Top 17 Chart Patterns Every Trader Should Know About
In our previous article Introduction to chart patterns, we explained what chart patterns were and how to recognize them. Let’s talk about today’s most popular chart patterns in this article.
Doji, which means “the same thing” in Japanese, refers to a candlestick pattern with an open and close that is virtually the same during the course of a trading session. Many analysts see the Doji candlestick, which can look like a plus sign, cross, or inverted cross, as neutral. It is a representation of indecision on the part of both buyers and sellers, as the price is unchanged.
Spinning Tops are a form of candlestick pattern that indicates indecision on the outlook of an asset. The candlestick will have a short real body and long upper and lower shadows, which means the price of the open and close during the trading session are close together and could signal a sideways movement to follow.
Marubozu, which means “bald head” in Japanese, refers to a candlestick pattern with no upper or lower shadows, so the price isn’t extended past the opening price range of the day. The pattern indicates a high level of decisiveness by either the sellers or buyers, and depending on whether the asset has gained or lost, there is usually greater demand than there is supply, and vice versa.
Hammer & Inverted Hammer
A hammer refers to a candlestick pattern that visually looks like a hammer, with a short real body and a long lower shadow. In this instance, the asset has traded a long way below its opening, and then had a rally towards the close, which puts it close to the opening price.
The opposite is true of the Inverted Hammer. The asset trades above its opening price, and then falls aggressively towards the close of trading, ending near the opening price. This formation will show a long upper shadow, and not much, if any, lower shadow.
A Hammer can be indicative of an asset that will experience a price reversal to the upside, while an Inverted Hammer shows the opposite, a possible downtrend in progress.
Shooting stars are a bearish candlestick pattern indicated by a significantly long upper shadow and a very small real body close to the low of the day. This formation will show after an uptrend, and usually signals that an asset price could start to fall, but many traders will watch the next candle for confirmation.
The Hanging Man candlestick refers to a pattern that shows a small real body and a long lower shadow, more than twice the body’s length. It is usually a signal that an asset will experience a bearish reversal as investors start to lose optimism and sell, believing that the price of the asset has hit its peak.
Bullish & Bearish Harami
A Bullish Harami refers to a candlestick pattern over two or more days that is useful for picking a reversal in a downward trend. After continued bearish downward candlesticks, a price increase shown by a small bullish candle contained within the previous day’s candle might indicate a new bullish trend emerging.
The Bearish Harami shows the opposite pattern, a signal that an upward trend may be coming to an end. As with both formations, the size of the second candle determines the significance of the reversal. The smaller it is, the more likely a switch to the upside or downside.
Bullish & Bearish Engulfing
The Bullish Engulfing pattern refers to a candlestick formation that indicates an increase in prices is likely. The first large real body is a down candle, while the second is a large upward candle that ‘engulfs’ the first. This change signals that the buyers of the assets have overtaken the sellers.
In comparison, the Bearish Engulfing pattern refers to the possibility of prices soon decreasing. The first upward candle is followed by a large downward engulfing candlestick.
As with both patterns, most traders will watch the close of the second and the third candle before acting on the following session.
Piercing Line & Dark Cloud Cover
A Piercing Line candlestick refers to a bullish pattern over two sessions that shows a possible reversal from a downtrend to an uptrend. It generally includes the asset opening near the high and eventually closing near the low, with a medium to large trading range. There should be a gap down following the initial day where the following day starts, and the second candlestick should cover half or more of the upward length of the first day’s candlestick.
Somewhat opposite to the Piercing Line is the two-session Dark Cloud Cover pattern, as it is often a signal of a bearish reversal from an uptrend to a downtrend. As with the Piercing Line, both candles should have quite large real bodies with high trading participation, and it’s also helpful for both to confirm the trend with a third candle.
Morning Star & Evening Star
Morning Star refers to a bullish candlestick pattern that is generally indicative of a potential upward movement of an asset in what would be a reversal from a prior downtrend. The visual pattern to look out for first includes a tall red or black candlestick, a middle white/green or black/red candlestick with a small real body and long shadows, and third is a tall white/green candlestick.
The opposite is true of the Evening Star pattern, which will often signal the reversal of an upward trend to a downward trend as the bearish traders overwhelm the bulls.
Three White Soldiers & Three Black Crows
Three White Soldiers refers to a bullish candlestick pattern that is generally indicative of a reversal in a downward trend in a price chart. The pattern to look out for includes three candlesticks in a row that shows a long real body and very little upper and lower shadows. Each real body opens within the prior candle’s real body and closes higher than the previous candle’s high.
The opposite can be said of the Three Black Crows candlestick pattern. It represents a possible reversal of an upward trend in a price chart and is considered to be bearish in nature. Both patterns are useful, but best to be used in addition to other technical analysis tools.
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