Mastering the patterns of Japanese candlesticks is impossible to spend without for any trader who intends to unlock strategic flexibility in the markets. Knowing these few key formations will let you use candlestick patterns for breakout, reversal, and continuation trading. This post will introduce the top five candlestick patterns that every trader should know to enhance their trading strategies.
tOP 5 Doji Candlestick Pattern for Breakouts and Reversals
1. The Doji
The Doji is a single candle formation essential for any trader’s toolbox, with an upper and a lower wick of quite considerable length and very little to no body whatsoever. At first sight, the picture of the Doji resembles a plus or a cross and means indecision for the marketplace.
Why is the Doji important?
The Doji represents a tug-of-war between buyers and sellers, with neither being able to get the upper hand.
This pattern can occur in any market condition, whether trending or sideways, and it can be used as a signal for breakouts or reversals. The Doji is a very versatile candlestick that could be traded on its own or in combination with other candlesticks. More complex examples of Doji patterns are the Double Doji—a breakout signal—and the Triple Doji, which is a powerful reversal pattern.
How to Trade the Doji:
- Double Doji: Breakout pattern, buy above the formation and place a stop-loss below.
- Triple Doji: Very strong reversal formation—the trade opens in the direction of the reversal, stops above the formation.
2. The Morning Star
The Morning Star forms with three candles as a bottom reversal of the trend from bearish to bullish. It normally occurs at the trough of the downtrend and backwards of the market.
The Morning Star Structure:
- The First Candle: a big bearish one showing strong selling pressure.
- Second Candle: Doji or a small-bodied candle, indicating indecision as the selling pressure starts to fade away.
- Third Candle: A big bullish candle confirms this reversal and buyers are in play.
Trading Strategy:
- Place a buy order above the third candle.
- Place a stop-loss below the second candle.
- Set profit targets above the formation or use a risk-reward ratio for more flexibility.
3. Three White Soldiers
The Three White Soldiers pattern is a bullish continuation pattern that predicts strong upward momentum. It consists of three consecutive long bullish candles, indicating that the buyers are in control after a prior downtrend.
Why Trade the Three White Soldiers?
Because this pattern would mean the continuity of the bullish bias, hence it is very suitable for entering a long position and getting on board.
How to Trade the Three White Soldiers:
- Place a buy order above the third candle.
- Place the stop-loss below the first candle, so you will be prepared in case of a sudden reversal.
- Set profit targets based on market analysis or price projection.
4. The Hanging Man
The Hanging Man is a single-candle pattern that forms at the top of an uptrend and signals potential bearish price action. It takes on the appearance of a hammer with a long lower wick and a small body at the upper end of the range.
What Does the Hanging Man Indicate?
The Hanging Man forms when the buyers come out on top during a trading session, but the sellers were able to push the price down quite a bit by the close. This is a signal that buying pressure is weakening, and a reversal might be in store.
How to Trade the Hanging Man:
- Place a sell order below the lower shadow of the Hanging Man.
- Place the stop-loss above the high of the candle.
- Place the take-profit level below the formation, adjusting it to your risk preference.
5. The Three Black Crows
The Three Black Crows is a three-candle bearish continuation pattern that signals strong selling momentum. It usually forms after a bullish trend and indicates that the market is likely to continue moving down.
The Three Black Crows – Structure:
Three big bearish candles in a row, each opens inside the body of the previous one and closes lower.
Why use the Three Black Crows?
The pattern indicates that the sellers have taken over, and the market is in a strong bearish trend. It provides traders with an opportunity to enter a short position with confidence.
How to Trade the Three Black Crows:
- Place a sell order below the third bearish candle.
- Place a stop-loss above the first candle.
- Set profit goals below the pattern, based on probable support levels.
Conclusion
Mastering these five key candlestick patterns—the Doji, the Morning Star, Three White Soldiers, the Hanging Man, and Three Black Crows—can make all the difference in your trading arsenal. Each of these patterns has its own peculiarities to be used for breakout, reversal, and continuation purposes. Your trading plan will improve with these impactful technical tools integrated into your market analysis and decision-making. Practice the following patterns now, and you may be surprised at how they can revolutionize your method of trading.
