Best Candlestick Patterns for Day Trading You Need to Master

There are several types of charts that you can use in the financial market. What is not known well by new traders is on the importance of these charts.

A good example of this is on the chart below.

line graph and candlestick chart

The chart shows a line graph of the USD/JPY pair and a candlestick chart of the EUR/USD pair. These two charts are necessary!

The line chart is a good one to show the trend of the pair. However, it does not tell traders what to do. As such, it is not a useful chart to use when trading.

This is unlike candlesticks, which are the most popular charts. Other types of charts you will encounter in the market are bar charts, step lines, histograms, circles, renko, and columns among others.

What is a Candlestick Chart?

Japanese candlestick patterns are some of the oldest types of charts. These charts were discovered hundreds of years ago in Japan, where they were used in the rice market. Today, these charts are the default when you open most trading software (Ppro8 too!).

They are popular because they give more indications to traders.

Parts of a Candlestick

In the first chart above, you can see that a line chart is pretty basic. It is just a line. Unlike a line chart, a candlestick has more parts that help traders know when to buy and when to sell.

This is shown in the image below.

explanation of a candlestick
Candlestick example: Bearish (Black) and Bullish (White)

The two images shows a bullish and a bearish candlestick. The black one is bearish candle while the one on the right is the bullish candle. The black and white parts of the candles are known as the body while the two lines are known as shadows.

The shadow and body of a candlestick chart is so important. For example, in a hammer candlestick, a long shadow means that the reversal is more convincing. At times, you will identify a candlestick with just a body and without shadows. This is known as marubozu.

Therefore, in a daily chart, a single candle usually represents a day. In a hourly chart, a single chart usually represents a hour. Candlestick patterns in day trading usually work with minute chart.

Benefits of using Candlestick Charts

There are many benefits of using candlesticks patterns when trading. Some of these benefits:

  • They tell us more – Unlike other types of charts, candlesticks tell us more about the financial asset. For example, they tell us when it opened and when it closed.
  • More accuracy – Candlestick patterns are usually relatively accurate in predicting the future price of an asset.
  • Used by most traders – These charts are used by most traders in the market. This means you are in good company.
  • Reversals and extensions – Candlesticks are excellent in helping you identify reversals and extensions.

Candlesticks vs bar charts

A common question is on the difference between candlesticks and bar charts. The two charts have a close resemblance but they have a major difference.

Bar chart does not have a body as you can see below. As such, it is relatively difficult to trade using a bar chart. The chart below shows how a bar chart looks like.

How to identify candlestick patterns

In the next section, We will explain some of the most popular candlestick patterns. Before that, it is important for you to know how to identify candlestick patterns.

First, always start your analysis by doing a multi-timeframe study. This is where you look at three timeframes and learn about each of them individually.

The benefit of doing a multi-timeframe analysis is that you will find patterns across all charts. For example, you can find a hammer pattern in a daily chart and a bullish engulfing in the hourly chart.

Second, if you are new to these candlestick patterns, a simple way is to use a candlestick cheat sheet that lists all of them. A good example of such a cheat sheet is shown below.

Finally, you can use an automated method to find candlestick patterns.

TradingView has an excellent tool that does that. Just open your chart, go to technicals, and then candlestick patterns as shown below. You can then select all candlestick patterns and the tool will overlay them on the chart.

What do candlestick patterns tell you?

Candlestick patterns can tell you a lot of information. The most basic ones are reversals and continuations. Some candlestick patterns like hammer and doji tells you that the existing trend is ending and a new one is about to form.

Second, the size of a candlestick can tell you the strength of the signal. For example, a hammer with a long lower shadow means that the reversal will be much strong.

Third, the pattern can tell you where to place your pending orders. For example, with a bullish engulfing, it makes sense to set a buy-stop above the upper shadow and a sell-stop at the lower shadow.

Fourth, it can tell you the support and resistance lines. These are important lines that you always need to know when opening and closing

Popular Candlestick Patterns

A good way to use candlesticks is to use the popular patterns. There are many patterns that have been identified that help to show reversals and new patterns.

Some of the common types of reversal candlestick patterns are:

among others. Other patterns are morning and evening star, shooting star, and Dojis.

Example of Candlestick Pattern at work

As you see, there are so many candlestick patterns that you can use in the market. In this article, we will look at just one and see how to use it when doing analysis.

When you look at the EUR/JPY pair shown below, there are several candlestick patterns that you can see.

A good one is the one we have labelled a bullish engulfing.

bullish engulfing pattern
Example of bullish engulfing patterns

To spot a bullish engulfing pattern, you need to first identify when a chart is moving downward trend.

In this, you need to spot a chart with several consecutive bearish bars (in this case, we identified a chart with several red bars). The candlestick pattern is established when a long bearish candle is followed and a smaller bullish candle.

This candle must be completely engulfed by the bearish candle. When this happens, it is usually an indication that a new upward trend is starting.

Summary

We think this is pretty clear: anyone who wants to day trade needs to know and master candlestick charts.

You cannot profitably trade with candlestick-based patterns and indicators without knowing first what a longer shadow or smaller body means.

Nor is it necessary to master all the candlestick patterns (there are about 50 different ones); if you know how to use the ones we have listed, you will have all the tools you need to become an excellent trader.

External useful resources

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