The Top Five Candlestick Chart Patterns Every Trader Needs to Learn

Candle patterns, for all intents and purposes, are merely reactions of traders at a particular time in the marketplace. The fact that human beings often react en masse to situations allows candlestick chart analysis to work. Candles also combine well with other tools of technical analysis such as support and resistance, moving average, and indicators such, stochastics, RSI, ADX and MACD to name but a few.

There are many candlestick patterns but only a few are actually worth knowing. Here are 10 candlestick patterns worth looking for. Remember that these patterns are only useful when you understand what is happening in each pattern.

1. Continuation Candlestick Patterns – lead to a continuation of the existing trend. They can be among the most powerful of all technical patterns because they usually lead to spectacular and very low risk trading opportunities.

Rising Three Method – The Rising Method consists of two strong bullish candles bracketing 3 or 4 small declining black candlesticks. The final white line forms a new closing high. The pattern is definitely bullish. The bull signal is given after the second bullsih candle closes above the first.
Falling Three Method – The bearish Falling Method consists of two long bearish candles bracketing 3 or 4 small ascending white candlesticks, the second black line forming a new closing low. The bearish is given after the second bearish candle closes below the first
Flag/Pennants – are short-term continuation patterns that mark a small consolidation before the previous move resumes. These patterns are usually preceded by a sharp advance or decline with heavy volume, and mark a mid-point of the move.
Rectangles – is a continuation pattern that forms as a trading range during a pause in the trend. The pattern is easily identifiable by two comparable highs and two comparable lows. The highs and lows can be connected to form two parallel lines that make up the top and bottom of a rectangle. Rectangles are sometimes referred to as trading ranges, consolidation zones or congestion areas

2. Kickers – A “kicker” is sometimes referred to as the most powerful candlestick pattern of all.

Morning Star – The Morning Star pattern signals a bullish reversal after a down-trend. The first candlestick has a long black body. The second candlestick gaps down from the first (the bodies display a gap, but the shadows may still overlap) and is more bullish if hollow. The next candlestick has a long white body which closes in the top half of the body of the first candlestick.
Evening Star – The Evening Star pattern is opposite to Morning Star and is a reversal signal at the end of an up-trend. The pattern is more bearish if the second candlestick is filled rather than hollow.

3. Reversal Chart Patterns – Although the fundamental and technical factors that lead to reversals may be varied, every stock price reversal is ultimately the result of one of two themes: distribution or accumulation.

Head and Shoulders Pattern – A Head and Shoulders reversal pattern forms after an uptrend, and its completion marks a trend reversal. The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows of each peak can be connected to form support, or a neckline
Inverted Head and Shoulders Pattern – forms after a downtrend, and its completion marks a change in trend. The pattern contains three successive troughs with the middle trough (head) being the deepest and the two outside troughs (shoulders) being shallower. Ideally, the two shoulders would be equal in height and width. The reaction highs in the middle of the pattern can be connected to form resistance, or a neckline.
Double Tops – The double top is a major reversal pattern that forms after an extended uptrend. As its name implies, the pattern is made up of two consecutive peaks that are roughly equal, with a moderate trough in-between.
Double Bottoms – The double bottom is a major reversal pattern that forms after an extended downtrend. As its name implies, the pattern is made up of two consecutive troughs that are roughly equal, with a moderate peak in-between.

4. Wedge & Triangle Patterns

Rising Wedge – The rising wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. In contrast to symmetrical triangles, which have no definitive slope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias.
Falling Wedge – The falling wedge is a bullish pattern that begins wide at the top and contracts as prices move lower. This price action forms a cone that slopes down as the reaction highs and reaction lows converge. In contrast to symmetrical triangles, which have no definitive slope and no bias, falling wedges definitely slope down and have a bullish bias. However, this bullish bias cannot be realized until a resistance breakout.
Symmetrical Triangle – usually forms during a trend as a continuation pattern. The pattern contains at least two lower highs and two higher lows. When these points are connected, the lines converge as they are extended and the symmetrical triangle takes shape. You could also think of it as a contracting wedge, wide at the beginning and narrowing over time.
Ascending Triangle – The ascending triangle is a bullish formation that usually forms during an uptrend as a continuation pattern. There are instances when ascending triangles form as reversal patterns at the end of a downtrend, but they are typically continuation patterns. Regardless of where they form, ascending triangles are bullish patterns that indicate accumulation.
Descending Triangle – The descending triangle is a bearish formation that usually forms during a downtrend as a continuation pattern. There are instances when descending triangles form as reversal patterns at the end of an uptrend, but they are typically continuation patterns. Regardless of where they form, descending triangles are bearish patterns that indicate distribution.

5. Individual Candle Patterns

Bullish – Engulfing and Hammer
Bearish – Engulfing and Shooting Star

To see video examples of each of these candle patterns, check out Accendo Traders 30 Day Stock Market Challenge