Most candlestick and chart patterns are a combination or variation of just a few types – you really don’t have to know them all. In fact, understanding what price action is saying is a far more simple way of anticipating future price movement than having to recall countless theory.
However, for anyone interested in learning everything there is to know about candlestick and chart patterns here are two excellent reads:
• Japanese Candlestick Charting (by Steve Nison)
• Encyclopedia of Chart Patterns (by Thomas N Bulkowski)

Both these authors have since written new books on the same topic which you may prefer.
In this section we will not only cover the only chart and candlestick patterns you will ever need but I will also explain why they are the most useful, the easiest to remember and why they are most likely to succeed.
Candlestick patterns
I will start with candlestick patterns because these can be very useful in combination with chart formations. In fact, it is very important not to think of candlestick patterns as being standalone objects. They can have wonderful and descriptive names – which may make them seem more important than they actually are.
Doji
One of the most popular, and easily recognisable, candlesticks is the doji.

A doji is categorised as an “indecision” candle because price opens and closes at the same (or similar) point. This means that although price ranged during the session it could not decide whether to be bullish (and close higher) or be bearish (and close lower).
A classic doji is where price opens and closes halfway between the high and the low of a relatively large-ranging session.
Dojis can have a bullish bias (opening high, ranging lower, then closing high) or a bearish bias (opening low, ranging higher, then closing low). But even these are considered indecisive.
Many bars can look like dojis but we should only attach meaning to them if they are at the extreme of a trend (or extreme of a counter trend/reversal). As dojis are not reversal candles we should not expect price to reverse – but we should be ready if it decides to do so. Hence the categorisation of “indecision”.
There is another candlestick related to the doji which also signifies indecision:
• Spinning top – like a classic doji but with a slightly larger body
With dojis and spinning tops it is quite important for the wicks to be considerably longer than the body – and preferably with a bigger range than the bars before (or after) it.
Also in the doji family are a few more candles, but in this case are considered reversal patterns. Again, these are only of significance if at the extreme of a trend/countertrend.
Reversal of an uptrend:
• Hanging man – a larger body at the top of the bar with the wick below
• Shooting star – a larger body at the base of the bar with the wick above

Reversal of a downtrend:

• Hammer – a larger body at the top of the bar with the wick below
• Inverted hammer – a larger body at the base of the bar with the wick above

With the four reversal candlesticks it should be noted that:
• The wick of the candle should be at least twice the length of the body
• A confirmation bar is required (i.e. a higher bar in a downtrend and a lower bar in an uptrend)

Of all these candlesticks the most important one to know and be able to recognise the doji.
But please be aware that it is not unusual to have several doji in a row – either moving up, down or sideways. This is why we should not think of them as reversals but as indecision candles. You must always wait for the next bar to close to confirm the outcome.

Engulfing candles
Engulfing candles are also very easy to spot, with a little practise, and are very useful reversal signals. There are two types:
• Bullish engulfing candlesticks
• Bearish engulfing candlesticks

A bullish engulfing candlestick pattern is comprised of a large bodied bullish bar that engulfs a smaller bodied bearish bar in a downtrend (to signal a reversal from a downtrend to an uptrend).
A bearish engulfing candlestick pattern is comprised of a large bodied bearish bar that engulfs a smaller bodied bullish bar in a uptrend (to signal a reversal from an uptrend to a downtrend).
Note: A bullish bar is one where price closes higher than it opened and a bearish bar is one which closes lower than it opened. The higher a bullish bar closes to the high of the range the more bullish it is. And the closer a bearish bar closes to the low of the range the more bearish it is.

With engulfing patterns we only need to look at the bodies of the bars – we can ignore the wicks. The first bar’s body must be smaller than the second bar’s body – as well as being within the open and close range of the second bar – in order for the second bar to engulf it.
These engulfing patterns are very effective because the second candle gives us a decisive move in the opposite direction. However, there is no way of measuring how long the reversal will last – regardless of the relative sizes of the bars.
Chart patterns
Once candlestick patterns get to be more than two bars we can start calling them chart patterns. There’s no difference in the formation (just a difference in terminology). In the West chart pattern names have been around longer than candlestick ones so it really is just a matter of preference.
Chart patterns are often grouped into “continuation” and “reversal” categories. Sometimes this can be useful and other times it can confuse – because some patterns can be both. This makes judging their success rate difficult.
So here I am going to show you how I use some of the most popular chart patterns. It includes all the ones I rely, and use, on a regular basis.
Flags
One of the most useful continuation patterns to know is the flag. They are very effective and straightforward to recognise.
There are two types of flag:
• Bullish flags
• Bearish flags

