Trading is all about predicting the future course of the prices. If you are right about the price movements, you will become a successful trader without a doubt. Candlesticks are patterns that can help you with it. There are 16 common candlestick patterns that you can use to spot trading opportunities but before that, let’s read more about what candlesticks are. 

What is Candlesticks?

Candlesticks represent a type of price chart that displays the high, low, open, and closing prices of a security for a specific trading period. The Candlesticks Body represents the price range, open-to-close. The Wick or the shadow shows the highs and lows.

Just like the name suggests, candlesticks have wick-like protrusions that tell you about price movements. A candlestick is used to display information regarding an asset’s price movement in the form of a diagram. Candlestick charts are highly beneficial in technical analysis. Even by looking at a few price bars, you can quickly interpret an asset’s future price movement. 

The colors on this chart are very prominent and help you identify the market direction. The green/white body represents an increase in the price, and the red/black body stands for a decrease in the price.

As time progresses, these singular candlesticks form patterns that allow traders and investors to assess the strength of support and resistance levels. Different candlestick patterns tell you about different stimulations taking place in the market. You can know about the buying-selling pressure, market indecision, continuation patterns, and more. We will discuss more of it in this article.

Visualizing the Candlestick Chart

The candlestick chart’s main component is the candle itself that consists of a body and one or two wicks. The shape of the body, the wicks, and colors help traders to determine the market movements.

While Steve Nison favored candlestick charts, he strongly advocated the traders to follow a triad approach. A triad approach includes reading a chart like a candlestick chart with other technicals. It includes relative support line, strength analysis, horizontal resistance, and, one of the most important, moving averages. One must also consider the risk-reward analysis through trade management and capital preservation.

Candlestick charts have always been popular in Japan and remain the preferred charting technique. It took candlestick charts over two centuries to reach the Western hemisphere. While the journey might have been long, these charts gained popularity quite rapidly. Within a quarter-century, these became the first choice of everyone engaged in Wall Street and Main Street.

Candlestick charts facilitate technical analysis. These charts date back to the 18th century when used in feudal Japan to organize the rice trade. By the early 1800s, these charts into organized candlestick charts. These candlesticks were introduced to the West by the founder of candlescharts.com, Steve Nison, in 1989. He wrote about these charts for Futures magazine. He was working with Merrill Lynch at that time.

Candlestick charts are very comprehensive and appeal to technical analysts for various reasons, their visualization being the primary factor. These charts clearly show the key turning points of the market. By understanding the basic 16 patterns, you can easily know about the market directions. Key reversal patterns have proper names. They allow traders to know exactly what they can expect—for example, morning and evening star candlestick patterns for bullish and bearish markets, respectively.

These charts are very flexible, which is another thing that is appreciated by technical analysts. These can be used in any market and time frame. All you need is a price for an open, close, high, and low.

If you are not yet familiar with candlesticks, it is better to learn its basics first. Only after you have familiarized yourself with every component and pattern, you would make a viable strategy. You can start by practicing on demo accounts. Enter and exit trades by using signals given by these charts. You would be able to see how accurate your calculations are, and you will not be losing real money.

While candlestick patterns are great, and you can use them for predicting trends quickly, it is never advised to use them alone. Back them up with other technical analysis. This will eliminate vagueness and help you in confirming the trend.

Reversal candlesticks

Reversal candlesticks are trading patterns that suggest a possible change in future trends, trend reversal. Usually, strong price movement in a different direction than the main trend is the first sign of trend reversal.

Strongest Candlestick Reversal Patterns are:

1.  The Magic Doji
2. Abandoned Baby
3. Engulfing Patterns
4. Hammer
5.  Hanging Man
6.  Harami 
7.  Stars

Bullish Candlesticks reversal patterns are:

1. Hammer
2. Inverse hammer
3. Bullish Engulfing
4. Piercing Line
5. Morning star
6. Three White Soldiers

Bearish Candlesticks reversal patterns are:

1. Hanging Man
2. Shooting Star
3. Bearish Engulfing
4. Evening Star
5. Three Black Crows
6. Dark Cloud Cover

Continuation Candlestick Patterns

1. Spinning Top
2. Falling Three Method
3. Rising Three Method
4. Spinning top

Identifying the Strongest Candlestick Reversal Patterns

There are some basic reversal candlestick patterns that traders must learn. Steve Nison’s ‘Japanese Candlestick Charting Techniques’ also has these charts. You can find the same on his website too. Some of the popular ones are explained below:

1. The Magic Doji

Doji is a Japanese word that translates to ‘at the same time.’ There are two candlesticks in this pattern that tell you time frames when you can expect the closing price to be almost the same as the opening price. This pattern is regarded as a significant individual candlestick pattern. This pattern can also play as a crucial component in various multiple candlestick patterns.

