Master the 5 core patterns of candlestick chart formations to quickly identify buy and sell signals

In stock market investing, the ability to accurately interpret candlestick charts often determines the success or failure of a trade. Candlestick combinations, with their intuitive and three-dimensional features, have become one of the most important tools in technical analysis. However, to truly grasp the essence of candlestick combinations, you need to understand their development history and complete framework, so you can make quick judgments in practical trading.

Why Candlestick Combinations Are a Mandatory Course in Stock Market Investment

Since China’s stock market opened in 1990, it has directly adopted candlestick charts. However, research and application of candlesticks have mainly been based on classic Japanese theories. Over the years, studies have been scattered, focusing on partial features of single, double, and multiple candlesticks, lacking systematic and comprehensive pattern summaries.

Candlestick charts are also called Yin-Yang candles, originating from rice market trading during Japan’s Edo period (1603–1867). Merchants used candlesticks to calculate daily rice price fluctuations. Later, this method was introduced into stock price trend analysis and gradually became popular in Southeast Asia.

Practical evidence shows that candlestick charts can predict future market directions more accurately and clearly determine the strength comparison between bulls and bears, providing important reference for investment decisions. It’s important to emphasize that technical analysis is only a reference tool. Conclusions drawn from classic candlestick charts or indicators are not 100% accurate. In actual operations, analysis should be case-specific, and conclusions should not be mechanically fixed.

Basic Understanding of Candlestick Charts: 48 Types of Candlestick Patterns Quick Reference

The 48 types of candlesticks are divided into 24 bullish (yang) and 24 bearish (yin) patterns. The core difference lies in the size of the real body (the gap between open and close prices) and the length of the shadows (the parts exceeding the real body between high and low prices).

Four main types of bullish candlesticks include small bullish, medium bullish, large bullish, and doji stars, each subdivided into 6 scenarios based on different combinations of real bodies and shadows:

• The larger the bullish real body, the stronger the buying pressure, generally indicating an upward trend
• Longer lower shadows suggest strong support, often leading to a rise
• Longer upper shadows indicate stronger selling pressure, often leading to a decline

Four main types of bearish candlesticks include small bearish, medium bearish, large bearish, and doji stars, similarly subdivided into 6 scenarios:

• The larger the bearish real body, the stronger the selling pressure, generally indicating a downward trend
• Longer lower shadows imply buying strength, often leading to a rise
• Longer upper shadows suggest strong selling, often leading to a decline

Mastering these 48 basic patterns is equivalent to learning the alphabet of candlestick combinations, which can be assembled into various complex predictive signals.

Morning Star: The Savior at the End of a Downtrend

The morning star is a three-candlestick pattern appearing at the end of a downtrend, indicating a potential reversal.

Identification features:

• First candle: long bearish real body, strong selling pressure, indicating the downtrend continues
• Second candle: a doji or hammer-shaped candlestick opening with a gap downward, with the high possibly below the first candle’s low, forming a gap, indicating a slight contraction in the decline
• Third candle: long bullish real body, strong buying, gradually recovering lost ground

Market implication: The appearance of the second candle suggests weakening of the bears, and the third long bullish candle confirms that the bulls are gaining control. When combined with volume analysis, the morning star often signals an upcoming reversal.

Evening Star: Warning Signal at the Peak of an Uptrend

The evening star is the opposite of the morning star pattern, appearing during an uptrend and serving as a strong reversal warning.

Identification features:

• First candle: long bullish real body, indicating the uptrend is still ongoing
• Second candle: a doji or hammer-shaped candlestick opening with a gap upward, with the low possibly above the previous high, forming an upward gap
• Third candle: long bearish real body, strong selling pressure

Market implication: The second candle shows the upward momentum is waning, and the third long bearish candle confirms the reversal signal. When the evening star appears during an uptrend, it warrants high alert, as it may be an excellent opportunity to sell or short-term avoid.

The Red Three Soldiers vs. Three Black Crows: The Positive and Negative Extremes of Price Movement

These are two of the most common contrasting patterns in candlestick combinations.

Red Three Soldiers (Bullish Signal):

• Three consecutive bullish (yang) candles
• Each close higher than the previous close
• Each open within the previous candle’s real body
• Each close near the day’s high or at the high

When the red three soldiers appear, the probability of an upward trend is higher, indicating sustained buying.

Three Black Crows (Bearish Signal):

• Three consecutive bearish (yin) candles in an uptrend
• Each close lower than the previous low
• Each open within the previous candle’s real body
• Each close at or near the day’s low

The three black crows form a step-down pattern, suggesting the market is nearing a top or at a high level, with further decline expected.

Double Black Crows: Head Reversal Warning Signal

The double black crows pattern often appears at market tops and is one of the most warning signals of reversal.

Identification features:

• First candle: long bullish candle, continuing the prior upward trend
• Second candle: gaps upward but closes lower, with the gap still present
• Third candle: again gaps upward but closes lower, engulfing the second bearish candle

Market implication: After two days of upward attack, the bulls fail to push higher, indicating weakening momentum. This pattern suggests a high probability of a reversal, and investors should stay alert, consider taking profits, or reduce holdings, waiting for clearer market direction.

Practical Tips: 3 Golden Rules for Candlestick Pattern Analysis

In actual trading, analyzing candlestick combinations requires following these principles to improve accuracy:

First, combine with volume verification. Candlestick patterns are visual representations of price movement, but volume is the real force behind price changes. Any candlestick pattern should be analyzed together with volume to draw more reliable conclusions.

Second, avoid mechanical conclusions. The same candlestick pattern can have different meanings in different market environments. A long bullish candle at the bottom may indicate a reversal, but during a mid-term rally, it could just be a normal correction. Do not apply a one-size-fits-all standard blindly.

Third, always be alert to risks. No matter how precise candlestick patterns are, they are only probabilistic tools. Every trading decision should include stop-loss settings to prevent losses from extreme market moves. Remember, risk management is always the first lesson in investing.

Mastering these core candlestick patterns and application rules, combined with continuous market practice, will gradually improve your technical analysis accuracy and provide stronger support for your trading decisions.