Which Candlestick Pattern Is Most Reliable: The stock market’s history dates back to the 1600s and since that period the stock market has witnessed a lot of developments.
One of these developments includes candlestick patterns introduced in the 1700s by a Japanese rice trader- “Homma Munehisa” that gave them an overview of the market prices for a certain period of time.
These candlesticks became more precise in the mid-1700s and more concrete interpretations were established which became to be known as “Candlesticks”.
This was later picked up by Charles Dow in the 1900s and still remains in common use today by traders in the financial market.
While there have been numerous candlestick patterns developed over the period which help you to identify the trend, there is no guarantee that all the candlesticks will work every time.
But there are few candlestick patterns that are commonly used by traders and can be relied upon. In this article, we will be discussing which candlestick pattern is most reliable and is commonly used by most traders.
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What Is A Candlestick?
A candlestick is a graphical representation that displays information about the opening price, the high, the low, and the closing price of a security for a specific time period. Candlesticks have three basic features:
- The Body: This represents the difference between the opening and closing price of the security for that selected time range
- The Wick: Also referred to as shadow, shows the highs and lows the security has made within the time range
- The Colour: The candlesticks are colored red and green depending on the increase or decrease in the price of the security during the time range. If the closing price is lower than the opening price, the candle will be colored red. If the closing price is more than the opening price, the candle will be Green.
Now that we have understood the basics of candlestick patterns, let us now see which candlestick pattern is most reliable and is commonly used by traders.
1. Bullish Hammer
A bullish hammer is a formation that is formed after a falling trend in the market. It gives us an indication that the market is likely going to make a bullish reversal. This candle can be identified by its small body and a wick at the bottom which is twice as big as the body.
The chances of reversal improve if the candles have longer wicks. The candle can be either green or red and forms at the bottom of the chart.
The formation of this candle means the buyers have outnumbered the sellers who were trying to push the price down.
2. Hanging Man
A hanging man is a candle pattern that is identical to a bullish hammer. But the candle appears after an uptrend and indicates that the market is likely going to make a bearish reversal.
The formation of this candle means the sellers have entered the market and the buyers are slowly losing momentum
3. Bullish Inverted Hammer
An inverted hammer is a candle formation that is formed at the bottom of the downtrend. It behaves as a trigger for a potential upside in the market. This candlestick is identified by a small body and a wick only at the top which is as twice the size of the body.
The chances of reversal improve if the candles have longer wicks. The candle can be either green or red and forms at the bottom of the chart.
The formation of this candle means the buyers have entered the market and the sellers are slowly losing momentum
4. Shooting Star
A shooting star pattern is identical to an inverted hammer candle pattern but appears at the top of the uptrend. This candle acts as a trigger indicating that markets may likely reverse downwards.
This candlestick is identified by a small body and a wick only at the top which is as twice the size of the body. The candle can be either green or red
The formation of this candle means the sellers have outnumbered the buyers who were trying to push the price do.
5. Bullish Engulfing
Bullish engulfing is a two-candlestick pattern that consists of a red candle which is followed by a large green candle that completely covers or engulfs the previous candlestick
This pattern is formed when the green candle opens below the red candle and closes above the red candle indicating a bullish signal in the market.
This candlestick pattern appears at the bottom of the downtrend and helps traders identify a bullish reversal. This pattern also appears during an ongoing uptrend which gives an indication that the bulls have a firm grip on the market
6. Bearish Engulfing
Bearish engulfing is a two-candlestick pattern that consists of a green candle which is followed by a large red candle that completely covers or engulfs the previous candlestick
This pattern is formed when a red candle opens above the green candle and closes below the green candle indicating a bearish signal in the market.
This candlestick pattern appears at the top of an uptrend and helps traders identify a bearish reversal. This pattern also appears during an ongoing downtrend which gives an indication that the bears have a firm grip on the market
7. Bullish Piercing Line
A Bullish Piercing Line is a candlestick pattern that is made up of a red candle followed by a green candle which opens the gap down and covers more than 50% of the previous candle while closing.
This candlestick is viewed as a bullish reversal pattern that appears at the bottom of the downtrend. It indicates that the bulls have entered the market and are pushing the price higher which causes a bullish trend reversal.
8. Dark Cloud Cover
Dark Cloud cover is a candlestick pattern that appears at the top of an uptrend and is viewed as a bearish reversal pattern. It indicates that the bulls have entered the market and are pushing the price lower which causes a bearish reversal trend
This candlestick pattern consists of a green candle followed by a red candle which opens the gap up and covers more than 50% of the previous candle while closing.
9. Three White Soldiers
Three white soldiers is a candlestick pattern that appears at the bottom of a downtrend indicating a bullish reversal in the market. This pattern indicates that bullish forces are more than the bearish forces for three consecutive sessions in the markets.
This pattern is represented by three long-bodied green candles that open and close progressively higher than the previous candle. These candles will have very little or no wicks on them.
10. Three Black Crows
Three black crows is a candlestick pattern that appears at the top of an uptrend indicating a bearish reversal in the market. This pattern indicates that bearish forces are more than the bullish forces for three consecutive sessions in the markets.
This pattern is represented by three long-bodied red candles that open and close progressively lower than the previous candle. These candles will have very little or no wicks on them.
11. Morning Star Pattern
A Morningstar pattern is a formation that appears after a downtrend in the market. This candle pattern signals the end of the downtrend and signals the beginning of an uptrend in prices.
This is a three-candlestick formation consisting of a red candle followed by a small-bodied candle that closes below the previous candle. This is followed by a large green candle that opens above the second candle. Here, the second candle formed can either be a red or a green candle
12. Evening Star Pattern
An Evening star pattern is a formation that appears after an uptrend in the market. This candle pattern signals the end of the uptrend and signals the beginning of a downtrend in prices.
This is a three-candlestick formation consisting of a green candle followed by a small-bodied candle that closes above the previous candle. This is followed by a large red candle that opens below the second candle. Here, the second candle formed can either be a red or a green candle
Also Read: 8 Best Books For Intraday Trading – Top Reads For Beginners!
In Closing
In this article, we covered which candlestick pattern is most reliable and is commonly used by most traders. Though these candlestick patterns give you a pretty good idea about the future price movement of the security, there is no guarantee that these candles will work every time.
Thus, it is always important to use these patterns along with chart patterns, indicators, and support & resistance levels which will give more conviction to your trades.
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