You can use the Magic Doji to check if the market is indecisive. If this pattern appears to post an uptrend, sometimes following a white long-bodied candle, you can say that there is indecision, and it is very high. This is the time when bulls should have been decisive. This pattern also indicates that there is an equilibrium in the market concerning demand and supply. In both cases, the pattern is hinting towards the end of an uptrend.

Similarly, if the pattern appears after a continuous decline, you can expect the downtrend to be ending.

When the close and open are at a low, you will see a Gravestone Doji. This position calls tops even though this formation is found at the bottoms. It is an important reversal candlestick pattern.

2. Abandoned Baby

This one is a rare three-candle pattern. It is used in defining the bottom. A relatively long-bodied candle follows the current trend. The second candle, which follows the current trend’s direction, shows the price gap that opens above or below the last day’s close. When it comes to the last candle, the price gap moves in the opposite direction of the trend.

The second candle’s shadow is not supposed to overlap with the shadow of the remaining two candles.

Wouldn’t you feel abandoned if you sold your asset during the middle candle? You would feel abandoned by the market and would want to leave the position. The chartists in the west call it ‘island reversal.’

3. Engulfing Patterns

There are engulfing patterns for both the bearish and bullish markets. Engulfing patterns are among the strongest candlestick reversal patterns. You can know about the possibility of a major reversal at the extremes.

The bearish engulfing has a white candle. The prices gap higher with every recurring open. They make a new high before pulling and turning intraday to close under the previous session’s bottom. This shows that bears are in power. They have sent the bulls into a retreat after counterattacking their final thrust.

This is known as ‘key reversal’ in the West. It is easier to identify the reversal in a chart.

4. Hammer

Hammer is one of the most common candlestick reversal patterns to be used by traders across the world. Hammer candlestick pattern has a small body with a no or negligible upper wick. The lower wick, however, is considerably long and makes a new low. While the color may not be defining, a whistle candle is considered more bullish. In this case, the lower wick needs to be at least twice the height of the body.

In Japanese folklore, a rabbit makes rice cakes using a wooden hammer with a long handle; the Japanese consider this pattern to suggest that the bulls get stronger and soon hammer out a base.

5. Hanging Man

Hanging Man candlestick pattern can be regarded as the Hammer pattern’s bearish equivalent (that shows bullish signals). This pattern looks like the Hammer pattern as well. As it appears after a rally, it takes the form of a bearish reversal indicator.

If the body is slightly filled in, it is more bearish, though it is not always the case.

The lower wick is again longer than the body and signifies the vulnerability of the prices. It tells traders that the underlying support may not be strong enough and could lead to a quick sell-off.

The bearish signal is confirmed by the close below the hanging man’s body during the next session. The patterns resemble a man hanging from a high level, hence, the given name.

6. Harami 

Harami means pregnant in old Japanese. There are two candles in this pattern – one is a small candle resembling a fetus, and another longer one represents the womb. The smaller candle can fit entirely inside the last session’s long body.

It is a reversal candlestick pattern, though not as popular or used at the reversal patterns like Engulfing, Hammers, and the Hanging Men. Yet, it is an important pattern as it can tell traders when the prices will separate from the previous trend.

7. Stars

These candlestick patterns have three candles and look like the Abandoned Baby pattern. There are two-star candlestick patterns, Evening Star and Morning Star.

Evening Star follows an uptrend. The first long and white candle is followed by a small-body candle and a third one that is long and filled-in. The second candle has a long lower wick that can overlap the body of the third candle. This pattern follows an uptrend and gives a bearish signal.

Morning Star is seen as a bullish pattern. It also has three candlesticks, but the wick of the second one does not overlap with the third one. It shows that the bulls are getting stronger.

Nison considered star patterns similar to traffic signals. The long green candle follows the direction of the trend. It turns yellow and implies that the market is indecisive. It ultimately turns red, which shows a countertrend move.

What is Bullish Reversals Candlestick Patterns?

Your candlestick chart may show a bullish pattern after there has been a downtrend. It will also signal a price movement reversal. This condition is supportive of traders who want to open a long position. They can take advantage of the upward trajectory and make some profit. 6 common candlestick patterns fall in this category. They are given as follows:

1. Hammer

A short body and a long wick, pointing downwards, form the Hammer pattern. You can find such a candlestick pattern at the bottom of a downtrend. There are two things that the Hammer pattern shows; there was selling pressure during the day, and that the prices were driven back up because of a strong buying pressure. You can have both red and green hammers – green hammers depict a stronger bull.

2. Inverse Hammer

This candlestick pattern is similar to the Hammer pattern. The main difference here is that it is inverted; that is, the lower wick is shorter while the upper wick is longer.

