Best Candlestick Patterns in Trading [Most-Used Patterns in 2023]

Have you ever wondered how traders decide which assets to purchase or sell? You may learn much about market sentiment and future price movements by analyzing candlestick patterns. 

Some of the most useful candlestick patterns for analyzing and predicting market movements are discussed in this Article. 

How do you distinguish between a Doji, Hammer, and Engulfing pattern? Follow along as we enlighten you with the answers to these and other questions, enabling you to make better trading choices.

3 Main Types of Candlestick Patterns in Trading

Candlestick patterns fall into three main categories: 

1. 1. Continuation patterns: Signal the likelihood of a prevailing trend continuing

1. 1. Bullish reversal pattern: Indicating a potential shift from a bearish to a bullish trend

1. 1. Bearish reversal patterns: Suggesting the opposite pattern for a bullish reversal pattern. 

Mastering these patterns and understanding when and how to apply them is essential for anyone seeking success in financial markets. 

Let’s delve into all these patterns:

Bullish Reversal Candlestick Patterns

Bullish reversal candlestick patterns are a group of chart formations that often signal a potential trend reversal from bearish to bullish in financial markets. 

These patterns provide traders with valuable insights into potential buying opportunities. While the effectiveness of specific patterns can vary, some popular ones include the Hammer, Bullish Engulfing, and Morning Star. 

Here are the most useful candlestick patterns in trading:

Hammer Patterns

It typically appears at the end of a downtrend and suggests a potential shift in market sentiment from bearish to bullish.

Candlestick Pattern	Hammer
Pattern Type	Reversal
Formation Position	Downtrend Bottom
Real Body Position	Small, near the top
Lower Shadow Length	More than twice the real body
Upper Shadow	No or very little
Success Rate	60%
Average Profit per Trade	1.12%
Winning Trades	60%
Losing Trades	40%
Max Drawdown	-29.6%
Volatility	Lower than buy-and-hold strategy
Timeframe	Ten days for selling after the pattern

Pattern Characteristics and Statistics

• • Appearance: The Hammer pattern has a distinct look, featuring a small real body near the top of the candlestick with a long lower shadow, resembling a hammer’s handle.

• • Bullish Reversal: This pattern typically emerges at the end of a downtrend, indicating a potential shift from bearish to bullish sentiment.

• • Success Rate: Historical data suggests that the Hammer pattern has a success rate of around 65%. However, this can vary based on market conditions, timeframes, and other factors.

• • Confirmation: Traders often look for confirmation of a bullish trend reversal after observing a Hammer. This confirmation can come from subsequent candlestick patterns or other technical indicators.

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Inverted Hammer Patterns

The Inverted Hammer is a candlestick pattern that resembles the standard Hammer pattern but with a longer upper shadow and a very short lower wick. 

This pattern signifies a shift from selling pressure to buying pressure in the market. It suggests that, initially, there was strong buying interest, leading to higher prices. 

Pattern Characteristics and Statistics

• • Appearance: The Inverted Hammer has a small real body near the bottom of the candlestick, with a significantly longer upper shadow and a very short lower shadow.

• • Success Rate: Historical data from 1,702 trades over 588 years reveals the Inverted Hammer’s strong bullish nature, with an average profit of 1.12% per long trade and a loss of 1.12% per short trade.

• • Winning Trades: The Inverted Hammer pattern shows a 60% success rate, with 40% of trades resulting in losses, notably higher than the average performance of 55.8% across all candlestick types.

• • Maximum Drawdown: The maximum drawdown for the Inverted Hammer pattern is -29.6%, significantly less volatile than a buy-and-hold strategy.

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The Morning Star Pattern

Morning Star is a multi-candlestick pattern consisting of three distinct candles, often seen as a sign of hope during a bearish market trend. 

This pattern indicates a potential reversal from a downtrend to a bullish market. 

