Regardless of if you’re starting out as a trader or if you have been trading for months or years, you’ll always look to candlestick patterns for profit opportunities. Candlestick patterns provide a glimpse of a possible price movement and allow a trader to secure or execute positions and strategies which can take advantage of that possible price movement. By having a thorough knowledge of candlestick patterns along with their effects on a chart, a trader gets better chances of gaining profits and minimizing losses. To get you more equipped with all the essentials about candlestick patterns, we’ll share with you the most traded candlestick patterns on eToro. In addition, this article will also discuss the effects of the patterns and how to execute trades.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 68% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
What is a Candlestick?
Before we dive into Candlestick Patterns, let us discuss the basics – the candlestick.
A candlestick is a visual aid or representation of the price movement in a candlestick chart. It is used by traders to understand how the price moves, and where the price move starts and stops.
It is composed of a body and a pair of tails or shadows on both ends. The body has a thick dimension while the shadow is made up of a thin vertical line. There are two classifications of candlesticks – one is bullish and the other is bearish. The bullish candlestick is a representation of an upward price movement and is characterized by a green color. The bearish candlestick on the other hand represents a downward price movement and is characterized by a red color. By simply looking at the color of the candlesticks, a trader is able to know if the price is moving toward a downward or upward trend.
As for the technical details, a candlestick is made up of an opening price, closing price, high price, and low price. The opening price is shown on the image through a red arrow, where the opening price of a bullish candle is at the bottom while the opening price of a bearish candle is at the top. The closing price of a candlestick on the other hand is shown by a green arrow on the image, where the closing price of a bullish candle is on the top while the bearish candle has a closing price at the bottom.
The high price and low price are represented by the tails – also known as “wicks” or “shadows” of the candle. The high price is the tail above the candle, while the low price is the tail below the candle. These prices are shown in the image through a black arrow.
By knowing the basic parts of a candlestick, a trader is able to understand the behavior of a market and is able to make assumptions of possible price movement. Now that you know how to read candlesticks, you now have a better chance of winning trades – but it gets better if you know candlestick patterns.
What are Candlestick Patterns?
A Candlestick Pattern is a candlestick or collection of candlesticks that show a particular trading pattern. These patterns are simply based on historical price movements and are known to signal specific results. These results can either be a price reversal or price continuation.
These candlestick patterns are discovered by traders with years of trading experience and in the industry. While these patterns do not guarantee results, these patterns can serve as a good guide and hint toward making assumptions and projections of future price movement. While many traders rely on candlestick patterns for possible price outcomes, it is still advised to perform due diligent research and analysis in making trading decisions.
A candlestick pattern can be composed of a single candlestick or no more than five. It can have a small body or sizeable body, and can also have very long or short tails. All the details of every candle provide meaning or significance toward the overall effect of the pattern. Being well-knowledgeable about the details of the candlestick pattern will enable a trader to make more sound decisions in trading.
Most Traded Candlestick Patterns
Here are a few of the most traded candlestick patterns that you’ll come across when trading on eToro.
The Marubozu Candle Pattern
The first kind of candlestick pattern that you may come across within eToro charts is the Marubozu pattern. This pattern is simply characterized by a full-bodied candle without wicks or tails on both ends. For a bullish or green Marubozu pattern, the opening price starts at the top and the closing price stops at the bottom with no wicks or tails. The bearish or red Marubozu pattern has an opening price at the bottom and a closing price located at the top with no wicks or tails as well.
The Marubozu pattern develops or forms in a chart when there is a considerable buyer or trader movement at a particular trading range. This considerable trading movement can be caused by recent catalysts such as recent news, disclosures, or recent announcements from the company.
This pattern is considered as a trend continuation pattern wherein the price is expected to continue toward the direction of the candlestick. For a bullish Marubozu, the next price action is expected to move upward or toward a bullish trend wherein the strong buying pressure is assumed to continue. On the other hand, a bearish Marubozu signals that the next candle will move downwards and indicates the strong pressure of the sellers.
The ideal trading plan when dealing with Marubozu candles is to trade toward the direction of the pattern – long trades for Bullish Marubozu patterns, and short trades for Bearish Marubozu patterns. Ideal entry points would be at the closing price of the candle.
