Candlestick Chart Pattern Cheat Sheet

In the world of trading and technical analysis, candlestick charts are one of the most powerful tools at a trader’s disposal. They provide insights into market sentiment, momentum, and potential reversals. Understanding the various patterns formed by candlesticks can significantly enhance a trader's ability to make informed decisions. This cheat sheet provides an overview of essential candlestick patterns, their meanings, and how to interpret them effectively.

1. Bullish and Bearish Engulfing Patterns

• Bullish Engulfing: This occurs when a small bearish candle is followed by a larger bullish candle, engulfing the previous candle. It signals a potential reversal from bearish to bullish sentiment. Traders often look for this pattern at the end of a downtrend, indicating that buyers are gaining strength.
• Bearish Engulfing: Conversely, a bearish engulfing pattern occurs when a small bullish candle is followed by a larger bearish candle. This pattern suggests a reversal from bullish to bearish sentiment and is commonly found at the top of an uptrend.

2. Hammer and Hanging Man

• Hammer: This pattern forms when a candle has a small body at the top and a long lower shadow. It typically appears after a downtrend and indicates a potential reversal. The long shadow shows that buyers attempted to push the price higher, but sellers managed to pull it back down, yet the bullish pressure remains strong.
• Hanging Man: Similar in appearance to the hammer, the hanging man occurs after an uptrend and indicates potential bearish reversal. The long lower shadow signifies selling pressure that might lead to a decline.

3. Doji Candlestick
The doji candle has a very small body, indicating indecision in the market. It occurs when the opening and closing prices are nearly equal. The presence of a doji can signal potential reversals, especially when found at the top or bottom of trends. Traders look for confirmation from subsequent candles to validate the reversal.

4. Shooting Star and Inverted Hammer

• Shooting Star: This pattern forms after an uptrend and has a small body with a long upper shadow. It suggests that buyers pushed the price up but were unable to maintain it, leading to a potential reversal.
• Inverted Hammer: Appearing in a downtrend, the inverted hammer has a small body at the bottom with a long upper shadow. It indicates that buyers attempted to push the price up but failed, signaling a possible reversal.

5. Morning Star and Evening Star

• Morning Star: This is a three-candle pattern that indicates a bullish reversal. It consists of a bearish candle, followed by a small-bodied candle (which can be bullish or bearish), and then a bullish candle that closes significantly above the middle candle.
• Evening Star: The evening star is the opposite of the morning star, indicating a bearish reversal. It starts with a bullish candle, followed by a small-bodied candle, and concludes with a bearish candle that closes below the middle candle.

6. Three White Soldiers and Three Black Crows

• Three White Soldiers: This pattern consists of three consecutive bullish candles that close progressively higher. It signals strong bullish momentum and is often seen at the bottom of a downtrend.
• Three Black Crows: In contrast, this pattern comprises three consecutive bearish candles that close lower, indicating strong bearish momentum and often signaling a reversal at the top of an uptrend.

7. Other Notable Patterns

• Piercing Line: A bullish pattern that occurs when a bearish candle is followed by a bullish candle that opens below the low of the previous candle and closes above its midpoint.
• Dark Cloud Cover: A bearish pattern where a bullish candle is followed by a bearish candle that opens above the high of the first candle and closes below its midpoint.

Conclusion

Understanding candlestick patterns can significantly enhance trading strategies. Traders should combine these patterns with other indicators and analysis methods to increase their effectiveness. Utilizing this cheat sheet can serve as a quick reference guide to spot and interpret key candlestick patterns, helping traders to navigate the markets with greater confidence.