Anatomy of candlestick charts, patterns, and formations: Part 3

If you haven’t already familiarised yourself with the first two articles of the Japanese candlestick patters series, have a read of part one with single candle formations here, and part two with two candlestick formations found on the following link. The deep dive into the golden standard for technical analysis wraps up with this article, which focuses on three candle patterns and some key considerations traders need to have in mind when reading charts.

Three candle patterns

Morning star reversal

The Morning Star is a bullish reversal pattern that typically forms at the end of a downtrend. It consists of a three-candle pattern.

Attributes :

• Bullish reversal pattern
• Market in a downtrend
• Candle one is a long bearish candle, indicating selling pressure
• Candle two is a small candle, either bullish or bearish, that gaps down from the previous candle
• Candle three is a long bullish candle that closes above the midpoint of the first candle
• Evening Star Reversal: The Evening Star is a bearish reversal pattern that typically forms at the end of an uptrend. It consists of a three-candle pattern.

Evening Star Reversal

The Evening Star unfolds over three consecutive trading periods and consists of three specific candlesticks.

Attributes:

• Bearish reversal pattern
• Market in an uptrend
• Candle one is a long bullish candle, indicating buying pressure
• Candle two is a small candle, either bullish or bearish, that gaps up from the previous candle
• Candle three is a long bearish candle that closes below the midpoint of the first candle

Three black crows: The Three Black Crows is a bearish reversal pattern that typically forms at the end of an uptrend. It consists of three consecutive long bearish candlesticks, signalling a strong shift in market sentiment from bullish to bearish.

Attributes:

• Bearish reversal pattern
• Market in an uptrend
• The pattern consists of three long bearish candlesticks.
• Each candlestick opens within the range of the previous candlestick and closes near its low.

Three white crows: The Three White Crows is a bearish reversal pattern that typically forms at the end of a downtrend. It consists of three consecutive long bullish candlesticks, signalling a strong shift in market sentiment from bearish to bullish.

Attributes:

• Bearish reversal pattern
• Market in a downtrend
• The pattern consists of three long bullish candlesticks.
• Each candlestick opens within the range of the previous candlestick and closes near its high.

Continuation patterns

Rising Three Method: The Rising Three Method is a bullish continuation pattern that can be observed during an uptrend. It signifies a temporary consolidation before the prevailing upward trend resumes. This pattern is characterized by a series of candlesticks that indicate a brief pause in the upward movement, followed by a continuation of the bullish momentum.

Attributes:

• Bullish continuation pattern
• Market in an uptrend
• The pattern consists of five candlesticks.
• The first candle is a long bullish candle, representing the existing uptrend.
• The next three candles are relatively small and contained within the range of the first candle.
• These three candles form a stair-step or steppingstone pattern, with each successive candle closing higher than the previous one.
• The fifth and final candle is another long bullish candle that exceeds the high of the first candle, confirming the continuation of the upward trend.

Falling Three Method: The Falling Three Method is a bearish continuation pattern that can be observed during a downtrend. It indicates a temporary consolidation before the prevailing downward trend resumes. This pattern is characterized by a series of candlesticks that suggest a brief pause in the downward movement, followed by a continuation of the bearish momentum.

Attributes:

• Bearish continuation pattern
• Market in a downtrend
• The pattern consists of five candlesticks
• The first candle is a long bearish candle, representing the existing downtrend
• The next three candles are relatively small and contained within the range of the first candle
• These three candles form a stair-step or steppingstone pattern, with each successive candle closing lower than the previous one
• The fifth and final candle is another long bearish candle that exceeds the low of the first candle, confirming the continuation of the downward trend

General considerations when analysing Japanese candlesticks

When using candlestick charts for analysis, it's important to consider the following:

Timeframe: The strength of a candlestick pattern can vary based on the timeframe being analysed. For instance, a short-term doji candle within a quiet time of the day will hold less value than one on the daily timeframe. While these candlesticks will typically work across a number of timeframes, it is often the case that longer-term patterns are of greater value due to the sheer amount of data being taken into account.

Confirmation/confluence: Candlestick patterns are best used as part of a trading strategy that incorporates other technical indicators or chart patterns to increase their reliability. Traders often find themselves seeking to find the absolute tops or bottoms of a market rather than riding the trend. However, if you are planning to go against the prevailing trend, it is sensible to look for a number of factors which build a picture to gain confidence of such a turnaround coming to fruition.

Market Context: Consider the broader market context when utilising any of these candlestick patterns. A reversal signal will hold greater value when approaching a notable support or resistance levels., and overall trend when analyzingcandlestick patterns.

Practice and Experience: Developing proficiency in candlestick analysis requires practice and experience. Regularly studying charts, identifying patterns, and observing their outcomes can help improve outcomes. Not all patterns are made equal, and thus it is sensible to backtest those mentioned in this article with a view to gauging where and when they are more reliable.