Top 5 Favorite Candlestick Patterns

Since the beginning of TradeSmart, students have often asked which candlestick patterns are the best? They may change the question around a little bit to which ones are the most reliable or consistent. Regardless of how the question is phrased, it always comes down to the base question, which is "What's the best candlestick pattern?"

Unfortunately, it is impossible to declare any candlestick the absolute best candlestick. Still, we have a top-five list we love to use when trading: one white soldier, engulfing patterns, dragonfly doji, evening star, and rising three.

​One-White Soldier/One-Black Crow

​The One-White Soldier is the bullish version of the pattern, while the One-Black Crow is the bearish version. Otherwise, they are essentially the same pattern, just with an inverted location and candle color. A few years ago, we first noticed the One-Black Crow pattern, kind of by mistake on several trades where a large black candle would gap down at open from a large white candle, all at resistance. Naturally, this pattern "looked" very bearish, but there was no mention of it in any candlestick literature we could find. We found a reference buried deep in a candlestick book to a little known pattern called One-Black Crow while researching. Finally, we had a name to attach to this candlestick pattern.

Here's What It Looks Like:

To create the One-Black Crow, the stock has been in a bullish swing, and it reveals a strong white candle at or near resistance. Then, the next morning the stock gaps down, and a large bearish candle is revealed.

This opening gap often goes unnoticed because there is not specifically a gap space on the chart. Unless they are looking at an intraday chart, most traders miss this opening gap completely. That opening gap is the very reason this is such a robust signal. We cannot emphasize enough what a strong reversal signal this is; however, it may not be perfect, but it is very good.

The Bullish version of this pattern is the One-White Soldier.

Here's What It Looks Like:

​In both cases, this pattern is a signal the trend or swing has come to an end. The odds are in favor of the stock reversing.

When You See It:

  • Either tighten your stops very tight
  • Exit the trade
  • Look for confirmation of a full-on trend reversal.

​Bullish/Bearish Engulfing Patterns

Engulfing Patterns are perhaps one of the most well-known candlestick patterns. They are well known because they are easy to identify, and the information they signify is consistently correct. According to Thomas Bulkowski's research, Bearish Engulfing patterns reverse bearish 79% of the time, which is a staggeringly high statistic, while Bullish Engulfing patterns reverse bullish 63% of the time.

The reason for this discrepancy is bear markets tend to develop faster than bull markets, which leaves open the possibility a stock may spend a few more days bottoming following a Bullish Engulfing. In contrast, with the Bearish Engulfing, it just gives up and starts selling off. Regardless of the reason, Engulfing patterns are consistent producers of significant trading signals.

Here's What It Looks Like:

Like many early reversal patterns, this pattern consists of two candle lines. The first candle is usually a small white bullish candle known as a spinning top, and the second candle is a large above average bearish black candle. The second candle opens with a gap higher but then trades down and closes with a close below the previous candle's opening price.

This pattern needs to appear at resistance, or the very least, after a bullish swing, and it is often the final two candles of a bullish trend. Look at any chart, and you will likely find a high number of these patterns at some of the most significant tops.

The Bullish Engulfing is essentially the same pattern but inverted in both location and color.

Here's What It Looks Like:

These are excellent patterns as they are consistent producers and relatively easy to identify. Like most reversal signals, when you see this pattern, it is an indication this trade is about to reverse.

​When You See It:

  • Tighten your stops
  • Consider exiting any trades you have
  • Determine what confirmations you need to confirm a new trend in the opposite direction

Dragonfly/Tombstone Doji

The Dragonfly and Tombstone Doji are strong indicators for a reversal because of the long upper shadow, which you can find on the Tombstone Doji, or the lower shadow, which you can find on the Dragonfly Doji. These shadows indicate a reversal of momentum.

The Tombstone Doji is simply a doji candlestick with an exceptionally long upper shadow and little or ideally no lower shadow. The doji itself is a reversal signal and adds to that a long upper shadow, and you have a strong indicator of a reversal. 

Location is critically essential in candlestick interpretation, mainly when dealing with a single candle line. The Tombstone Doji at resistance is essentially a Shooting Star with a Doji instead of a spinning top body.

