Many traders will certainly already have read about the possibilities of reading candlesticks. In this article, we want to provide you with important background knowledge that is often forgotten in educational articles on candlesticks.
I would like to explain the whole thing using a classic example in the DAX, but it can also be applied to crypto, commodities and forex. A little later in the article, we will explain the most common candles and what you can do with them. The classic DAX has a daily trading time of 9 am to 5:30 pm, which means that the daily candle starts at 9 am and ends at 5:30 pm. As you will see in the article, it is possible to interpret possible price movements based on the different appearances of the closed candle. Beginners in particular are often unaware that there is both pre-market and post-market trading. Advanced traders, on the other hand, often do not know that the candle image can also depend on the broker's server time (time zone) if they themselves trade from a different time zone. Trading interruptions, as in the Nikkei225, can also distort the chart.
Example: Different daily candles in the Xetra-DAX and derivatives on the DAX
Xetra DAX
Trading hours: The Xetra DAX is traded on the German Stock Exchange, which is usually open from 9:00 a.m. to 5:30 p.m. CET. This means that the daily candle of the Xetra DAX captures all price movements within this time window.
Candlestick image: The daily candlestick on the Xetra DAX will show a complete picture of price movements during the official trading hours, with an opening price at 9:00 am and a closing price at 5:30 pm CET.
Derivatives on the DAX
Trading hours: Derivatives, such as futures or options on the DAX, can be traded on other platforms such as Eurex, where trading hours differ from those of Xetra. For example, Eurex is open from 8:00 to 22:00 CET.
Candlestick image: The daily candlestick for a DAX derivative will therefore not only cover the trading hours of Xetra, but also the pre- and post-trading activities. This means that the candlestick may show greater volatility and different highs and lows compared to the Xetra DAX candlestick.
By taking these aspects into account, you can ensure that your technical analysis is more accurate and you understand the nuances that arise from different trading times and server settings. This is crucial for effective use of candlestick patterns in your trading strategy.
Let's take a closer look at the basics of candles:
Structure of the candlesMultitimeframe View
Doji candles are known for their particular shape, where the opening and closing prices are almost identical, indicating indecision in the market. However, there are different types of doji candles, each of which has its own meaning and signals different market conditions.
Doji Overview
1.Standard Doji
The classic Doji has an almost non-existent body, with wicks on both sides that are approximately the same length. Market interpretation: This indicates a balance of power between buyers and sellers and can signal a reversal in the current trend, especially if it occurs after a strong move.
2. Long-Legged Doji
This Long Leg Doji is characterized by long wicks both above and below, indicating great uncertainty and volatility. Market Interpretation: The Long-Legged Doji indicates that both buyers and sellers were active during the trading period and there was significant price movement, but the market closed close to the opening price.
3. Dragonfly Doji
The Dragonfly Doji has a long lower wick and no upper wick, with the open and close at the upper end of the trading range. Market interpretation: This pattern often occurs near lows and can signal a possible reversal to the upside, as it shows that buyers have come back and pushed the price back to the opening level.
4. Gravestone Doji
The opposite of the Dragonfly Doji, the Gravestone Doji has a long upper wick and no lower wick. The opening and closing prices are at the lower end of the trading range.
The opposite of the Dragonfly Doji, the Gravestone Doji has a long upper wick and no lower wick. The opening and closing prices are at the lower end of the trading range.
The opposite of the Dragonfly Doji, the Gravestone Doji has a long upper wick and no lower wick. The opening and closing prices are at the lower end of the trading range.
Market interpretation: This pattern is often seen as a signal of an impending downward movement, especially when it occurs at the end of an upward trend. It indicates that the buyers have slowed down during the session and the sellers have pushed the price back to the opening level.
5. Four-Price Doji
In this rare form of Doji, the opening, closing, high and low prices are the same.Market interpretation: A four-price doji indicates extreme market indecision. It is rare, but can be an indicator of weak trading activity and low volume.
6. Abandoned Baby Bullish
A Doji that is completely surrounded by candles on both sides, with a gap between Doji and the surrounding candles.Market interpretation: This rare and strong reversal pattern indicates a potential bullish turnaround after a downtrend.
7. Abandoned Baby Bearish
Similar to the Abandoned Baby Bullish, but at the end of an uptrend, with a Doji surrounded by gaps on either side. Market interpretation: It signals a possible bearish reversal.
8. Tri Star
The Tri-Star pattern is a rare candlestick formation that consists of three Doji candles. This formation appears as a series of three consecutive Dojis that appear as either perfect or near-perfect Dojis, with the wicks and bodies being very small. The candles show remarkable stability in the opening and closing price over three trading periods.
The Tri-Star formation can appear in two variants: as a bullish or bearish pattern, depending on whether it appears at the end of a downtrend or an uptrend.
Bullish Tri-Star: Typically occurs at the end of a downtrend.
Bearish Tri-Star: Usually appears at the end of an uptrend.