This shows a buying pressure followed by a selling pressure that could not bring the market prices down as it was not strong enough. This pattern foretells that the buyers will soon control the market.

3. Bullish Engulfing

A short and red candle, engulfed by a bigger green candle, form the Bullish Engulfing candlestick pattern. In general, the second day opens with lower prices than the first day. However, the bullish market pushes the prices up and makes the market more profitable for the buyers.

4. Piercing Line

Just like the Bullish Engulfing candlestick pattern, this one uses two sticks as well. The first one is red, and the next one is green. Both are long candles. The significant feature here is the gap between the green candlestick’s opening price and the red candlestick’s closing price. Piercing Line represents strong buying pressure. Here, the prices get pushed up above or to the mid-price level of the previous day.

5. Morning Star

The Morning Star pattern brings a ray of hope to the market. It is a positive candlestick pattern, especially when there has been a downtrend. This pattern is made with three sticks: a short candle, one long red candle, and one long green candle. The ‘Star’ will not overlap with the red and green candles. This pattern shows that the first-day selling pressure is subsiding with the advent of the bull market.

6. Three White Soldiers

This candlestick pattern occurs during the course of three days. There are three consecutive small-wick candles in green or white color. These candles progressively open and close higher than the previous day. Three White Soldiers give a powerful bullish signal that takes place after a downtrend. It also shows steady buying pressure.

Bearish Reversal Candlestick Patterns

There is usually the formation of the bearish candlestick pattern after there has been an uptrend. This pattern signals resistance. In a bearish market, the prices fall, which is not ideal for traders. They open short positions that allow them to make profits from the falling prices. Long positions are closed in this market. There are 6 common candlestick patterns for this category as well: These are:

1. Hanging Man

The Hanging Man is quite similar to the Hammer candlestick pattern. It has the same shape, but it forms at the endpoint of an uptrend, unlike its bullish counterpart. It shows that the day saw a significant sell-off, but the prices were pushed up again by the buyers. Since there is a large sell-off, bears will control the market, and bulls have lost.

2. Shooting Star

The Shooting Star looks identical to the Inverted Hammer candlestick pattern. It is formed when there is an uptrend. The lower body is small, while the upper wick is long.

You will see a slightly higher gap on an opening day in the market that rallies to an intra-day high as the prices are about to close above the open. It looks like a star is falling, hence, the name.

3. Bearish Engulfing 

This pattern takes place when the uptrend ends. A short and green candle, engulfed by a bigger red candle, forms this pattern. The Bearish Engulfing signifies a slow down or a peak price movement. It shows that the market is waiting for a downturn—the lower the second candle, the stronger the signal.

4. Evening Star

We have the Evening Star pattern for the bearish market like we have the bullish Morning Star candlestick pattern. It also has three candlesticks. There are two large candles, a red and a green one, and the shorter one is sandwiched between the two. This pattern shows a reversal of an uptrend. If the third candlestick is erasing the first candle’s gains, it is a strong signal.

5. Three Black Crows

You will see three consecutive standing long red candles in this pattern. The wicks are either too short or non-existent. Every session opens to the previous day’s opening price; the thing to notice is the selling pressure that forces the prices to move lower with each close. This pattern warns the traders about the upcoming bearish downtrend. This is a seller-dominated market.

6. Dark Cloud Cover 

Staying true to its name, this candlestick pattern converts the last day’s optimism into pessimism. The red-colored candle opens above the green candle of the previous day but closes below the midpoint. This shows that the bears will be running the market and push the prices further lower. The short wicks of the candles show a decisive downtrend.

Continuation Candlestick Patterns

We read about how candlestick patterns indicate that the market direction is or has changed. Certain patterns are not related to the market direction at all. These are known as continuation candlestick patterns. Like other patterns tell traders about whether the market is bullish or bearish, these four candlestick patterns allow traders to see a period of rest. This is the period when the price movement is neutral, or the market is indecisive. There are four continuation candlestick patterns:

1. Doji

The Doji pattern highlights the market struggle between buyers and sellers as the closing and the opening price points are almost the same. The pattern looks like a plus sign or across. The wicks vary in length, and the candles are almost non-existent. While in singularity, the Doji pattern is a neutral signal, where none of the parties gain. It can still be spotted in reversal candlestick patterns, in partnership with patterns like the bearish evening star or the bullish morning star.

2. Spinning Top

The body of the candle and the wick are generally of equal length, both being short. This pattern forms when there is indecision in the market. The bull and the bear are at war, with the former trying to push the price higher and the latter trying to pull in lower. This pattern indicated consolidation in the market that might take place after an uptrend or a downtrend. This pattern is often used with other patterns alone; it is considered a benign signal.

