Introduction:

In order to be a successful day trader, it is important to be able to recognize popular candle stick patterns. These patterns can give you valuable information about the current market trend and where the market is likely to head next. While there are many different patterns that you can look for, there are a few that are more popular than others. In this article, we will take a look at the most popular candle stick patterns for day trading and how you can use them to your advantage.

Why should you care about candlestick patterns?

Candlestick patterns provide important insights into the state of the current market trend. By understanding these patterns and learning to recognize them, you can gain an edge over other day traders who are not as familiar with these patterns. This can help you make more sound and informed decisions when it comes to day trading.

Moreover, potential bullish and bearish reversals can be identified using these patterns. Knowing when to buy or sell a particular stock or asset can give you a significant advantage in the day trading market. This can ultimately help you significantly increase your trading profits.

What are the most popular candle stick patterns?

The most popular candle stick patterns to look for are Hammer, Harami, Doji and Inverted Hammer.

Hammer:

A hammer is a bullish reversal pattern that appears on a downward trend and signals a potential reversal to an uptrend. A hammer is composed of a candle body consisting of a single candlestick or a group of candlesticks with a long lower shadow and a short real body near the top of the candlestick. The hammer candlestick pattern can be a beneficial tool for traders who are looking to spot potential reversals in price trends. Hammer patterns feature a long lower shadow which indicates that sellers initially tried to push the price down but were quickly met with buying pressure which brought the price back up - this is a bullish sign and could indicate strength from buyers in the future.

Traders may choose to use the hammer candlestick as a buy signal; if followed by other confirmations like a higher close or another bullish candlestick pattern, this could present an opportunity to buy. However, it's important to remember that no single indicator can guarantee success and trading should always be done with research and analysis.

Harami:

The Harami is a Japanese candlestick pattern that is used in technical analysis to identify the potential reversals of a current trend. It is composed of two consecutive candle bodies with the second one opening and closing within the range of the first, the pattern looks like a small candlestick inside a larger candlestick. The Harami pattern is formed when a long candlestick is followed by a smaller candlestick that is completely engulfed by the prior candlestick's body. The smaller candlestick can be either bullish or bearish, but it is typically interpreted as a sign of indecision in the market. The benefits of using the Harami candlestick pattern in trading are that it can help traders identify potential reversals in the price trend. The pattern suggests that the prior trend may be losing momentum and a reversal may be imminent. However, it's important to note that the Harami pattern is not a definitive signal and should be used in conjunction with other technical indicators and analysis.

Some traders use the Harami pattern as a signal to take profits or exit a trade, while others use it as a signal to enter a new trade in the opposite direction of the prior trend. As with any trading strategy, it's important to backtest and validate the effectiveness of the Harami pattern in the specific market and timeframe being traded.

Doji Candle:

A doji is a candlestick pattern with a neutral sentiment. A Doji is formed when a security's price opens and closes at or near the same level, resulting in a small or non-existent body, with a long upper and/or lower shadow. The pattern is typically interpreted as a sign of indecision in the market, as it suggests that neither buyers nor sellers have control over the security's price. A Doji pattern can be a sign of either a reversal or simply a market indecision.

Using the Doji candlestick pattern for trading can be decisive, as it may signal a reversal or period of support or resistance. If a Doji appears after several long bullish candles, the buyers' power could be waning, and subsequently the price trend potentially reverting. The same may hold true when a Doji appears at the end of several long bearish candles, indicating that sellers are losing strength and a reversal is likely. Additionally, a Doji appearing at a key support or resistance level could suggest that the level is particularly significant and that a breakout may be imminent. Traders may use the Doji pattern as a signal to take profits or exit a trade, or as a signal to enter a new trade in the direction of the anticipated breakout.

Inverted Hammer:

The inverted hammer is a single candle pattern with a bullish reversal setup. It is formed when a security's price opens, trades lower during the session, but then rallies to close near the high of the session. The inverted hammer candlestick is a single-candle formation that resembles an upside-down hammer. It has a long upper shadow and a relatively small lower shadow, with the candle body at the bottom of the formation. The upper shadow should be more than twice the size of the candle’s body. This particular candlestick pattern is often seen as an indication of price reversal after a downtrend in stock prices. This indicates a rejection of the current bearish trend, a potential shift towards an upward trend.

