Candlestick pattern recognition

Candlestick patterns offer traders powerful insights into market sentiment and potential price movements. By understanding these patterns, traders can identify opportunities for entering or exiting trades and anticipate trend reversals. Let's explore some common candlestick patterns in detail:

Breakaway Pattern

The Breakaway pattern is a reversal pattern that occurs at the end of a trend. It consists of a series of consecutive candlesticks moving in the same direction, followed by a gap in the opposite direction. This gap signals a potential change in market sentiment, with traders interpreting it as a breakaway from the previous trend. Bullish Breakaway patterns occur at the bottom of a downtrend, while Bearish Breakaway patterns occur at the top of an uptrend.

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spreadex financials engulfing chart example

Bullish/Bearish Engulfing

Bullish and Bearish Engulfing patterns are two-candlestick formations that signal significant shifts in market sentiment. A Bullish Engulfing pattern occurs when a large bullish candle completely engulfs the previous bearish candle. This suggests a transition from bearish to bullish sentiment, as buyers have overwhelmed sellers, pushing the price higher. Conversely, a Bearish Engulfing pattern forms when a large bearish candle fully engulfs the preceding bullish candle. It indicates a shift from bullish to bearish sentiment, with sellers dominating the market and driving prices lower. Traders often view Engulfing patterns as strong reversal signals, particularly when they occur at key support or resistance levels or coincide with other technical indicators.

Dark Cloud Cover

The Dark Cloud Cover pattern is a bearish reversal pattern that forms after an uptrend. It consists of two candlesticks: a bullish candlestick followed by a bearish candlestick that opens above the previous day's close and closes below the midpoint of the previous day's body. This pattern suggests a potential reversal from bullish to bearish sentiment, with the second candlestick "clouding" the optimism of the previous day's gains.

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Doji

The Doji candlestick pattern is a significant indicator of market indecision. It forms when the opening and closing prices are very close or nearly equal, resulting in a small or non-existent body with long upper and lower wicks. The appearance of a Doji suggests a standoff between buyers and sellers, where neither group has gained control over the price direction. It can occur in various market conditions and timeframes but is particularly meaningful when it appears after a strong trend. In such cases, a Doji may signal potential exhaustion of the prevailing trend and the possibility of a reversal. Traders often look for confirmation from subsequent price action before making trading decisions based on a Doji formation.

Gap Pattern

A Gap pattern occurs when there is a noticeable gap between the closing price of one candlestick and the opening price of the next candlestick. Gaps can signal significant changes in market sentiment and are often associated with increased volatility. Common types of gaps include Breakaway Gaps, Continuation Gaps, and Exhaustion Gaps, each providing valuable insights into market dynamics and potential price movements.

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spreadex financials harami chart example

Harami Pattern

The Harami pattern is a reversal pattern that consists of two candlesticks: a large candlestick followed by a smaller candlestick that is completely engulfed by the previous day's body. The smaller candlestick is often referred to as the "inside day." A Bullish Harami occurs after a downtrend and suggests a potential reversal to the upside, while a Bearish Harami occurs after an uptrend and signals a potential reversal to the downside.

Harami Cross Pattern

The Harami Cross pattern is a variation of the Harami pattern that features a small doji or spinning top candlestick inside the body of the previous day's candlestick. This pattern suggests a potential reversal in market sentiment, with traders interpreting the small candlestick as a sign of indecision or uncertainty. A Bullish Harami Cross occurs after a downtrend and signals a potential reversal to the upside, while a Bearish Harami Cross occurs after an uptrend and suggests a potential reversal to the downside.

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spreadex financials hammer chart example

Hammer and Hanging Man

Both the Hammer and Hanging Man candlestick patterns feature small bodies with long lower wicks and little to no upper wicks. The distinction between them lies in their position relative to the preceding price action. A Hammer forms at the bottom of a downtrend, indicating potential bullish reversal. It suggests that despite significant selling pressure, buyers managed to push the price back up, resulting in a long lower shadow. This pattern implies a rejection of lower prices and a potential shift in sentiment from bearish to bullish. On the other hand, a Hanging Man occurs at the top of an uptrend and suggests potential bearish reversal. It signifies that although buyers attempted to push the price higher, sellers entered the market, causing the price to retreat from its highs. Traders typically wait for confirmation from subsequent price action before acting on signals from Hammer and Hanging Man patterns.