3. Falling Three Method

The Falling Three Method is used to confirm if the bearish trend will continue or not. There are three long red candles, three small green candles, and another single red candle. This pattern shows that the bull is still not powerful enough to change the market direction.

4. Rising Three Method

This pattern is an equivalent of the Falling Three Method, but it is used for the bullish trend. There are three short, situated between two long green bodies. This pattern shows that buyers are in control of the market.

What is Key Reversal?

A key reversal or reversal day and a one-day reversal is a simple pattern recognition tool that helps traders identify possible trend reversals. Traders can use this information and capitalize on possible market conditions.

Key reversal day is the day candle when main trend reversal.

Please, you can download the free key reversal indicator: Download key reversal indicator.

What is bullish key reversal?

Bullish Key Reversal day represents a daily candle on the chart from which the declining trend stops and the rising trend occurs on the chart.

Reversal day is presented with the black box below:

What is bearish key reversal?

Bearish Key Reversal day represents a daily candle on the chart from which the bullish trend stops and the bearish trend occurs on the chart.

Reversal day is presented with the black box below:

Why is a Key Reversal Important?

Traders do technical analysis using various indicators, and a key reversal is an important part of it. It allows traders to predict how a current trend will move. Traders can you this knowledge to find profitable entry and exit points. Traders, however, need to keep in mind that key reversals should not be used in solitary. Use them in conjunction with other indicators like the Moving Averages.

Working of Key Reversals

The occurrence of a key reversal is not very common. It depends predominantly on the type of stock that you are trading. Key reversals might not take place all the time, but you can rely on them when they do. This is when a key reversal day occurs:

When there is an uptrend: an asset’s prices reach a new high before closing near the last day’s lows.

When there is a downtrend: an asset’s prices reach a new low before closing near the last day’s highs.

Keep in mind that these key reversals are more reliable when there has been a strong trend. This is what you should look for when a trend has ended:

When an uptrend has ended:

• The Open has to be above the previous day’s close.
• There has to a new high for the new day.
• The Close has to be below the previous day’s low.

When a downtrend has ended:

• The Open has to be below the previous day’s close.
• There has to a new low for the new day.
• The Close has to be above the previous day’s high.

Understand the Key Reversal Bar

A key reversal can be used to identify both bullish and bearish signals. 

A bullish ley reversal can be identified when the bar opens below the last day’s low but closes above it, and a bearish can be identified when the bar opens above the last day’s high but closes below it.

If you are use signals for trading, you should wait for confirmation. Open a position above the bar of a bullish key reversal. If you are doubtful, let the price close above the bar before buying. Sell or close a position below the bar of a bearish key reversal. To be sure, you can allow the price to close below the bar before you sell.

Related Terms

• Reversal Day: A change in trend is highlighted by reversal days. More than their occurrences, traders must focus on their potency.
• Closing Price Reversal: This is a powerful indicator that helps in the identification of trend reversals. If large spikes follow a strong advance, this indicator becomes more important.
• Hook Reversal: It is a candlestick pattern that does not last for a long time and tells traders about possible reversals.
• Island Reversal: Island reversals help the traders to see the gaps between different signal days. It is a powerful reversal signal.
• Open-Close Reversal: This indicator can help you speculate a trend reversal after a strong trend.
• Pivot Point Reversal: This indicator is easy to understand, and this makes it one of the most popular and widely used reversal patterns.

Candlestick chart patterns developed in Japan and found their way to the Western trading market. These are indicators that are used by traders for technical analysis. Their formation allows traders to keep an eye on the price movement of assets, derivatives, securities, and currencies. These chart patterns include various candles in different colors and shapes. Every candle has two components: a body and one or two wicks. A candle wick is also known as a shadow. It is essential to understand how wicks behave to use this indicator accurately.

What is a Candle Tail?

A candle tail or candle shadow, or candle wick, is an upper or lower line that can be seen protruding from the candle body. It defines the fluctuation period related to the opening and closing prices of an asset. In simple words, these shadows (tail, wick) tell us about the lowest and the highest prices at which trades have been performed for a specific security over a defined period of time. 

Candlestick chart patterns are formed with a set of data that includes closing price, opening price, and high-low values. Cumulatively, this data create a candlestick. 

The body of the candlestick can either be a filled or hollowed portion. There are lines on either side of the body that can be called wicks, but it is generally the one on the upper end known as the wick. The one at the bottom is called a candle tail. Whether you call both the lines wick or one tail, both are together known as shadows of the candle.

Learning Candlestick Basics

All the information presented in a candlestick chart is engrained in the body and the shadows. In a data set, the high value is represented by the upper candle tail, and the low value is highlighted by the lower shadow or the candle tail.