Market interpretation: The Tri-Star pattern is seen as a potential indicator of an imminent trend reversal. Due to its rarity, it often attracts special attention. The Tri-Star formation reflects a clear uncertainty and indecision in the market. Over three periods, it shows that no significant price changes are taking place, indicating a stalemate between buyers and sellers. This can often be interpreted as a warning signal for traders that a change in the current market dynamics is imminent.
Look for a trend reversal: Doji patterns are particularly meaningful after a prolonged price move, as they can indicate a potential exhaustion of the trend.
Additional confirmation: It is important to look for additional signals before trading based on a doji. This can include technical indicators, further candlestick patterns or volume analysis.
Risk management: Doji alone do not provide a strong basis for trading. It is advisable to incorporate other methods of analysis and always set stop-loss orders to manage risk.
These different types of doji candles provide deep insights into market dynamics and can serve as a valuable tool in technical analysis. Each pattern should be considered in the context of the existing market trend and in combination with other technical analysis tools to optimize trading decisions.
9. Hammer
The hammer is a candlestick formation that occurs at the end of a downtrend. If is characterized by a small body at the upper end of the trading range and a long lower wick that is at least twice as long as the body. The upper wick is usually very small or non-existent. Market Interpretation: This candlestick signals a potential reversal or support. It shows that despite significant selling activity, buyers have returned to drive prices to near the top of the range, indicating increasing buying interest.
10. Hanging Man
The Hanging Man is similar in shape to the Hammer, but occurs at the end of an upward trend. It also has a very small body at the top and a long lower wick.Market interpretation: This pattern is seen as a warning signal for a possible price reversal. It indicates that, despite a prevailing upward trend, there was selling pressure, which temporarily lowered the price significantly before it closed again near the opening level.
11. Bullish Engulfing
A Bullish Engulfing Pattern consists of two candles. The first candle is short and falls into the existing downtrend, followed by a longer, upward sloping candle that completely encloses the body of the first candle. Market interpretation: This indicates a strong shift in momentum from sellers to buyers. It is often an indication of an imminent bullish reversal.
12. Bearish Engulfing
Market interpretation: This pattern indicates a strong shift in momentum from buyers to sellers and is often seen as a signal for an imminent bearish reversal.
13. Shooting Star
The Shooting Star is a candlestick that occurs at the end of an uptrend and shows a small lower body with a long upper wick. The body at the lower end of the trading range is very small, while the upper wick is prominent. Market interpretation: Similar to the Hanging Man, the Shooting Star signals a possible downtrend. It shows that buyers lost momentum during the session and sellers pushed the price back near the opening level.
14. Piercing Line
The Piercing Line is a two-part bullish reversal pattern that occurs at the end of a downtrend. The first
The Piercing Line is a two-part bullish reversal pattern that occurs at the end of a downtrend. The first candle is a long black candle followed by a long white candle that opens below the lowest point of the first candle and closes above the middle of the body of the first candle.
Market Interpretation: This pattern indicates a reversal in the downtrend, with the second day showing that buyers have come back and pushed the market higher strongly.
15. Morning Star
The Morning Star is a three-part pattern that occurs at the end of a downtrend. It begins with a long black candle, followed by a small Doji or spinning top candle that has a gap down, and ends with a long white candle that cuts deep into the body of the first candle. Market interpretation: This pattern signals a bullish reversal. The second day shows indecision in the market, and the third day confirms the return of buyer power.
16. Evening Star
The Morning Star's counterpart, the Evening Star, is a three-part pattern that occurs at the end of an uptrend. It begins with a long white candle, followed by a small Doji or spinning top candle that has a gap up, and ends with a long black candle that cuts deep into the body of the first candle. Market interpretation: This pattern signals a bearish reversal. The second day indicates decreasing buyer activity and growing uncertainty, while the third day confirms the takeover by sellers and the beginning of a possible downtrend.
17. Three White Soldiers
This pattern consists of three consecutive long rising candles with closing prices higher than the previous day and small wicks. Market Interpretation: The Three White Soldiers signal a strong bullish reversal, especially after a prolonged downtrend, as they indicate continued buying pressure.
18. Three Black Crows
The counterpart to the Three Withe Soldiers, this pattern consists of three consecutive long black candles, each closing lower than the previous day, with small wicks. Market interpretation: The Three Black Crows indicate a strong bearish reversal and show that sellers dominate the market.
19. Bullish Harami
A small rising body that is completely enclosed by a previous large falling body. Market interpretation: A bullish harami often occurs after a downtrend and may indicate an imminent bullish reversal as selling momentum wanes.
20. Bearish Harami
A small falling body that is completely enclosed by a preceding large rising body. Market interpretation: Similar to the Bullish Harami, but signaling a potential bearish reversal after an uptrend.
21. Marubozu
Marubozu
Bullish Marubozu: A completely white or green Marubozu candle indicates strong upward pressure. The opening price was the lowest of the period and the closing price was the highest, showing that buyers controlled the market from the beginning to the end of the session.
