Traders identify over a dozen candlestick patterns for different market conditionsand use them widely forthe trade setup.
Study of candlestick patterns has become mainstream in technical analysis. Candlestick chartsare unique patterns that pack data from multiple timeframes into a single bar or candle, detecting underlying trends across time horizons. What makes them more useful is that candlesticks are a visual representation of open-high and low-close in one single bar. Colour-coded bars add depth and make it easier for traders to understand price direction.
Knowledge of the candlestick pattern is useful for traders.But not all these formations are equally telling, and hence, we will discuss the most powerful candlestick patterns that traders use.
Bulkowski’s name would float in when discussing the most powerful candlestick patterns. Bulkowski studied candlesticks patterns and categorised them into two types.He also assigned a percentage to each based on their accuracy to predict the market.
Continuation:These formations appear as a confirmation of the ongoing trend
Reversal:Traders open positions based on trend reversal predictions, and for that, they rely on charts and indicators. Reversal patterns predict trend change.
These formations have colourful names. So, let’s take a look at the list of most powerful candlestick patterns.
Three line strike
the three-line strike predicts a bullish reversal in a downtrend. Each candle opens at lower low and closes near the intrabar low. After the three-bar formation completes, the fourth bar in a green or white bullish candle opens lower than the previous candle but closes at a higher point than the first candle of the three candle formation.
According to Bulkowski, the trend reversal patterns predicts a change in trend with 83 percent accuracy.
Two Black Gaping
The second pattern that we are going to discuss is also from Bulkowski’s list. It’s called the two black gapping.
It is a continuation pattern, means when it appears traders expect the existing trend to continue for a while. A black or red candle appears after a notable high in an uptrend. Then more robust bearish candles appear. The pattern in the chart indicates that price fall will continue, triggering a downtrend.
Above the stomach
Above the stomach is a two candle formation, where the first candle is a bearish candle but the second one is a bullish candle which opens at the midway of the first candle but closes high above it. It is a bullish trend reversal pattern with 63 percent accuracy rate.
Three black crows
Three black crows are a bearish reversal pattern.
Traders predict a reversal when three back candles appear is a row close to the high of an uptrend. Each candle striking a lower low that closes near the intrabar low indicates the downtrend will continue.
This pattern has a higher accuracy rate, almost 78 percent in predicting a reversal accurately.
A star appears away from the ongoing trend, indicate a reversal. The evening star is a bearish reversal pattern, appears after a long bullish candle. The star opens higher than the bullish candle, but this time new buyers don’t appear in the market, resulting in a small bearish candle. The candle following the evening star appears even lower confirming the downtrend will continue.
One can easily identify an evening star in the chart. It is a candle with a short body and shadows that appear after a strong bullish candlestick followed by a bearish candle.
The abandoned baby pattern appears at the bottom of a downtrend, appearing after a bearish candle. It appears away from the trend, recording a lower low, often without a real body. It indicates that new sellers fail to appear, and the market arrives at a moment of indecision. The third candle appears at a bullish gap, completes the pattern.
The world of the candlestick formations is quite colourful, and the list of most powerful candlestick won’t be complete without mentioning a few more reversal candles.
Bullish Engulfing Pattern
It occurs that one back candle appearing in the downtrend is followed the next day by a large bullish candle. The second candle is large enough to engulf the previous candle. To confirm the pattern, the stock price must open below the previous candle and closes above.
A bullish engulfing is a robust reversal pattern when the engulfing candle appears after a series of downward bearish candles. Aggressive traders will enter the market at the closing of the bullish candle, anticipating a continuous uptrend.
The Ending Note
Chart patterns are unique shapes that traders use to predict what the price might do next. Candlesticks form several chart patterns that are broadly classified into continuation patterns and trend reversal pattern. Traders use a different combination of technical tools to predict where is the money in the trade. One might argue that candlesticks don’t offer additional information, but their visual appeal and colour coding help them stand out. Moreover, candles offer a visual representation of a market condition, which offers a break from complex number and graphs. Candlestick patterns help traders to focus on the most critical information to study market psychology and take action.