An investor’s best friend is the candlestick chart, which you can use to identify trends in stocks, commodities, and currencies. The most reliable patterns are called “Three Black Crows,” “Evening Star,” and “Two Black Gapping.”
Some people believe they offer an early warning for the impending reversal of a trend or stock market crash. These three patterns are among the most reliable of all candlestick charts. This blog will outline each one so you know what to look out for on your next trading day!
What is The Candlestick Chart Patterns?
The candlestick chart is a simple way to spot trends in the price of an asset over time. The candlestick is easy to read and consists of the stock’s trading session open, close, low, and high prices. To determine whether a trend is up or down, it is essential to look at the highs and lows. The trader should keep in mind that the closing price will indicate whether an uptrend or downtrend occurred during the day.
The candlestick does not indicate the total gain or loss an asset will make over a given period; however, it is still helpful for determining the strength of a trend.
The Three Black Crows
This bearish pattern is made up of 3 bearish candles. All three close near their lows for that period. This pattern is a clear indication that the asset is going to continue trending down. You can also find this pattern in intraday charts to indicate that the investment will continue trending down for that day.
One must look for at least five candlesticks in a trending-down channel with a downward slant to identify this pattern. The last three candles should be black and close near their lows for that period. Additionally, the candle immediately before this sequence of bearish candles should also have closed near its low.
The three black crows pattern is found in all time frames. The longer the period, the number of candles needed to make this pattern will increase. For example, three black crows candlestick patterns on the daily chart are more reliable than 15-minute charts. This pattern allegedly has a 78% accuracy rate.
This pattern combines the shooting star and dark cloud cover, which gives it its name. An evening star candlestick pattern consists of five candles. The first three are bearish, and the last two are bullish, with the middle candle being a critical turning point:
The first candle after the star should be a positive one that closes well into the top of the asset’s price range.
The next candle closes well below the midpoint of its prior day’s range.
The last three candles are bearish and close near their lows for that period, with each closing near their respective lows or lower if possible. The final candle should open above the previous day’s open and then trade down, piercing the midpoint of that candle’s range.
The evening star pattern is best used to foreshadow a potential trend reversal on a longer time frame chart such as an hourly, daily, or weekly chart. The most reliable versions have few or no upper wick and long lower wick.
This pattern has a 72% accuracy rate.
Two Black Gapping
Finally, a bearish candlestick pattern is the two black gapping. It’s made up of two bearish candles. This pattern announces with frightening accuracy that the stock has opened at a much higher or lower price than the previous day’s closing.
This pattern is much more reliable in Asian markets than in European or American markets. It does not frequently occur, which gives it greater predictive power than most other candlestick patterns. This pattern is best suited for stock index charts because stocks always open at the index level.
The best way to identify this pattern is to watch for two consecutive bearish candles where the second candle opens well below the low of the first and closes near its open.
This candlestick pattern has an 84% accuracy rate.
Bonus: The Three Lines Strike
Three Line Strike is a bullish pattern that is a more reliable variation of the morning star. The three-line strike pattern consists of four candles:
First, there is a black candle that closes near its low.
The next candle opens within the previous candle’s body and trades as high as or higher than the midpoint of that first candlestick. This second candlestick should also have no wicks extending from it on either side.
The third candle occurs when the second candlestick closes near the midpoint of its body and is a white candle that opens above the prior open. This final candle also has no wicks extending from it on either side.
The last candlestick should be green and engulf the previous candle’s bodies, closing well above the midpoint of that white candlestick.
This pattern’s reliability is increased when there are fewer or no upper wick and long lower wick. Additionally, this pattern works best in a downward trend.
This pattern has an 84% accuracy rate.
What to Watch Out For?
There are vital factors to consider when identifying candlestick patterns. Some examples of these are:
- The candle colour: A green, white or black coloured candlestick indicates an up day while red implies a down day.
- The open and close: The closer the open and close is to the high, the more reliable the pattern.
- The body length: Reliability increases when the candlestick’s body is longer than average.
- The upper and lower wicks: It is a good indication of strength when there are no wicks, incredibly long.
Timing Matters: When looking at candlestick patterns, timing is everything. A simple signal may work in one timeframe but fail in another. It is essential to identify the location of these signals to maximize their reliability and effectiveness.
Candlestick charts are more reliable than standard bar graphs, so they are the preferred method of showing stock market prices. They provide valuable information to any trader who takes the time to learn what they mean, but it’s important not to apply candlestick patterns haphazardly.
The most reliable candlestick chart patterns are evening stars, three-line strikes, and two black gapping. Visit the rest of our blog for more valuable insights.