The inverted hammer helps traders to identify possible turning points in the price trend. Characterized by a long upper wick, this pattern implies that sellers initially took control of the session, dragging the price down. Later buyers, however, helped to push prices back higher leading to a tentative bullish sign. For some traders the Inverted Hammer serves as an entry trigger point; if followed by a higher close or another bullish candle configuration then this may indicate that now could be a good time for an investment. Nevertheless, it's important to backtest and validate the effectiveness of the Inverted Hammer pattern in the specific market and timeframe being traded.

How can you use candlestick patterns to your advantage?

Using candlestick patterns can give you an advantage when day trading as they provide significant insight into the market, helping you make more informed decisions when trading. The most important thing to keep in mind is that these patterns should only be used as an indication of the current market, and not as a guarantee of price movements.

Some common ways you can use candlestick patterns to your advantage in trading:

1.     Identifying market trends: By looking at the candlestick patterns on a chart, traders can identify the direction of the market trend. If the candles are mostly bullish (green), it suggests that the market is in an uptrend, while mostly bearish (red) candles suggest a downtrend.

2.     Spotting trend reversals: Certain candlestick patterns, such as the "hammer" or "shooting star," can signal a potential trend reversal. A hammer candlestick pattern is a bullish reversal pattern that forms at the bottom of a downtrend, while a shooting star pattern is a bearish reversal pattern that forms at the top of an uptrend.

3.     Confirming other indicators: Candlestick patterns can also be used to confirm other technical indicators, such as moving averages or trendlines. For example, if a trader sees a bullish candlestick pattern forming at a key support level, it may confirm the support level and increase the likelihood of a bullish trend continuation.

The most important tip when using candle stick patterns is to be aware of the risks involved. If a trade does not meet your pre-defined risk-to-reward ratio, you should cut your losses and move on. When using the patterns, always consider the broader market conditions and look for confirmation from other indicators, such as volume and market sentiment. This allows you to incorporate more data points for more accurate trend analysis. The patterns should also be used in conjunction with other analysis techniques, such as technical analysis, to increase the chances of making accurate trades. You should always be mindful of your risk management strategies and recognize that there is no guarantee of success.

Which pattern is the most reliable?

When it comes to candle stick patterns, there are a few that are more reliable than others for day trading. The Bullish Engulfing Pattern is considered one of the most reliable candle stick patterns and it occurs when a small bear candle is followed closely by a larger bullish candle, completely engulfing the red candle’s body. This pattern is considered an indication of potential trend reversal and a signal to buy.

The Bullish Hammer Pattern is another reliable candle stick pattern, and it serves as an indication of a potential trend reversal and potential buying opportunity. This pattern occurs when the price closes above the open and is indicated by a long lower wick followed by a small body.

The Bullish Harami Pattern is considered a reliable pattern and it occurs when a large candle is followed closely by a small candle, both of which are of the same colour. The reversal signal for this pattern is based on the assumption that a large prior candle indicates strong selling pressure followed by reduced selling pressure the next day.

Finally, the Doji pattern is considered one of the most reliable candle stick patterns. This pattern is created when the price opens and closes at the same price, forming a cross-like shape. A Doji signal indicates a possible trend reversal, depending on the preceding and following patterns.

How can you use multiple patterns to confirm a trade?

While some traders rely on one candle stick pattern to confirm a trade, it can be beneficial to use multiple patterns in combination with one another to better ascertain the direction of the market.

For example, if a Bullish Engulfing and a Bullish Hammer pattern occur at the same time, together they provide a stronger signal of trend reversal and a potential buying opportunity than if either pattern is observed on its own.

The same holds true for other patterns as well. Combining the Bullish Harami and Doji patterns can provide an even better indication that a trend reversal is imminent, and a trading opportunity is at hand.

By combining multiple candle stick patterns, traders can form a stronger view of the market and be more accurate in their trading decisions. Each trader should determine which candle stick patterns they are most comfortable using and make sure they are aware of the combined signals the patterns produce.