You will see a hollow candlestick when the closing price of a security is higher than its opening price. When this happens, the candle tail becomes representative of the security’s opening price, and the candle wick shows the closing price of the same security.

Similarly, you will get filled candles when the sling price is lower than the opening price. The shadows represent the opposite information in this case, with the wick showing the opening price while the tail shows the closing price.

More About the Candle Tail

The shadows show the high and the low values for a specific time period, but there is more than you can learn from them. 

These shadows tell analysts and traders about a security’s overall performance during a specific period of time. It allows them to formulate better strategies. When there is a short shadow, it shows that the most active time for that particular security was between the closing and the opening prices. If the shadow is longer, you can assume that the security was traded well before the opening and past the closing prices for a period of time. 

The two shadows are seldom equal, and it is important to see which one is longer and which one is shorter. When the candlestick wick is longer than the tail, it shows that buyers took strong actions during the trading session. This long wick is created by a weak low and a strong high.

When the tail is longer than the wick, it shows that sellers were in control of the market during a particular trading session and could bring the prices down to their preference before the buyers pushed the prices successfully up. It signifies a strong close of a session.

Whether at the top or the bottom, the formation of one long shadow majorly happens after a trend has ended and before the price action has reversed, making way for a new trend that will move in the opposite direction.

Spinning Tops

Spinning tops are not very common. They occur when the wick and the tail are of the same size. In this pattern, the body is usually small, making the candlestick look like a spinning top. One shadow is longer than the other; we can check who controls the trading session, traders, or buyers. However, when a spinning top occurs, it shows that the market is going through a period of indecisiveness. 

A small body shows that the price movement has been slow throughout the session, and the equally long wick and tail show that both bulls and bears were active during a particular time frame. The result for this time period is either standoff or stalemate.

Conclusion

• A candlestick consists of a candle body and two shadows on either side of it. The upper shadow is called the wick, and the lower one is called the tail.
• The wick’s top part shows the highest part, and the tail’s low part shows the lowest value during a trading session. 
• Typically, the shadows’ length differs, which can be used to see whether the buyers or the sellers dominate the market.
• When the lengths of both the shadows are the same, it is known as a spinning top.

Chart patterns are a compact way of getting information related to price movement. They can be found within price charts. They assist traders in technical analysis. These are generally color-coded and help traders in many ways. If you are new at it, it might take some getting used to, but it will be worth it. 

As these charts take the past price movements to suggest future price movements, they enable traders to develop viable strategies. If traders know what they are hoping to see, these charts can be of tremendous help.

List of chart patterns

Popular forex chart patterns are patterns that traders usually use in their strategies; traders promote in their books such as top 10 chart patterns:

1. Head and Shoulders
2. Double Top
3. Double Bottom
4. Rounding Bottom
5. Cup and Handle
6. Wedges
7. Pennant or Flags
8. Ascending Triangle
9. Descending Triangle
10. Symmetrical Triangle

Let see how to read forex chart patterns:

1. Head and Shoulders

The Head and shoulders chart pattern represents the three peaks pattern that two outside peaks are close in height, and the middle peak is highest. Head and shoulders chart formation occurs when a market trend is in the process of reversal.

This chart pattern has three peaks, a longer one in the middle and two comparatively smaller ones on the extremes. The traders use this chart pattern to anticipate a bullish to a bearish reversal in the market.

Generally, the middle peak or the second is the larger one. Eventually, these peaks will fall to the previous level of support, also called the ‘neckline.’ As soon as the third peak also falls back to the neckline, the chances of the market reversing into a bearish downtrend are highly likely.

2. Double Top

The double top chart pattern represents a bearish chart pattern after two consecutive times the high price (two tops) with a moderate decline between the two highs.

As the previous chart pattern, this one is also used to identify possible market reversals. An asset’s price will peak when demand overpowers supply, but it will retrace back eventually to the support when buyers start closing their positions. This price will climb up one more time and will reverse to support on a more permanent basis. It will go against the prevailing trend, but it will retrace back to support.

3. Double Bottom

The double bottom chart pattern represents a bullish chart pattern after two consecutive times the low price (two bottoms) with a moderate upside potential between the two lows.

The double bottom pattern shows that there is more supply than demand in the market, which leads to the fall in the prices of assets. This period of selling can make the prices drop below the support level. These prices will rise and move towards the level of resistance but will drop again. Eventually, there will be a trend reversal, and an upward motion will begin. The market will become bullish.

As the double top is considered a bearish reversal pattern, this one is regarded as a bullish reversal pattern. It signifies that the downtrend has ended, and the market will see an uptrend now.

4. Rounding Bottom

The rounding bottom represents a U-shaped trough chart pattern, which ultimately shifts into a slow, gradual increase.