Bearish Marubozu: A completely black or red Marubozu candle indicates strong downward pressure. Here, the opening price was the highest and the closing price was the lowest of the period, indicating that sellers were in control for the entire duration.
In an uptrend, a Bullish Marubozu can confirm the continuation of the trend and indicate that the upward momentum is still strong.
In a downtrend, a Bearish Marubozu signals that the downtrend is likely to continue and that selling momentum remains strong.
The volume that occurs during the formation of a Marubozu candle is a critical indicator of the strength of the corresponding signal. High volume during a Marubozu formation increases the significance of the signal and the likelihood of a sustained move in the indicated direction.
22. Spinning Top
A candlestick with a small body and long wicks at the top and bottom, indicating an indecisive market situation.
In an uptrend, the appearance of a spinning top suggests that despite continued buying, sellers are beginning to offer significant resistance, which could lead to a possible weakening of the uptrend.
In a downtrend, a spinning top could indicate that the selling force is weakening and buyers are beginning to hold their ground, indicating a possible stabilization or reversal of the trend.
Another important aspect of the spinning top is the trading volume during its formation. High volume can reinforce the significance of the pattern as a sign of a potential trend reversal, while low volume could indicate that the indecision is less significant.
23. Tweezer Top
Two or more consecutive candles with almost identical high price points. Market interpretation: Tweezer tops can signal an imminent bearish reversal, especially after a prolonged uptrend.
24. Tweezer Bottom
Market interpretation: This pattern indicates a possible bullish reversal, especially after a downtrend.
25. On Neck Line
A small white candlestick following a long black candlestick, with the closing price of the white candlestick close to the lowest point of the black candlestick. Market interpretation: This pattern indicates a continuation of the current downtrend.
26. In Neck Line
Similar to the On Neck Line, but the closing price of the small white candle closes close to, but slightly higher than, the lowest point of the previous black candle.Market interpretation: It also signals a possible continuation of the downtrend.
27. Upside Gap Two Crows
Market interpretation: A bearish reversal pattern indicating a possible reversal after an uptrend.
28. Advance Block
Three consecutive long white candles with shortening bodies and longer upper wicks.Market interpretation: This pattern indicates a weakening of the current uptrend and may signal an imminent bearish reversal.
29. Homing Pigeon:
Two black candles in a downtrend, with the second candle closing within the body of the first candle.Market interpretation: A bullish reversal pattern indicating a possible recovery.
30. Descending Hawk
31. Matching Low
Two consecutive black candles, where the second candle reaches the same or almost the same closing price as the first. Market interpretation: A bullish reversal pattern showing that sellers were unable to push prices further, which could lead to a potential stabilization or reversal.
32. Unique Three River Bottom
A bullish reversal pattern consisting of three candles, within the second candle having a lower low than the first and the third candle's wick reaching into the middle of the first. Market interpretation: It signals a bottoming out and a possible reversal from a downtrend.
33. Ladder Bottom
Four candles in a downtrend, with the last three showing progressively higher lows and higher highs.Market interpretation: A bullish reversal pattern indicating stabilization and a possible trend reversal.
34. Upside Tasuki Gap
A gap between a long white candlestick and a subsequent white candlestick, followed by a black candlestick that penetrates the body of the previous candlestick but does not close the gap. Interpretation: A continuation pattern in a bullish market.
35. Downside Tasuki Gap
Similar to the Upside Tasuki Gap, but in a downtrend and with black candles. Interpretation: A continuation pattern in a bearish market.
36. Separating Lines
Two long candles to different colors that open at the same price.Market interpretation: Depending on the color and position, it can signal a trend continuation or a reversal.
37. Stalled Pattern
Three consecutive long white candles, each with a higher closing price, with the third candle having a smaller body. Interpretation: A sign of decreasing upward pressure and possible trend reversal.
38. Bullish Stick Sandwich
Two black candles enclosing a white candle. Market interpretation: A bullish reversal pattern indicating an imminent trend reversal.
39. Kicking
Market interpretation: A very strong reversal signal.
40. Breakaway
Four candles starting with a gap, followed by three candles in the direction of the trend, ending with a long candle that goes against the trend. Market interpretation: A reversal pattern that signals the start of a new trend.
41. Concealing Baby Swallow
Four black candles with the first two forming a Marubozo and the last two a rare Harami constellation, within a downtrend.Market interpretation: A strong bullish reversal signal.
41. Three Stars in the South
Three consecutive black candles, watch with a smaller body than the previous one, in a downtrend. Volume is rather unimportant in this pattern. Market interpretation: A bullish reversal pattern indicating a trend reversal.
42. Three Line Strike
Three consecutive rising candles followed by a long falling candle that offsets the gains of all three rising candles. Market interpretation: A bullish reversal pattern in the previous falling trend, often signaling the end of a downtrend. Often very impulsive and a classic fake out.
Thank you for this educational gem. It's a lot of work!
And small request regarding structuring blocks: we've updated the typography in the editor. It will be better to use headers instead of quotes, as in the future, a table of contents will be generated in the articles using headers.