The Spinning Top Candle Pattern
One more candlestick pattern that you’ll usually come across when trading at eToro is the Spinning Top pattern. This pattern is usually seen as a trend reversal pattern but can also signal neutrality or continuation depending on the trader’s analysis. This pattern develops when there is equal pressure among buyers and sellers.
It is made up of a thin or small body and long wicks on both ends. The way to execute trades with the Spinning Top pattern is to consider the previous candles before it. If the pattern forms at the end of an uptrend having significant bullish candles, there is a great chance that the market will reverse toward a downward trend. On the other hand, if the pattern develops at the end of a downtrend having significant bearish candles, it could signal a reversal toward an uptrend.
It can also be a case of trend continuation if the body of the pattern opens at the close of the previous candle. Also, the pattern should have the same color as the previous candle.
Depending on the trading strategy being used, the color of the candle may or may not be of great significance.
The Doji Candle Pattern
A popular candlestick that can signal neutrality, trend continuation, and trend reversal depending on its classification is the Doji pattern. Its classifications include the Neutral Doji, Long-legged Doji, Dragonfly Doji, and the Gravestone Doji.
The Neutral Doji resembles a cross having a very thin body and small tails. It signals neutrality among buyers and sellers and can be treated in the same way as the spinning top pattern which can signal trend reversal or continuation depending on the prior candles before the pattern.
The Long-legged Doji has rather longer tails compared to the Neutral Doji. Although it has the same assessment as the Neutral Doji, its long tails indicate the intense pressure of the buyers and sellers. ideal entry and exit points for this pattern would be at the tip of its tails.
The Dragonfly Doji which resembles the letter “T” is a reversal candle that forms at the bottom of a bearish trend. Just like the previous classifications of the Doji candle, its opening price is the same as its closing price. However, the opening and closing price is located at the tip of the upper tail. This means that buyers have taken control over the sellers. As an ideal entry point for long trades, consider a position above the candle and consider the lower tail for an ideal exit point.
The last classification of a Doji candle is the Gravestone Doji which looks like an inverted “T”. It is the counterpart of the Dragonfly Doji and forms at the top of a bullish trend. its opening and closing is located at the tip of the lower tail and it displays selling pressure. If this pattern shows up at the end of a bullish trend, the next candle is expected to reverse or move toward a bearish trend. As an ideal entry point for short trades, consider shorting positions below the pattern. On the other hand, ideal stop loss when doing short trades would be at the tip of the upper tail.
The Hammer and Inverted Hammer Candle Pattern
The Hammer Candle Pattern is also among the most easily identifiable patterns on any eToro chart. The Hammer pattern is characterized by an opening and closing price located at the top of the candle and paired with a long wick or tail. Its long tail shows the trace of the buyer-seller struggle, and the body displays the overwhelming pressure of the buyers. This pattern forms at the end of a downtrend and is assumed to suggest or signal a trend reversal. Regardless of the color of the Hammer when it forms on a downtrend chart, the trend is expected to reverse toward a bullish trend or uptrend.
The counterpart of the Hammer Candle Pattern is the Inverted Hammer Candle Pattern. Unlike the Hammer candle pattern, the body of the candle is located at the lower tail. Additionally, this candle suggests a trend reversal from an uptrend to a downtrend.
Ideal entry and exit points for both the Hammer and Inverse Hammer candle would be at the tip of the tails.
Our Final Thoughts
Candlestick patterns are indeed reliable for any kind of trading plan or strategy provided that it is used with the right analysis or interpretation. To further improve the efficiency of candlestick patterns, indicators such as RSI, Moving Averages, Support and Resistance, Stochastics, MACD can be used. In addition, a second or third candle can also be used as a confirmation for the assessment of the candle. It is also important to consider any fundamental analysis to greatly improve the accuracy of future assumptions when trading.
Being familiar with these candlestick patterns will enable you to make more sound decisions when trading and will help lessen possible risks.
Trading is never a walk in the park and even expert traders can lose trades, however, by equipping yourself with the knowledge about candlestick patterns, you’ll have a better chance of gaining potential profits. Also, by knowing candlestick patterns, you can easily identify opportunities and dangers in a specific chart.
By simply practicing your newfound knowledge about the most traded candlestick patterns on eToro you’ll be able to execute trades more confidently. With an eToro virtual portfolio, you can trade on a real-time market without having to spend anything. With constant practice through an eToro virtual portfolio, you’ll be able to master these candlestick patterns in no time.
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