This chart pattern can be used to check both reversal and continuation of a trend. It isn’t uncommon to see the prices of an asset falling slightly back even during an uptrend. These prices will rise again, asserting that traders are trading in a market with bullish continuation.

You can use rounding bottom to check reversals as well. Suppose there is a downtrend, and you see a rounding bottom forming before the reversal of a trend. This will be a reversal as now; the prices will enter the bullish uptrend.

Traders can use this chart pattern by keeping an eye on its formation and buying halfway above the low point. They can make profits on the trend continuation once the prices break above resistance.

5. Cup and Handle

A cup and handle forex pattern is a bullish continuation pattern that resembles a cup with a handle, where the cup pattern is in the shape of a “U.” The handle pattern has a slight downward drift.” U” shape looks like a cup and handle looks like a triangle.

Cup and handle a bullish continuation pattern. The traders use it to look for any period or hint of bearish sentiment before the trend ultimately follows the bullish motion. When looked closely, the cup will remind you of the rounding bottom chart formation. The handle can be compared with the wedge pattern.

An asset’s prices are likely to see a temporary retracement after a rounding bottom. This phenomenon is termed as the handle. This retracement occurs between two parallel lines, which look like a handle on the price graph. Eventually, the asset will leave the handle and follow the bullish trend again.

6. Wedge chart pattern

The wedge chart pattern represents a price pattern marked by converging trend lines on a price chart, such as an upward range trend in prices (rising wedge) or a downward trend in prices (falling wedge). 

The price movements of an asset tighten up between two sloping trend lines, wedges are formed. Wedges can be both falling and rising. Both types of wedges are reversal patterns.

When you see a trend line between support and resistance, represented by two upwardly slanted lines, it is called a rising wedge. You will see that the support line is steeper as compared to the line of resistance.  A rising wedge is a premonition of a more permanent decline in the price of an asset. This wedge is indicative of a bearish market.

When you see a trend line between two lines sloping downwards, it is called a falling wedge. You will see that the resistance line is steeper as compared to the line of support.  A falling wedge indicates that the prices will break through the resistance and rise eventually. The falling wedge represents a more bullish market.

7. Pennant or Flags

Flag trading patterns recently we described in our article.

The bullish flag chart pattern represents the bullish breakout pattern during the main bullish trend, after a short period of consolidation, formed in an area less than 50% of bullish retracement.

The bear flag chart pattern represents the bearish breakout pattern during the main bearish trend, after a short period of consolidation, formed in an area less than 50% of bearish retracement. Price oscillation during the period of consolidation can be usually presented as a flag.

When there is a consolidation in an asset’s prices after witnessing an upward movement, flags or pennant is created. Traders are likely to witness a significant increase in the prices when the trend is still anew. After that, you will see a series of many smaller downward and upward movements.

Pennants chart patterns represent a continuation chart pattern, formed after a large upward or downward movement, followed by consolidation, before continuing to move in the same direction.

Pennants are versatile as they can identify both bullish and bearish signals and reversal or continuation of a trend.

This pattern appears to form a triangle, which looks similar to the wedge chart pattern. The difference is that it is not as narrow as a wedge. The other difference is that pennants or flags are always horizontal, while wedges are either ascending or descending.

8. Ascending Triangle

The ascending triangle represents a chart pattern where the horizontal line can be drawn along the swing highs, and a rising trendline can be drawn along the swing lows.

This chart pattern shows the continuation of a bullish trend that signifies that an uptrend is in continuation.

These triangles often have at least two identical peak highs. This allows the formation of a horizontal line. The trend line in this pattern stands for an uptrend, and the horizontal line indicates the past level of resistance.

9. Descending Triangle

The descending triangle represents a chart pattern where the horizontal line can be drawn along the swing lows, and a downside trendline can be drawn along the swing highs.

The descending triangle is the bearish equivalent of an ascending triangle. It signifies the continuation of a downtrend. As the market is falling, traders prefer to open short positions with CFDs to capitalize on the existing market scenario.

Descending triangles show that the market is in control of the sellers. Therefore, the pattern usually shifts lower and can break through the level of support. You are likely to see the formation of successive lower peaks, signaling that the trend is likely to continue.

Descending triangles are formed by a horizontal support line and a resistance line that slopes downwards. The trend line will eventually break through the horizontal support line, and there will be a continuation of the downtrend.

10. Symmetrical Triangle

A symmetrical triangle represents a chart pattern where two converging trend lines connecting a series of sequential peaks and troughs. A new trend will be created when price breaks one of the trendlines. Usually, price breaks in the direction of the main trend. 

Unlike the other two triangle chart patterns, this one does not represent any particular market. It can be either bearish or bullish. It generally signals the continuation of a trend. The market will likely continue in the same direction, and the trends are unlikely to see a reversal.