Candlestick Pattern	Morning Star
Pattern Type	Reversal
Formation Position	Downtrend Bottom
Number of Candles	3
Candle Types	1st: Bearish, 2nd: Doji, 3rd: Bullish
Overlapping	No overlap between 1st and 3rd candles
Success Rate	Variable, often reliable in downtrends
Suggested Action	Enter a long position after a following bullish candle
Stop-Loss Placement	At the low of the 2nd (Doji) candle

Pattern Characteristics and Statistics

• • Formation: The Morning Star is a three-candlestick pattern, with the first being a bearish candle, the second a Doji (indicating market indecision), and the third a bullish candle signaling a potential reversal.

• • Indication of Reversal: The first candle continues the downtrend, while the Doji in the middle suggests market uncertainty and a potential turning point. The third bullish candle signifies the resurgence of bullish sentiment and a reversal in the trend.

• • No Overlap: The “star” candle should not overlap with the real bodies of the first and third candles, typically displaying a gap between them.

• • Success Rate: Historical data shows that the Morning Star pattern is a reliable sign of a bullish reversal in the market. Its success rate can vary, but it often outperforms other patterns during downtrends.

• • Trading Strategy: Traders may consider entering a long position if the following day forms a bullish candle after the Morning Star pattern. A stop-loss can be placed at the low of the Doji candle, the second candle in the pattern.

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Bullish Engulfing Patterns

The Bullish Engulfing pattern is a multi-candlestick chart pattern signaling a bullish reversal after a downtrend. 

Candlestick Pattern	Bullish Engulfing
Pattern Type	Reversal
Formation Position	Downtrend Bottom
Number of Candles	2
Candle Types	1st: Bearish (Red), 2nd: Bullish (Green)
Success Rate	Approximately 50% to 80%
Average Gain	Approximately 3% to 10% on successful trades
Average Loss	Smaller, typically around 2% to 5% on failed signals
Suggested Action	Consider entering a long position after a Bullish Engulfing pattern
Market Context	Effectiveness can vary based on market conditions and timeframes

Pattern Characteristics and Statistics

• • Formation: It consists of two candles; the second candle completely engulfs the first. The first candle is bearish, indicating the continuation of the downtrend. However, The second candle is larger and bullish, opening lower than the first. 

• • Reversal Sign: The second candle, opening lower than the first, indicates early bearish sentiment. However, as the day progresses, buying pressure intensifies, resulting in a clear win for buyers and the reversal of the downtrend.

• • Success Rate: The Bullish Engulfing pattern typically has a success rate ranging from 50% to 80% in various market conditions.

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Piercing Pattern in Candlestick Charts

The Piercing Line, another two-candlestick pattern, often emerges at the bottom of a downtrend or during a pullback, suggesting anticipation of a bullish move. 

This pattern is characterized by a long red candle followed by a long green candle, with a substantial gap between the red candle’s closing price and the green candle’s opening price. 

The green candle’s close should cover at least half of the previous day’s red candlestick body, signifying strong buying pressure.

Candlestick Pattern	Piercing Pattern
Pattern Type	Reversal
Formation Position	Downtrend End
Number of Candles	2
Candle Types	1st: Bearish, 2nd: Bullish
Second Candle Gap	Gap down
Second Candle Close	Closes significantly above the first candle’s real body
Reversal Sign	Transition from bearish to bullish sentiment
Average Confirmation Time	2.3 candles
Average Invalidation Time	4.3 candles
Average Success Rate	Approximately 72.9%

Pattern Characteristics and Statistics

• • Formation: The Piercing Pattern is created by two candles – the first bearish, the second bullish.

• • Second Candle: The bullish candle opens with a gap down and closes more than 50% above the real body of the preceding bearish candle.

• • Piercing Line Gap: The Piercing Line features a substantial gap between the red candle’s closing price and the green candle’s opening price.

• • Success Rate: The average confirmation rate across all 4,120 markets is 72.9%. Traders often see confirmation of this pattern within a brief 2.3 candles after its development, and any possible invalidation tends to emerge within 4.3 candles after that.

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Three White Soldiers Patterns

This pattern comprises three consecutive long and bullish (or white) candles, typically with minimal shadows. 

Importantly, each candle opens and closes at progressively higher levels than the previous one. The Three White Soldiers pattern usually emerges after a downtrend, indicating a consistent and significant influx of buying pressure.

