward trend. Doji stars are harbingers of a change in the direction of movement. Therefore, it is important to wait for the next candle after the doji for confirmation of the reversal.
Confirmation of a reversal at the top in an upward trend is a doji star, followed by a long red body that overlaps a significant part of the green body, and this model is called Evening Doji Star.
It is worth noting that if a green candle appears immediately after the doji star, creating a price gap upward, the doji ceases to be a bearish signal.
If a doji appears after a candle with a red body during a downward trend, confirmation of a reversal at the bottom will be a green candle whose body overlaps a significant part of the body of the red candle, and this model is called Morning Doji Star.
However, if a red body appears after the doji star during a downward trend, forming a price gap downward, then the doji ceases to be a bullish signal.
In rare cases, during an upward trend, a doji star may form a price gap upward without shadows crossing, followed by a red candle with a downward price gap without shadows crossing. Such a star is considered one of the strongest reversal signals at the top and is called a Abandoned Baby.
The same situation applies to a downward trend. If a doji candle appears with gaps before and after it without shadows crossing, then the market has likely reached a bottom, and this model is called Abandoned Baby at the bottom.
💭 Shooting star – represents a model of two candles that warns of a possible end to price increases and is not among the most important reversal signals.
The body of the shooting star is small and is located in the lower part of the price range of the candle, while the upper shadow is long.
As with other stars, the color of the body does not matter.
Ideally, the body of the shooting star should create a gap relative to the body of the previous candle, but this is not mandatory.
Inverted hammer – a model that externally resembles the shooting star: it has a small body located at the lower part of the candle's range and a long upper shadow.
Unlike the previously discussed model, the inverted hammer indicates a possible reversal at the bottom and is a bullish signal if formed after a downward trend.
It is important to wait for the next candle to confirm the bullish signal, i.e., when the opening price the next day is higher than the body of the inverted hammer, and the larger the price gap, the stronger the bullish signal.
Another confirming signal may be a green candle with a higher closing price level.
💭 Harami – a candle with a small body that is within the comparatively long body of the preceding candle. If translated, the name of the model means "pregnant". The long candle is the "mother", and the small candle is the "child".
The peculiarity of the model is that the small candle must be located in the middle of the preceding candle, and the length of the shadows does not matter.
The smaller the candle "child", the more significant it is.
Harami is not a significant reversal signal; it stops the market, ending the preceding trend, and a pause occurs in the market.
Cross harami – unlike the previous model, after a long candle, a doji appears, not a candle with a small body. This model is among the most significant reversal signals.
💭 Belt hold – this model represents a long green candle that opens at the low of the previous candle and then moves upward. In the case of a bearish belt hold, it is exactly the opposite.
The longer the candle "belt hold", the more significant it is for the subsequent market development.
If the subsequent closing price is above the bearish belt hold, then there is a high probability of resuming the upward trend.
If the subsequent closing price is below the bullish belt hold, then selling pressure increases again.
💭 Two soaring crows – this model creates a gap between the small body of the first red candle and the body of the preceding candle, also forming 2 red candles.
This formation has a bearish character.
In the ideal model, the opening price of the second red candle is higher than the opening price of the first red candle, while the closing price is below the closing price of the first red candle.
💭 Holding on the tatami – the first three candles are similar to those in the "two soaring crows" model, but a red candle follows them. If the next candle is green and its opening price creates a gap upward relative to the upper shadow of the last red candle – then it is possible to buy.
This model occurs in a bullish market and is a bullish continuation model.
A formation with two, three, or four red candles is possible.
💭 Three black crows – this model consists of three consecutively decreasing red candles.
This formation heralds a price decline if it appears in areas of high prices or after a prolonged upward trend, and the closing prices of these three candles should be at or near the minimum prices.
The opening price of each candle must be within the body of the preceding candle.
The ideal scenario is if the body of the first red candle in a row of three candles is below the maximum of the green candle of the previous trading session.
🤟 Did you like the review or want to better understand cryptocurrencies and technical analysis?
✔️ Then subscribe to the channel and like