While this chart pattern signals the continuation of a trend, if the market has been indecisive before a triangle pattern is formed, the market could go in either direction. This is why symmetrical triangles are seen as bilateral patterns; that is, they are useful when the market is volatile, with no clear indication regarding the movement of an asset’s price.

Chart patterns and price levels

To trade chart patterns, traders need to recognize chart patterns, define important price levels, and do time impact analysis before trade execution. Traders can create trades after several triggers are presented.

One shoe does not fit all. Similarly, there is no ideal or best chart pattern. Every chart pattern follows or highlights a trend, but how they do it and what precise value they give differs. These charts are viral in candlestick trading as it is easier to see past openings and closings of the market through them.

Every chart pattern has a USP, with some being more suitable when the market is volatile while others when there the market is indecisive. There are different patterns for both bullish and bearish markets as well.

While there might not be one universal ‘best’ chart pattern, there is one for you. Depending on the market in which you are trading, there is one ideal chart pattern for you. It is straightforward to go along with a wrong or a chart that is incompetent for your market. This article will help you in finding your perfect match. This will allow you to maximize your profits.

As these charts use support and resistance levels as their fundamentals, it is important to know what these levels are and how they facilitate trading.

• The level at which the price of an asset stops falling only to bounce back is called support.
• The level at which the price of an asset stops rising before going back down is called resistance.

Support and resistance levels represent a balance between demand and supply (or buyers and sellers). When demand overpowers supply, the prices will rise. This is because the sellers are in control. There are fewer sellers and more buyers, which means that availability is less, and the one that pays more will get. Similarly, when there is more supply than demand, prices will fall as there is a surplus of a commodity and not enough buyers in the market.

In both situations, there will come the point when prices stop rising or falling. For example, let’s assume that an asset’s price is rising as there are more buyers than suppliers. This will allow the prices to move up vertically. However, this rise will come to an end when, after a particular price, the buyers will be unwilling to pay more. They will rather close the position than to pay a hiked price.

This will create resistance. The price will decline and try to move towards the support level. This happens because supply will increase as more buyers close their positions. Once the prices have fallen to buyers’ preference, they will start buying again and open more positions. There will be the creation of a support level at this position as demand and supply try to reach an equilibrium.

If the buying continues, the price will rise again towards resistance because demand is more than supply again. The price will fall again when buyers close positions again. This back and forth remains in the trading market.

Different Types of Trading Chart Patterns

Three types of chart patterns can be categorized into the following classes:

• Continuation patterns tell that the current trend is likely to continue.
• Reversal patterns signal that an ongoing trend has the possibility of changing the direction.
• Bilateral patterns tell traders that the market has become volatile, and the prices can move in either direction.

Opening a position with CFDs will be the best choice with all of the above chart patterns. This is because CFDs are versatile. Traders can go short and long with CFDs as they allow them to speculate on both falling and rising markets. You can opt to go short when there is a bearish reversal or go long when there is a bullish reversal. You have the liberty to hold either position, depending on the chart pattern.

What the chart patterns show is not set in stone. These are called indicators, which means that they only indicate the direction in which the market moves. If you are using them for technical analysis, do keep in mind that chart patterns cannot guarantee anything. It would help if you used them with caution.

Do chart patterns work?

Chart patterns work based on trading community experience,  scientific research papers, trading literature, and personal experience. Many companies created pattern recognition software to analyze chart patterns and made statistically significant proof that bullish and bearish chart patterns can be used in price prediction.

Chart patterns are great for technical analysis. The charts explained above can help you understand how and why the prices of assets behave or move in a particular way. As chart patterns can clearly define the level of support and resistance, it becomes easier for traders, even the new opens, to decide whether they would want to open a long or a short position. As you can see, if the trend is reversing, you can even close a position. Like with other aspects of training, understanding chart patterns can also take some time but incorporating them in your trading strategy will be rewarding.

Some traders base their trading strategies on fundamental analysis, some use technical analysis while others use a mixture of both. Technical analysis is more famous among stock market traders. They use a number of technical indicators and tools, which they add to their daily charts, to analyze market trends and price movements. While tools and indicators are great, trading strategies cannot be based on these alone. A more comprehensive way of technical analysis is the use of a chart like the naked chart. Many indicators deem this as the ultimate alternative of using a number of tools and indicators. Let’s see how a trading chart can help you.

Naked charts represent simple trading charts without indicators. Naked trading, or “indicator free” trading is simply a trading technique without technical indicators where traders use only candlesticks and price levels as trading triggers.