This three-day pattern provides a strong bullish signal, reflecting a clear shift from bearish to bullish sentiment in the market.

Candlestick Pattern	Three White Soldiers
Pattern Type	Reversal
Formation Position	Downtrend End
Number of Candles	3
Candle Types	Bullish (100%)
Shadow Length	Typically minimal
Reversal Sign	Transition from bearish to bullish sentiment
Success Rate	Approximately 80% to 90% (based on studies)
Market Context	A strong and reliable bullish reversal signal

Pattern Characteristics and Statistics

• • Formation: The Three White Soldiers pattern comprises three consecutive long and bullish (or white) candles.

• • Position: It typically appears after a downtrend, signaling a potential bullish reversal.

• • Candle Types: Each candle is bullish (or white) and opens and closes at progressively higher levels than the preceding one.

• • Shadow Length: The candles typically have minimal shadows.

• • Success Rate: Studies have indicated a success rate of approximately 80% to 90%, making it a strong and reliable bullish reversal signal.

• • Market Context: It often indicates a steady advance of buying pressure after a downtrend, hinting at a potential reversal.

Bearish Candlestick Reversal Patterns

The Bearish candlestick patterns, such as the Evening Star, Hanging Man, and Bearish Engulfing, serve as valuable indicators in technical analysis, offering insights into potential market downturns. 

Here are some of the most famous bearish reversal patterns:

The Evening Star Bearish Reversal Patterns

The Evening Star is composed of three distinctive candlesticks. The pattern typically emerges after an uptrend, signaling a potential shift in market sentiment from bullish to bearish. 

Candlestick Pattern	Evening Star
Pattern Type	Reversal
Formation Position	Uptrend Top
Number of Candles	3
Candle Types	1st: Bullish (100%), 2nd: Doji (0%), 3rd: Bearish (100%)
Overlapping	No overlap between 1st and 3rd candles
Success Rate	Approximately 60% to 80%
Average Loss	Variable, typically larger on failed signals
Strength of Pattern	Notable when the 3rd candle fully erases 1st candle’s gains
Suggested Action	Consider entering a short position after an Evening Star pattern
Market Context	Effectiveness can vary based on current market conditions

Pattern Characteristics and Statistics

• • Formation: This pattern consists of a long green (bullish) candle, followed by a short-bodied candle (often a Doji), and ultimately, a large red (bearish) candle that closes below the midpoint of the first green candle.

• • Reversal Sign: The first candle suggests the continuation of the uptrend, while the Doji reflects market uncertainty. The third bearish candle implies a resurgence of bearish sentiment and an impending trend reversal.

• • No Overlap: The second candle should not overlap with the real bodies of the first and third candles.

• • Success Rate: Historical data suggests the Evening Star pattern has a success rate varying from 60% to 80%, making it a reliable bearish reversal signal.

• • Bearish Strength: This pattern’s strength is especially notable when the third candle completely erases the gains of the first candle.

Bearish Engulfing Patterns in Trading

The Bearish Engulfing pattern is a multi-candlestick formation signaling a bearish reversal following an uptrend. 

Comprising two candles, it features the second candle completely engulfing the first, indicating a shift from bullish to bearish sentiment. 

Candlestick Pattern	Bearish Engulfing
Pattern Type	Reversal
Formation Position	Uptrend Top
Number of Candles	2
Candle Types	1st: Bullish (100%), 2nd: Bearish (100%)
Success Rate	Approximately 57%
Average Profit per Trade	0.62%
Winning Trades	57%
Losing Trades	43%
Max Drawdown	-39.7%
Volatility	Lower than buy-and-hold strategy
Average Winning Trade Gain	3.7% over ten days
Average Losing Trade Loss	-3.5% over ten days

Pattern Characteristics and Statistics

• • Formation: Bearish Engulfing is formed by two candlesticks. The first is a bullish candle, indicating the uptrend’s continuation and the second is a long bearish candle that fully engulfs the first.

• • Success Rate: Based on historical data and 4,096 trades across 568 years, the Bearish Engulfing pattern shows an average profit per trade of 0.62%. Going long on a Bearish Engulfing pattern can yield a 0.62% profit per trade if selling after ten days while short-selling can lead to a loss of -0.62% per trade. This indicates a strong bearish nature of the pattern.

