What are the Types of Candlestick Patterns?

If you know more about foreign exchange trading, you must have heard of candle charts, also known as K-line charts. Candlestick charts are a widely used technical analysis tool in the stock and foreign exchange markets and are popular for their clear graphics and intuitive information delivery. Among the many types of candle charts, some are considered particularly important by investors because they can provide key market trend information and become a powerful tool for investment decisions. This article will delve into these important candle chart types, let investors know what types of candle chart patterns are divided, and allow investors to better understand market dynamics.

Introduction of K-ine candle chart

Candlestick charts refer to the price activity of an asset over a specific period of time. They are an excellent way to understand the price movement of an asset over a certain period of time, which can be hours, days, weeks, or even months. They use four main components for their analysis, including open, close, high, and low.

The history of candlestick charts dates back to the 18th century, when Japanese rice farmers tried to understand fluctuations in rice prices. They found that the market is affected by human emotions. In addition to following the laws of supply and demand, candle charts can visually depict market emotions and understand market patterns. Ultimately, traders use these patterns to analyze and predict the short-term price trends of the market and then make corresponding trading decisions based on this information.

While candlestick charts are similar to bar charts, candlestick charts are more visual and more clearly highlight upward and downward price movements between the open and close prices. Increasing price movement forms a green candle, indicating strong positive price dynamics in the market. In contrast, a bearish candle is red and indicates falling prices.

K-line candles are divided into two types: bullish candles and bearish candles. The body of the candle represents the opening and closing prices of the stock price, while the shadows of the candle represent the highest and lowest prices the stock price has reached. A bullish candle is green and represents an increase in stock price, opening at the bottom of the real body and closing at the top of the real body. A bearish candle is red and represents a decline in stock price, opening at the top of the real body and closing at the bottom of the real body. On a given K line, any of the entity and upper and lower shadow lines may not exist. By observing the color and shape of the candle, we can understand the trend of the stock price.

Key K-Line Candle Chart Patterns

There are many forms of candlestick charts, each representing different market conditions and trends.

1. Bullish Engulfing Pattern

   The highest price is the same (or slightly higher) as the closing price, and the lowest price is the same (or slightly lower) as the opening price. There are no upper and lower shadows or extremely short shadows. The big positive line is a long positive line in the entity, and it is a bullish signal when it appears in the early stage of the rising market. When a big positive line appears midway and continues to rise, it indicates that the bulls are strong. In a market that continues to accelerate its rise, the emergence of a big positive line indicates that the rise has peaked. On the contrary, the big negative line is a long negative line of entities. It is a bearish signal when it appears in the rising market, and it continues to be bearish when it appears in the middle. In a continuous falling market, the big negative line may be a signal of bottoming out and rebounding.

   Main features:

   This pattern may appear in any stock price movement.

   The longer the Yang line entity is, the stronger the power is; conversely, the weaker the power is.

   Under the daily limit system, the largest daily Yang line entity can reach 20% of the opening price of the day; that is, it opens with the lower limit and closes with the higher limit.

   
   

2. Bearish Engulfing Pattern 

   
   

   The big negative line is also called the long negative line. The "big negative line" in the candle chart usually refers to a negative line with a long real part, which means that the market sellers are stronger during a specific period of time and the closing price is far away from the opening price. This situation may reflect pessimistic investor sentiment and increased selling.

   The candle chart consists of a real body (rectangular part) and a shadow line (a line extending up and down), while the "big negative line" mainly focuses on the length of the real body. A typical characteristic of a large negative line is that the opening price is close to the highest price and the closing price is close to the lowest price, forming a falling entity. This shows that during this time period, the market started out strong but ended with increased seller pressure, causing prices to fall significantly.

   Application rules
   

   The appearance of a large Yinxian in a rising market means that the market will retreat sharply downward.

   The appearance of a large Yinxian in a falling market means that the market is accelerating its downward plunge.

   
   

   
   

3. Morning Star Pattern 

   
   

   Morning Star is a pattern composed of three K lines, which marks the market bottoming out and turning around. The occurrence of this pattern is worth watching because it is a clear reversal signal, making it an ideal buying opportunity.

   First candle (negative line): This is a negative line in a downtrend, indicating that the market is currently dominated by sellers.

   The second candle line (a small, real body or a candle with a lower shadow): This candle line is usually smaller than the first negative line and sometimes has a lower shadow, indicating that there is some uncertainty in the market and that buyers and sellers The forces between them begin to balance.

   The third candle line (positive line): This is a positive line in an upward trend, indicating that the buyer has taken control of the market and the price may rise.