Kicking Pattern

The Kicking pattern is a reversal pattern that consists of two candlesticks moving in opposite directions. In a Bullish Kicking pattern, the first candlestick is bearish, followed by a bullish candlestick that opens above the previous day's close. This pattern suggests a sudden shift in market sentiment from bearish to bullish. Conversely, in a Bearish Kicking pattern, the first candlestick is bullish, followed by a bearish candlestick that opens below the previous day's close, signalling a reversal from bullish to bearish sentiment.

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Morning Star/Evening Star

Morning Star and Evening Star patterns are three-candlestick formations that typically appear at the end of trends and signal potential reversals. The Morning Star pattern forms during a downtrend and consists of three candles: a long bearish candle, followed by a small-bodied candle (Doji or spinning top) that indicates market indecision, and completed by a long bullish candle. This pattern suggests a transition from bearish to bullish sentiment, with the final bullish candle confirming the reversal. Conversely, the Evening Star pattern occurs during an uptrend and comprises a long bullish candle, followed by a small-bodied candle, and completed by a long bearish candle. It indicates a shift from bullish to bearish sentiment, with the final bearish candle confirming the reversal. Traders often wait for confirmation from subsequent price action before acting on signals from Morning Star and Evening engulfing patterns, as false signals can occur in volatile markets.

Piercing Line

The Piercing Line pattern is a bullish reversal pattern that forms after a downtrend. It consists of two candlesticks: a bearish candlestick followed by a bullish candlestick that opens below the previous day's close and closes above the midpoint of the previous day's body. This pattern suggests a potential reversal from bearish to bullish sentiment, with the second candlestick "piercing" the pessimism of the previous day's losses.

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spreadex financials spinning top chart example

Spinning top

A spinning top features a small body with long upper and lower shadows, indicating indecision among traders. The small body reflects minimal price movement from open to close, while the long shadows suggest significant volatility during the period. This pattern often signals a potential reversal or a period of consolidation in the market.

Shooting Star

A shooting star candle pattern features a small real body near the lower end of the trading range and a long upper shadow, with little to no lower shadow. This formation indicates that the price opened, rallied significantly, but then fell back near the opening price by the close. The long upper shadow shows that buyers were initially in control, but sellers took over, potentially signalling the end of an uptrend.

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Tri-Star Pattern

The Tri-Star pattern is a rare and powerful reversal pattern that consists of three consecutive doji candlesticks with nearly identical opening and closing prices. This pattern suggests a period of extreme market indecision and uncertainty, with neither bulls or bears able to gain control. Traders interpret the Tri-Star pattern as a potential signal of a major trend reversal, although confirmation from subsequent price action is typically sought before making trading decisions.

Three Soldiers

The Three Soldiers pattern is a bullish reversal pattern that forms at the bottom of a downtrend. It consists of three consecutive bullish candlesticks with progressively higher closes. This pattern suggests a gradual shift in market sentiment from bearish to bullish, with each candlestick indicating increasing buying pressure and conviction among traders. Traders interpret the Three Soldiers pattern as a potential signal of a reversal to the upside, often looking for confirmation from other technical indicators or chart patterns.

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Three Outside Pattern

The Three Outside pattern is a bullish reversal pattern that forms after a downtrend. It consists of three consecutive candlesticks: two smaller candlesticks within the range of the previous day's body, followed by a larger bullish candlestick that closes above the previous day's high. This pattern suggests a sudden and decisive shift in market sentiment from bearish to bullish, with the third candlestick "breaking out" of the previous day's range.

Three Line Strike

The Three Line Strike pattern is a bullish reversal pattern that consists of four consecutive candlesticks: three small bearish candlesticks followed by a larger bullish candlestick that completely engulfs the previous three candlesticks. This pattern suggests a swift and decisive reversal from bearish to bullish sentiment, with the final candlestick overpowering the preceding bearish trend.

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Tasuki Gap

The Tasuki Gap pattern is a continuation pattern that occurs within an existing trend. It consists of three candlesticks: a bullish candlestick followed by a gap down, a small bullish or bearish candlestick that fails to fill the gap, and a third bullish candlestick that opens above the previous day's close. This pattern suggests a brief pause or consolidation within the trend before the uptrend resumes, providing traders with opportunities to enter long positions or add to existing ones.

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