All You Need to Know About Naked Chart Trading

Unlike the practice of adding indicators to your daily trading charts, the naked chart will allow you to trade every day without focusing on any indicator. Naked Chart Trading is related to Price Action Trading as it focuses on real-time price trends than anything else. Price action is the movement of a security’s price plotted over time. Plain candlestick charts are used along with singular patterns such as pin bars. 

This might sound simple but this is exactly what the experts advise. Traders often get overwhelmed by a number of indicators. In order to not miss anything, they keep adding these indicators to their charts and create clutter. Trading can be done efficiently when you have clear charts and your mind is not running in different directions. This is exactly what a naked chart makes it possible. Trading in itself can be taxing and seeing a number of lines running all over your screen will only increase your psychological burden. Naked charts are simple and proficiently tell you about price movements.

Data that concentrates mainly on price action is anyway considered superior. If you are still confused, let us clear this up for you. Indicators are nothing but derivatives of these price movements or actions. Experts often label them as lagging because they do not provide complete and accurate information. Yes, they do help traders in identifying possible reversals and trends but to form a rewarding trading strategy, you should consider naked charts or price action if you really want to use an indicator.

How to Trade Without Using Indicators

Many traders rely heavily on indicators and end up making a mess. Trading without indicators is possible and highly effective. All you need to do is to understand the market structure and studying its momentum. This is how you can do it:

1. Identify the Market Direction:

The market structure is made of swing-highs and lows. In order to understand the market direction, a trader must know about these highs and lows. Their order of occurrence creates signals that allow you to determine the direction of the market. You can identify whether the market is bearish or bullish using these highs and lows. You will be able to capture new trends as well. 

Identifying swings requires practice and knowledge. There are highs and lows which are further segregated into four parts. Highs can be higher highs or higher lows. Similarly, lows can be higher lows or lower lows. This is how you identify trend using these four terms:

• If the higher highs are persistent and are followed by higher lows, you have an uptrend.
• If the lowers lows are persistent and are followed by lower highs, you have a downtrend.
• There is a third option with no set pattern of swings and this is called a consolidating trend.

You can easily find out a trending market by analyzing these charts. Don’t beat yourself trying to make sense out of those complicated indicators. You will get a buy signal when the higher highs and lows are continuing as it depicts a bullish trend. You will get a sell signal when the lowers highs and lows are continuing as it depicts a bearish trend.

Along with clear highs and lows, you can also see neutral or ranging market conditions. These are not desirable conditions. It happens when the price levels show both highs and lows simultaneously at the same level as the prices are stuck between two levels. In this condition, swing points are identified in the same area. It is very difficult to spot the chances of reversal.

2. Spot Reversals Using a Naked Chart

Resistance and support levels can help traders in identifying possible reversals. These can be spotted using charts. Trend lines and horizontal levels are also useful when it comes to spotting price reversals. Some traders and investors also resort to Fibonacci levels for the same. All of the above can create two possible scenarios. First, prices will move continuously along the major support levels and then make a U-turn. The other possibility is that prices retrace along with the old support levels. They use a new resistance level to make the reversal possible.

If you are able to identify important levels of support and resistance along with uptrends, you can easily spot reversals.

3. Catching Trade Signals

Charts are highly reliable when it comes to generating buy and sell signals. Candlestick patterns highlight reversals in naked charts.

Naked Chart Trading VS Indicators

Traders fear losing information and they keep adding indicators to their charts to avoid that. This is a big mistake as it will lead you nowhere. You are in a more advantageous position if you are relying on trading charts. By developing skills to read charts, you can have a more practical approach rather than relying on intuition, which is what trading via indicators is about. However, we cannot neglect the fact that indicators are there for a reason and can be useful when used rightly. This is how naked charts are different than indicators:

1. Naked charts are more reliable. Unlike indicators which are often lagging as they show past price actions, naked charts show current price actions. You will be able to make quick decisions using charts.
2. It is okay to use a couple of indicators but that is not usually the case. Traders go overboard with adding indicators to their charts, thus, making everything messy and confusing. From old trend lines to cloud patterns, everything will be visible on your chart that can overwhelm you. Instead, use a clean naked chart and use it to spot current trends and reversals.
3. A naked chart doesn’t just offer current information. Charts are more comprehensive than indicators as you can have access to historical data that you can employ to study how the market moves and make an informed decision.
4. Indicators can give crystal-clear signals. They are not subjective and it is one of their biggest advantages. New traders will find it easier to understand indicators than charts.
5. Price actions create obvious signals which means that more traders will be using the same strategy. This herd mentality can make things less profitable.
6. Sometimes, all you will get is a blank chart which will lead you nowhere. Indicators can provide some reference points on these charts that can help you in making decisions. This can save you time.

We can conclude that in the battle of naked charts vs indicators, there is no clear winner. It is all about the individual strategy of traders. Work with the one that makes decision making easier for you.