Like a shooting star at support becomes something else, the Tombstone Doji at support takes on a different meaning, and it may or may not lead to bearish results. The Dragonfly Doji, on the other hand, should occur at support, and it is a very bullish signal which looks like this:

In the case of both the Tombstone Doji and the Dragonfly Doji:

  • Make sure it is in the right location
  • Tighten stops if you are in any trades
  • Look for confirmation of a trade reversal

​Evening Star/Morning Star Reversals

The Evening and Morning Star Reversal patterns rank right up there with Engulfing Patterns in terms of popularity. They also rank up there in terms of consistency with playing out as expected. This pattern is a little different from the previous ones as it involves three candles rather than two.

An Evening Star Reversal Looks Like This:

Like all bearish reversal patterns, the Evening Star Reversal needs to occur at resistance after a bullish swing. The first candle is a strong bullish white candle. The second candle is a small spinning top of any color, and the third candle is a black candle. Also, in an ideal formation, the second candle, the spinning top, would either gap up, gap down, or both.

The reason it is such a strong pattern is that it gets into the concept of blended candles. If you were to take the three-day pattern and merge them down to two, you would discover an Evening or Morning star pattern is a two-day formation with an extra spinning top squeezed into the middle.

What makes this even more powerful signal is the spinning top. The spinning top itself is a reversal signal, so the combination of these candles leads to outstanding results. The Morning Star Reversal is the same principle but with an inverted picture. The colors are inverted, as is the location.

Here’s What a Morning Star Reversal Looks Like:

It is important to note; the candle colors are only crucial to candles one and three. Candle two, the spinning top may be either black or white.

​When You See It:

  • Tighten your stops
  • Consider exiting any trades you have
  • Determine what confirmations you need to confirm a new trend in the opposite direction

Rising Three/Falling Three Methods

Next, we are going to shift gears from reversal patterns to a continuation pattern. These patterns indicate the current trend or swing will be continuing in the same direction as opposed to reversing direction. The bullish variation is known as the Rising Three Method, and the bearish variation is known as the Falling Three Method. The name comes from the legendary Japanese Trader Sokyu Honma. He first published this trade setup in 1755 in a book he titled "The Three Monkey Record of Money."

The Rising Three method is constructed from five candles.

The first one is a long bullish white candle. The next three are sideways and usually represented by spinning tops. Finally, on the fifth day, the pattern finishes by showing another strong white candle.

The Rising Three is called such because of the three small candles that occur between the two larger candles on the outside. As you can see, this pattern can be deceptive. It can be incredibly deceptive if the three candles in the middle are black, as many traders mistake that to signal a bearish reversal is forming. In most circumstances, when you see a Rising Three, you can put an entry trigger just above the 5th candle and enter the bullish trade. It is a strong continuation signal.

The Falling Three Method is identical to the Rising Three, only inverted.

It consists of five candles where the first one is a long black candle, followed by three small candles, usually spinning tops that do not close higher than the first day's black candle.

Then on the fifth day, the bearish trend continues and shows another long black candle.

The Falling Three is a great signal and has helped us navigate some of the most peculiar times in recent history. For example, during the crash of 2008, the S&P 500 had already sold off substantially, and we reached a support level. At first, we thought the three white candles were shaping up to indicate a bullish swing, but on the fifth day, when that next bearish candle appeared, we knew the bears were not done.

​Here's What Happened:

This is just one of the ample examples of the Falling Three Method anticipating a bearish trend.

There are just as many examples of the Rising Three Method anticipating a bullish trend.

Because of this pattern's consistency, it is one of our top five candlestick patterns of all time.

Here’s What to Do If You See One:

  • If it’s a Rising Three, place a bullish trigger just above the 5th candle.
  • When the trade moves above that price enter a bullish trade.
  • If it’s a Falling Three, place a bearish trigger just below the 5th candle.
  • When the trade moves below that price, enter a bearish trade.

​In Closing

Candlestick Patterns are so important we have been teaching them since the beginning of TradeSmart. In our first class, we introduced our students to Japanese candlestick patterns and never changed that viewpoint. We understand one of the main challenges to learning candles is the number of possible patterns, as it can be overwhelming at first. However, you only need to understand a handful of patterns to use them effectively, and the five candlesticks presented here are a fantastic place to start.