• • Winning Trades: The Bearish Engulfing pattern boasts a 57% success rate, with 43% of trades incurring losses, surpassing the average performance of 55.8% across all candlestick patterns.

• • Maximum Drawdown: The pattern exhibits lower volatility than a buy-and-hold strategy, with a maximum drawdown of -39.7% compared to the stock’s drawdown of -59.3%.

• • Average Trade Gains: On average, winning trades yield 3.7% over ten days, while losing trades incur an average loss of -3.5%, providing a reasonable profit margin, especially with the 57% success rate.

Hanging Man Patterns in Trading

The Hanging Man is the bearish counterpart of the Hammer pattern. It indicates a significant sell-off during the day, with buyers momentarily pushing prices up but ultimately failing to maintain control. 

This pattern is characterized by a small real body located at the top of the candle, along with a long lower shadow at least twice the length of the body. 

Importantly, it usually lacks an upper shadow. The psychology behind this formation revolves around market dynamics where prices initially open, sellers push them lower, and buyers attempt to drive prices back up. 

Candlestick Pattern	Hanging Man
Pattern Type	Reversal
Formation Position	Uptrend End
Number of Candles	1
Real Body Position	Small, at the top
Lower Shadow Length	At least twice the length of the real body
Upper Shadow	Small or nonexistent
Success Rate	Approximately 50% to 70%
Suggested Action	Consider entering a bearish position when identified correctly
Market Context	Effectiveness can vary based on current market conditions

Pattern Characteristics and Statistics

• • Formation: Hanging Man is a single candlestick pattern.

• • Position: It usually forms at the end of an uptrend.

• • Shape: The pattern has a small real body at the top with a long lower shadow, typically lacking an upper shadow.

• • Success Rate: The Hanging Man is often viewed as a reliable bearish signal when identified correctly, with success rates ranging from 50% to 70%.

Dark Cloud Cover Pattern

The Dark Cloud Cover pattern is composed of two candles, with the first being bullish, indicating the continuation of the uptrend. 

The second candle is bearish, opening with a gap up but closing more than 50% below the real body of the previous bullish candle. 

One is a red candle that begins above the green body that came before it and ends below its median. This chart pattern is indicative of bears taking control of the market and pushing prices down. The possibility for a powerful downturn is frequently signaled by candles with short shadows.

Candlestick Pattern	Dark Cloud Cover
Pattern Type	Reversal
Formation Position	Uptrend End
Number of Candles	2
Candle Types	1st: Bullish, 2nd: Bearish
Second Candle Gap	Gap up
Second Candle Close	More than 50% below 1st candle’s real body
Reversal Sign	The transition from bullish to bearish sentiment
Success Rate	Approximately 60% (during uptrend reversal)
Pattern Ranking	22nd out of 103 candle patterns (after trend reversal)

Pattern Characteristics and Statistics

• • Formation: The Dark Cloud Cover pattern comprises bullish and bearish candles.

• • Position: It typically appears after an uptrend, signaling a potential bearish reversal.

• • Candle Types: The first candle is bullish, and the second is bearish.

• • Second Candle Gap: The second candle opens with a gap up and closes more than 50% below the previous bullish candle’s real body.

• • Successful Rate: Statistics indicate that it shows a reversal performance of approximately 60% of the time when the price transitions from an uptrend to a downtrend in a bull market.

• • Downtrend Expectation: The Dark Cloud Cover pattern often precedes a strong downtrend, particularly if the candle shadows are short.

Three Black Crows Patterns

The Three Black Crows pattern is a potent bearish reversal signal, particularly effective when it emerges after an uptrend. It consists of three consecutive long red candles with short or virtually non-existent wicks. 

Each candle opens at a similar price to the previous day but undergoes consistent selling pressure, resulting in lower closes. 