   At the tail end of a downtrend, the Morning Star K-line Pattern usually appears stronger and is an obvious trend reversal signal. The three K lines form a complete psychological turning process: from pessimism to long-short balance, and then to optimism. Therefore, this pattern is more effective in trend reversal and stop-and-fall trading.

   
   

4. Evening Star

   
   

   The evening star is similar to the morning star. It is a K-line combination form and can be regarded as the reversal form of the morning star. Unlike the morning star, the evening star usually appears at the end of an uptrend, often marking a periodic top of the price.

   First candle line (positive line): This is a positive line in an uptrend, indicating that the market is currently dominated by buyers.

   The second candle line (a small, real body or a candle with a shadow line): This candle line is usually smaller than the real body of the first positive line and sometimes has an upper shadow line, indicating that there is some uncertainty in the market for sellers and buyers. The forces between them begin to balance.

   The third candle line (negative line): This is a negative line in a downtrend, indicating that sellers have taken control of the market and prices may fall.

   When these three candles appear in sequence, forming an evening star pattern, this may be a signal of a trend reversal.

   
   

5. Three Red Soldier

   

   "Three Red Soldiers" is also called "Three White Soldiers," which is a bullish trend reversal pattern.

   The three red soldiers usually consist of three adjacent positive lines. The opening price of each positive line is higher than the opening price of the previous one, and the closing price is also higher than the closing price of the previous one.

   This is considered a sign of strong buyer power, suggesting the market may continue to rise.

   
   

6. Round Bottom Bullish 

   
   

   Also known as a saucer bottom, it is usually used to describe the stock price trend forming a bottom arc shape, indicating that a trend reversal may occur. This pattern may appear in a K-line candle chart as the stock price gradually declines over several consecutive periods and then forms a curved bottom, implying a change in market sentiment from pessimism to optimism. Because it is shaped like a saucer, it is also called a saucer bottom.

   In the K-line candle chart, the round bottom pattern may appear as the stock price fluctuates at the bottom level for a long time and then gradually rises. This pattern is sometimes called "bottom accumulation" because investors appear to gradually accumulate shares at low prices, ultimately driving the stock price higher.

   Technical Characteristics:
   

   It can appear at the end of a decline or in the middle of an increase.

   The stock price or index initially fell and rebounded relatively quickly. As the enthusiasm for traders' participation decreased, the strength of the decline and rebound became weaker and weaker. Later, it could neither fall nor rise, and it traded sideways. It is not until new funds enter the market that the stock price or index begins to improve slightly and begins to rise slowly. Then more funds enter the market, pushing the stock price or index to accelerate upward.

   The trading volume becomes smaller and smaller as the decline slows down, shrinks to the minimum when going sideways, and then gradually increases as the stock price or index rises. When stock prices accelerate their rise, trading volume also increases significantly. On the K-line chart, the histogram of trading volume is often arc-shaped.

   
   

7. Propeller Chart 

   
   

   Propellers refer to those stocks in the K-line combination that have small K-line entities and long upper and lower shadows but show independent trends within a certain period of time. Sometimes, these stocks may have continuous negative lines, but the stock price does not fall. When these stocks with propeller characteristics are not high in absolute price, have good fundamentals, and have no history of capital expansion, we call them propeller kings. Generally speaking, in a consolidating market, stocks with propeller-king characteristics may provide greater investment opportunities.

   The following conditions are required to determine whether a stock complies with the propeller law:

   It occurs when the overall market declines, and the cumulative decline is relatively large, usually in the middle and late stages of the market.

   It is in a shrinking state and does not meet the requirements of the 135-day Moving Average.

   The application of the propeller rule helps identify stocks that remain relatively independent and have greater opportunities in market turbulence.

   
   

8. Friends Counterattack Chart 

   
   

   A friend counterattack is a graphic form in technical analysis that usually appears in a downward trend and consists of two K lines, one yin and one yang.

   A friend's counterattack is seen as a signal to stop falling. When this pattern appears, investors are reminded not to be blindly bearish because bulls may launch a counterattack upward. The technical significance of Friend's Counterattack is similar to that of Dawn, except that the signal is relatively weak.

   Features Include:

   First, a big negative line appears, indicating that the market is falling.

   The next day, a short gap and a low opening followed, forming a big Yang line or a Zhong Yang line. The closing price of this positive line is the same as or very close to the closing price of the previous day's negative line.

