There is a wealth of information available online and in Bookstores that will teach you the details of using Candlesticks as indicators. The following are 10 candlestick patterns that have in my own experience produced consistent results. These will work better when you understand what is happening in each pattern.

Candlesticks are not stand-alone indicators they must be combined with other forms of technical  analysis to really be useful.  For example, when you see one of these  patterns on the daily chart, move down to the hourly chart.  Does the  hourly chart agree with your expectations on the daily chart?  If so,  then the odds of a reversal increase.

The following patterns are divided into two parts: Bullish patterns  and bearish patterns. These are reversal patterns that show up after a  pullback (bullish patterns) or a rally (bearish patterns).

Bullish Candlestick Patterns


Engulfing: This pattern consists of two candles. The first day is a narrow  range candle that closes down for the day. The sellers are still in  control of the stock but because it is a narrow range candle and  volatility is low, the sellers are not very aggressive. The second day  is a wide range candle that engulfs the body of the first candle and  closes near the top of the range. The buyers have overwhelmed the  sellers (demand is greater than supply). Buyers are ready to take  control of this stock!

Hammer: As discussed above, the stock  opened, then at some point the sellers took control of the stock and  pushed it lower. By the end of the day, the buyers won and had enough  strength to close the stock at the top of the range. Hammers can develop  after a cluster of stop loss orders are hit. That's when professional  traders come in to grab shares at a lower price.

Harami: When you see this pattern the first thing  that comes to mind is that the momentum preceding it has stopped. On the  first day you see a wide range candle that closes near the bottom of  the range. The sellers are still in control of this stock. Then on the  second day, there is only a narrow range candle that closes up for the  day. Note: Do not confuse this pattern with the engulfing pattern. The  candles are opposite!

Piercing: This is also a two-candle reversal pattern  where on the first day you see a wide range candle that closes near the  bottom of the range. The sellers are in control. On the second day you  see a wide range candle that has to close at least halfway into the  prior candle. Those that shorted the stock on first day are now sitting  at a loss on the rally that happens on the second day.  This can set up a  powerful reversal.

Doji: The doji is probably the most popular  candlestick pattern. The stock opens up and goes nowhere throughout the  day and closes right at or near the opening price. Quite simply, it  represents indecision and causes traders to question the current trend.  This can often trigger reversals in the opposite direction.

Bearish Candlestick Patterns


Notice that all of these bearish patterns are the opposite of  the bullish patterns. These patterns come after a rally and signify a  possible reversal just like the bullish patterns.


There is one more pattern worthy of mention.  A kicker is sometimes  referred to as the most powerful candlestick pattern of all.


You can see in the above graphic why this pattern is so explosive.   Like most candle patterns there is a bullish and bearish version.  In  the bullish version, the stock is moving down and the last red candle  closes at the bottom of the range.

Then, on the next day, the stock gaps open above the previous days  high and close.  This shock event forces short sellers to cover and  brings in new traders on the long side.

This is reversed in the bearish version.

Look for confirmation in at least 2 other indicators, RSI, Moneyflow etc BEFORE hitting the buy/sell button.

Current Copper Chart


Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.