Candlestick Characteristic	Description
Pattern Type	Bearish Reversal
Candlestick Count	Three Consecutive Candles
Candlestick Color	Red or Black
Candlestick Shadows	Short or Non-Existent
Opening Price of Each Candle	Similar to Previous Day’s Closing Price
Closing Price Lower Than Opening	Yes
Success Rate	Approximately 80% (Dependent on Context)
Context Influence	High (Effectiveness Depends on Context)

Pattern Characteristics and Statistics

• • Formation: This pattern comprises three successive bearish candles.

• • Position: Typically, it appears after an uptrend, marking a potential shift to bearish sentiment.

• • Candle Types: All three candles are bearish, opening at the prior day’s closing price and closing lower.

• • Shadow Length: The candles tend to have minimal or negligible shadows.

• • Reversal Significance: It strongly suggests a shift from a bullish market to a bearish one.

• • Special Note: Its significance increases at higher price levels or after a mature uptrend, indicating the potential for declining prices.

• • Success Rate: The Three Black Crows candlestick pattern can strongly indicate an uptrend reversal, with an approximate 80% success rate, but its effectiveness is influenced by context and trading approach.

Top 2 Continuation Patterns

These patterns indicate that an existing trend, whether bullish or bearish, is likely to persist rather than reverse. Traders use these patterns to recognize periods of temporary consolidation within an ongoing trend, providing valuable insights for making informed trading decisions.

Here are two of the most famous continuation candlestick patterns:

Spinning Top Continuation Pattern

The Spinning Top continuation candlestick pattern features a short body neatly positioned between two equally lengthy wicks, symbolizing a market in indecision with little to no significant price change. 

Essentially, this pattern serves as a sign of temporary consolidation or a breather following a noteworthy uptrend or downtrend. 

While Spinning Tops may appear as neutral signals on their own, they hold significance as potential precursors to forthcoming market developments, indicating a waning control of the current market pressure.

Statistic	Value
Success Rate	Approximately 0.49%
Market Sentiment Shift	Approximately 55.9%

Pattern Characteristics and Statistics

• • Formation: The spinning top pattern consists of a candlestick with a short body and equally long shadows.

• • Position: It often appears after substantial price movements and is seen as a consolidation or market rest period.

• • Candle Types: Similar to the doji candlestick, the spinning top has a short body with shadows of equal length.

• • Shadow Length: The wicks or shadows are usually of equivalent length to the body.

• • Success Rate: Spinning tops have a success rate of approximately 0.49%.

• • Market Sentiment Shift: They suggest a potential shift in market sentiment in approximately 55.9% of cases.

Doji Candlestick Patterns

The Doji pattern is a price action pattern that reflects market indecision, formed when the opening and closing prices are nearly identical. 

In essence, it signifies a tug-of-war between bulls and bears, with neither side gaining control over prices. A typical Doji features a short to non-existent body, with wicks of varying length, often resembling a cross or plus sign.

Aspect	Description
Pattern Description	Neutral candlestick patterns with opening and closing prices nearly equal.
Success Rate	Typically exhibits a low success rate, about 0.51%, when viewed in isolation.
Market Sentiment Shift	Suggests a potential shift in market sentiment in approximately 55.6% of cases.
Usage	Often used in conjunction with other technical indicators and analysis.

Pattern Characteristics and Statistics

Formation: Doji patterns have near-equivalent opening and closing prices, creating a short-bodied candlestick with varying-length wicks, often resembling a cross or plus sign.

Position: They can occur at different points in a trend, indicating potential reversals or consolidation.

Candle Types: Doji candles have a tiny body with nearly identical open and close prices, while the length of their upper and lower shadows varies, reflecting market sentiment and volatility.

Success Rate: In isolation, Doji patterns typically show a low success rate (0.51%), but they are frequently used with other indicators due to their tendency to suggest shifts in market sentiment (about 55.6% of the time).

Last Words

We’ve explored some of the top candlestick patterns, a valuable tool in your trading arsenal. However, remember that trading is not just about patterns; it’s a journey of continuous learning and adaptation. 

Don’t forget the importance of risk management, emotional control, and staying informed about the broader market context. 

Trading is a skill that grows with experience, so keep practicing and refining your strategies. Embrace the process, stay patient, and, most importantly, trade with a plan. 

Here’s to your trading success and wise financial decisions!