   
   

9. Hanging/Hammer Man Chart 

   
   

   Hammer Line

   The lower shadow of the hammer line is very long, the upper shadow is very short, the entity is small, and the shape is a bit like a hammer. If it occurs during a downtrend, it may be a reversal signal, indicating that the market is rebounding from the bottom.

   Key points of the hammer line:

   The hammer line needs to appear in a downtrend and have the characteristics of a reversal.

   The longer the lower shadow, the better, and the smaller the real body, the better.

   The hammer line is best able to appear at the support level.

   The emergence of the hammer line indicates that the market has found support at the bottom, and buying orders have gradually entered, pulling the market up.

   Hanging Man

   Hanging man, also called hanging man, is a graph composed of two candle lines. The first candle line is a long black real body, the second is a short white real body, and the closing price of the second candle is higher than the first real body. . The gap formed by the white real body between the two candle lines is one of the characteristics of the hanging neck line.

   The appearance of the hanging neck line indicates that the market is experiencing seller pressure in an uptrend. Although the opening and closing prices are close, the market has experienced large fluctuations throughout the day. The lower shadow of the hanger indicates that buyers attempted to push the price higher during the trading day but were ultimately unable to maintain it. This could signal a shift in market power, with sellers potentially starting to dominate.

   Investors need to wait for more confirmation signals after confirming the hanging neck pattern to avoid false signals.

   
   

10. Double Bottoms Patterns 

    
    

    The engulfing pattern is an important reversal pattern consisting of two candlestick real bodies of opposite colors.

    Regarding the engulfing form, there are three criteria:

    First, before an engulfing pattern occurs, the market must be in a clearly identifiable up-or-down trend, even if the trend is only short-term.

    Secondly, the engulfing pattern consists of two candle lines. The real body of the second candle line must completely cover the real body of the first candle line. If it is a bullish trend, the first candle is a bear line, and the second candle is a bull line. Vice versa. Likewise.

    Third, the color of the second entity of the engulfing form must be opposite to the color of the first entity.

    If engulfing patterns possess these characteristics, the likelihood that they constitute an important reversal signal is greatly enhanced.

    In an engulfing pattern, the real body on day one is very small, and the real body on day two is very large. Engulfing patterns often appear after very long-term or sharp market movements. If there is a very long-term uptrend, it may mean that potential buyers have entered the market to take long positions, resulting in a lack of sufficient new long supply in the market to continue to push the market upward. And after a sharp market move, the market may have gone too far and become susceptible to profit-taking positions.

    In an engulfing pattern, the second real body is accompanied by excess volume. Additionally, in an engulfing pattern, the next day's entity engulfs more than one entity.

    
    

11. Dark Clouds Cover

    
    

    The dark cloud cover pattern, also known as the dark cloud line pattern, is one of the more common top transition patterns on the K-line chart. It usually occurs during an upward trend in stocks or markets and is a potential turning signal.

    A dark cloud cover pattern indicates a possible reversal in the market's uptrend. The Yang line on the first day represents a strong buyer's market, but the Yin line on the second day indicates that sellers have entered the market, pulling the price back, and the closing price of the Yin line is lower than half of the previous day's Yang line, implying the strengthening of the seller's power. This pattern suggests a potential bearish counterattack, and investors should be aware that the market may enter a downtrend.

    Traders usually adopt cautious strategies after confirmation of dark cloud cover, such as waiting for further confirmation signals or adopting defensive trading strategies to avoid potential downside risks.

    Feature:

    The first day is a Yang line. The specific pattern is based on a rising Yang line, which represents an upward trend.

    The second day is the Yin line. The opening price of the Yin line on the second day is higher than the closing price of the previous day, but the final closing price is lower than half of the previous day's Yang line, forming a covered Yin line.

The above are not all K-line candle chart patterns. In fact, there are many other complex candle chart patterns. Candlestick charts are a powerful technical analysis tool that play a key role in interpreting market trends. By understanding and skillfully using various important candle chart types, investors can more accurately judge market behavior and improve the accuracy of their trading decisions.

When using candlestick charts to make trading decisions, investors also need to pay attention to some key techniques, such as using K-line patterns in combination with support and resistance levels, for better results. For example, if three or more K-line combinations appear at the same position, it is likely to be a support or resistance level. If a K-line combination appears at the support or resistance level, the signal is more reliable. It can also be combined with other technical analysis tools, such as moving averages and relative strength indicators, to comprehensively judge market trends. In addition, pay attention to market news and events in a timely manner to avoid blindly following the trend. Finally, set clear stop-loss and profit points, reasonably control risks, and analyze the market rationally to ensure the robustness and sustainability of investment decisions.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.