Best Candlestick Patterns Explained in Easy Way

Up until this chapter, we’ve been looking at only single candlestick patterns. While they give you important and relevant information with respect to the price trends and market sentiment of a stock, they may not always translate well in real life. This is primarily because single candlestick patterns take only a single trading session into consideration, thus limiting the amount of information available.

Here’s where multiple candlestick patterns come into play. To accurately identify trading opportunities and signals, you might have to make use of more than one candlestick pattern spanning over multiple trading sessions. In this chapter, we’ll be focusing on 5 such important multiple candlestick patterns and what we can infer from them.

1. Bullish harami

The harami patterns all take into account two trading sessions. The bullish harami is a bullish candlestick pattern that features two candlesticks, with the first one being a long red candle, followed by a much smaller green candle. The smaller green candle needs to be contained within the long red candle. The structure of the pattern looks like this. 

Inference: The bullish harami pattern bears significance only when it occurs during a downtrend. It is considered to be a sign of bullishness in the market and can be construed as one of the turning points or a reversal of the trend. 

The logic for bullish harami goes like this. The stock is in a bearish trend with its prices going down every trading session, and with the bears comfortably in a dominating position. The first long red candle in a bullish harami reinforces this logic. 

The second short green candle indicates that the price of the stock opened at a much higher point than the previous day’s close with the bulls making a strong appearance in the market. Although the price of the stock was unable to close above the previous day’s open price, the stock ends on a positive note. As you can see from the reference pattern above, the green candle is shorter and is contained within the long red candle, confirming the presence of a bullish harami.    

The sudden surge in the buying interest is completely unexpected by the market and ends up throwing off the bears. This renewed interest in buying the stock is likely to continue for the next few trading sessions, prompting a bullish reversal of the trend. 

2. Bearish harami

This candlestick pattern is quite the opposite of the bullish harami. Again, the bearish harami spans over two trading sessions. The first candle in this pattern is a long green candle, with the second one being a much shorter red candle. Just like in the bullish harami, the smaller candlestick is contained within the longer one. Here’s what a bearish harami looks like. 

Inference: The bearish harami pattern occurs during an uptrend and is considered to be a sign of bearishness in the market. It is generally viewed as the turning point or as a reversal of a trend. Looking at the bearish harami, we can infer the following. 

The stock is in a bullish trend with its prices rising every trading session, and with the bulls comfortably having the upper hand in the market. The first long green candle in a bearish harami reinforces this logic. 

The second short red candle indicates that the price of the stock opened at a much lower point than the previous day’s close with the bears making a strong appearance in the market. The stock ends on a negative note with the prices closing above the previous session’s open price. 

In this case, the sudden surge in the selling interest is completely unexpected by the market and ends up throwing off the bulls. This sudden intense selling pressure in the stock is likely to continue for the next few trading sessions, prompting a bearish reversal of the trend. 

3. Bullish harami cross

Another bullish candlestick pattern, this is a slight variation of the regular bullish harami pattern. In a bullish harami cross, after a long red candlestick, a doji appears instead of a short green candle. Since, the doji resembles the ‘cross’, the pattern is named as the bullish harami cross. Here’s what the bullish harami cross looks like. 

Inference: The bullish harami cross appears during a downtrend and is a sign of an impending trend reversal. As you’ve already read in the previous chapters, the doji is a sign of uncertainty in the market. Therefore, when a doji makes a sudden appearance in the midst of a bearish trend, it can be construed as a possibility of a reversal. However, it is a good idea to track the next trading session’s price movement before confirming the reversal signal.  

4. Bearish harami cross

Similar to the bullish version, the bearish harami cross also features a doji. This doji appears after a long green candle instead. Here’s what the bearish harami cross looks like. 

Inference: The bearish harami cross typically makes an appearance during an uptrend and is an indicator of reversal. Similar to the bullish harami cross, a sudden and unexpected doji in the midst of a clear bullish trend reinforces the possibility of a trend reversal. If the next trading session turns out to be a negative, then the reversal signal is said to be confirmed.    

5. Bullish engulfing pattern

Similar to the haramis, the engulfing pattern also takes the candlestick patterns of two trading sessions into consideration. The bullish engulfing pattern is a bullish candlestick pattern that features a red candle, followed by a much larger green candle. The green candle appears in such a way that it completely engulfs the red candle. The bullish engulfing pattern looks like this. 

Inference: The pattern holds significance only when it appears during a bearish trend. Let’s take a look at the logic of the pattern. The first red candle in the bullish engulfing pattern essentially confirms the downtrend and reiterates the hold of the bears in the market. In the second green candle, the price opens at a lower point than the previous session’s close and makes an attempt to go even lower. 

However, at this point, the bulls make a strong comeback and drive the price higher than the previous day’s opening point. This sudden and swift increase in the buying interest breaks the bears’ hold on the market by a significant margin. The bulls then successfully manage to take over the market and the price goes on a rise for the next few trading sessions.

Wrapping up

These are some commonly recognised multiple candlestick patterns. They can help traders like you identify trends and potential reversals, so you can plan your trades accordingly. Head to the next chapter to see more multiple candlestick patterns.

A quick recap

• To accurately identify trading opportunities and signals, you might have to make use of more than one candlestick pattern spanning over multiple trading sessions. Here’s where multiple candlestick patterns help.
• The harami patterns all take into account two trading sessions. The bullish harami features two candlesticks, with the first one being a long red candle, followed by a much smaller green candle. The smaller green candle needs to be contained within the long red candle.
• The bullish harami pattern bears significance only when it occurs during a downtrend. It is considered to be a sign of bullishness in the market and can be construed as one of the turning points or a reversal of the trend. 
• The bearish harami spans over two trading sessions. The first candle in this pattern is a long green candle, with the second one being a much shorter red candle. Just like in the bullish harami, the smaller candlestick is contained within the longer one.
• The bearish harami pattern occurs during an uptrend and is considered to be a sign of bearishness in the market. It is generally viewed as the turning point or as a reversal of a trend.
• In a bullish harami cross, after a long red candle, a doji appears instead of a short green candle. It appears during a downtrend and is a sign of an impending trend reversal.
• The bearish harami cross also features a doji. This doji appears after a long green candle instead. It typically makes an appearance during an uptrend and is an indicator of reversal.
• The bullish engulfing pattern also takes the candlestick patterns of two trading sessions into consideration. It features a red candle, followed by a much larger green candle. The green candle appears in such a way that it completely engulfs the red candle. The pattern holds significance only when it appears during a bearish trend.