The candlestick chart is one of the most popular chart types in trading because it is simple to read and gives detailed information that guides traders in making trading decisions. The candles form different patterns to show price activities; traders then use them to determine their market moves, and, as you might expect, there are some popular and common candlestick formations used in crypto trading.

What Are Candlestick Patterns?

Candlesticks form different patterns based on the lengths of their wicks and bodies. The pattern formed by each candlestick gives insight into the general mood and happenings in the market. A combination of different candlesticks forms various structures that give you a larger picture of market moves, which you can use to derive signals and make critical trading decisions.

You can know if a candlestick is bearish or bullish through its color. Many trading platforms let traders customize candles to whatever colors they desire. However, standard colors for bearish candles are usually black or red, while bullish candles are usually green, blank, or white. In our examples below, we use red candlesticks for bearish candles and green for bullish candles.

3 Bullish Candlestick Patterns

We will group candlestick patterns into three different types based on their signals. Thus, we have bullish, bearish, and neutral candlestick patterns.

Below are some patterns that signal that a bullish move is continuing or about to start:

1. Bullish Engulfing Candlestick

The bullish engulfing candlestick is formed by a bearish candle followed by a larger bullish candlestick, whose body engulfs the body of the previous candlestick. This pattern shows that buying pressure is increasing significantly and overwhelming selling pressure.

A bullish engulfing candlestick pattern

If the bullish engulfing candlestick appears in an uptrend, it can be interpreted as a continuation pattern. That is, the uptrend has a better chance of continuing. However, if it appears in a market where the seller seems to be in control, it could be that the bearish trend is about to end, and bullish momentum is increasing.

2. Hammer

A hammer candlestick pattern

Just like the name suggests, the hammer looks like a hammer. The candle has a small body, a long wick below it, and little to no upper wick. The hammer can either be red or green. Seeing a hammer at the end of a downtrend when the bearish volume gets smaller could mean the trend is about to reverse.

3. Inverted Hammer

The inverted hammer's shape is the opposite of the hammer's. It has a long wick above the body and a small body with little to no lower wick. The pattern indicates a potential bullish reversal.

inverted hammer candlestick pattern

The long wick above the body shows that the buyers pushed the price higher but could not sustain it, making it close nearer to the opening price. It signals that buying momentum is imminent.

3 Bearish Candlestick Patterns

1. The Bearish Engulfing Candlestick

a picture of bearish engulfing candlestick

The bearish engulfing candlestick is the opposite of the bullish engulfing candlestick. The first candle in the formation is bullish, while the engulfing candle is bearish. This pattern reveals that selling pressure has intensified and signifies the bears are more in control.

2. Hanging Man

inverted hammer candlestick pattern

You can see the hanging man as the bearish alternative to the hammer. It has a long lower wick and a small body. When it occurs at the top of an uptrend, it could signal that the uptrend is weakening and that bearish momentum is imminent.

3. Shooting Star

The shooting star has a similar shape to the inverted hammer. The shooting star candle has a long upper wick and little or no lower wick. It usually indicates that an uptrend is about to end and a reversal is imminent. The formation often indicates a change in momentum, as the price might start to move downwards after it appears.

a screenshot of shooting star candlestick

3 Neutral Candlestick Patterns

1. Standard Doji

Dojis have small bodies, and sometimes they have almost no bodies. They indicate an indecisive market as the opening and closing prices are the same or almost the same. They are considered neutral patterns because they are neither trend continuation nor reversal patterns.

long-legged doji candlestick pattern

The standard Doji does not indicate any particular change in trend since the price is closing at the close of the previous candlestick. Traders might need to be patient to see what happens next in the market before making a conclusion.

8. Gravestone Doji

gravestone doji candlestick pattern

The gravestone Doji reveals more pressure from the buyers during the trading period, but they could not maintain it, making the price close at or near the closing price of the previous candle. At this point, the market is at a standstill, and there is a potential for a price reversal.

9. Dragon-Fly Doji

dragonfly doji candlestick pattern

The dragonfly Doji shows a bearish move that could not be sustained, making the price end at the closing price or very close to the closing price of the previous candlestick. Like other Dojis, it also indicates price indecision.

3 Keys to Trading Candlestick Charts

When studying candlestick trading patterns, you should always put these important points in mind:

1. Always Wait for Confirmation

Expert traders do not execute trades based on one single candlestick pattern; they typically wait for more confirmations that indicate that the price is headed in the predicted direction before entering any trade.

In a downtrend, for example, the appearance of a hammer is not enough to say that the price is moving up immediately. An expert trader would wait for more candlestick formations or use technical indicators for confirmation. Using various confirmations creates a confluence that gives traders more confidence in any position they wish to enter.

2. Each Pattern Has Its Own Distinct Story

It is hard to ascribe a certain chain of events to any pattern, which means that there are times when a trader may interpret the same patterns differently based on more market information. Interpreting a candlestick pattern correctly may also require you to include historical market data in your analysis. Every candlestick pattern has a unique story that distinguishes it from the previous similar one.

3. Opening and Closing Prices Matter

Although candlesticks have different shapes and show various information, price action traders also consider the opening and closing prices of candles in their analyses. These prices are as important as the candle's shape, as you cannot interpret chart information correctly without considering them.

Know What The Candle Is Saying

Understanding candlestick patterns is essential to "knowing what the market is saying." Whether you trade using price action or with technical indicators makes no difference; you must be able to read charts and understand the signals they provide—it is a major step to successful trading.