As the names suggest, a bullish flag indicates a continuation of a bull/up trend and a bearish flag indicates a continuation of a bear/down trend (after a brief pullback).
The textbook flag is often depicted with a linear counter move against the trend for a few bars followed by one large bar which engulfs the whole reversal move. In reality, while we do often see such uniform flag formations, more often than not they look a lot messier.
Here are some rules for flags:
• Between 2 and 11 bars making the pullback
• No part of the pullback bars should breach the extreme of the original pivot high/low
• A flag is confirmed when the body of the breakout candle goes beyond the original pivot

A flag is an effective pattern because price has only pulled back for a few bars – not enough to worry about price falling into consolidation. Generally the pullback will not be too deep, either, but even if it is you can still trade the breakout (if you wish) as the duration has been short. Price has told us it’s just taking a little breather before continuing with the original trend.

Double tops and double bottoms
Double tops and bottoms are often used as a trend reversal signal but I do not find them a reliable pattern for this. Afterall, they may turn in to triple tops/bottoms or consolidation. And generally trying to anticipate trend-changing reversals is not at all straightforward – or necessary.
So another way to use them is as a continuation pattern and look for:
• A double bottom in an uptrend
• A double top in a downtrend

When the neckline is broken (with the body of the breakout bar) then the pattern is confirmed and a continuation of the trend is likely to resume.
The two extremes of the double bottom/top should be within a few ticks of each other. This can be a little discretionary if one of the tops/bottoms is affected by a level of support or resistance (such as a round number or moving average). But generally you should be able to draw a horizontal line to connect the two points.
Double tops/bottoms often work well as a continuation pattern because price is finding support (in an uptrend) or resistance (in a downtrend) with the overall trend winning the day.

Measured moves
A measured move is when we expect price to move a particular amount based on a previous move. Measured moves only anticipate price – not time.
Double tops and bottoms fall in the category of anticipating a measured move. The price difference between the extreme of the double top/bottom and the neckline of the double top/bottom is how much we would expect price to move after the completion of the pattern.
While measured moves give us a target for price we should never rely on them to transpire. Other factors can affect them and render them unfulfilled (such as a strong level of support/resistance situated between current price and the target price). However, provided you are aware of this, it is surprising how often the move materialises. Anticipation – but not expectation – is the key here.
Head and shoulders
Head and shoulder patterns are a bit more difficult to identify – even for more experienced traders. Sometimes they are very clear cut, other times one or both of the shoulders can be difficult to clarify.
Head and shoulders are reversal patterns – with price reversing from the turning point of the ‘head’ – but not necessarily trend-reversing patterns. As with double tops/bottoms they can also be used to confirm the trend direction.
There are two types of this pattern:
• Head and shoulders
• Inverted head and shoulders

A head and shoulders formation in an uptrend can signal a trend reversal. In a downtrend it is more likely to signal a continuation.
An inverted head and shoulders formation in a downtrend can signal a trend reversal. In an uptrend it is more likely to signal a continuation.
For a head and shoulders pattern you get a pivot high, pivot low, higher pivot high, pivot low, lower pivot high. The opposite is true for an inverted head and shoulders. The pattern is confirmed when price breaks the neckline.
The neckline for this pattern is found by drawing a line to connect the two pivot lows (for a head and shoulder) or the two pivot highs (for an inverted head and shoulders) and extending it to intersect price.
In a textbook head and shoulders pattern the neckline is a horizontal line (in addition, the shoulders are the same height, too). But this is not the case in practice. Shoulders can be lopsided and the neckline will usually be at an angle.
The measured move for this pattern will be calculated from the extreme of the head to where the neckline intersects the most recent bar. And the measured move is anticipated to begin from where price intersects the extended neckline.
So whether the neckline is ascending or descending can play a part in the success of the measured move (bearing in mind the move can also be affected by horizontal lines of support or resistance).
If the head and shoulders pattern is difficult to identify then don’t worry – just look at price action and see what it is telling you. Price made a new high, retraced a little, made a higher high, retraced, could only manage a lower high, retraced. This tells you there is weakness. And the opposite for the inverted head and shoulders holds true. This can be seen even if you are unable to clearly identify the two shoulders.
Finally, even if you miss the pattern altogether you should be able to see the flag formation of the second shoulder. If this is not clear, either, then neither pattern is helping with the analysis and this is often due to price consolidating. In which case we need to stand aside until a new trend develops.
Cup and handle
To identify a cup and handle you need to look for a large rounded bottom followed by a smaller (both in width and depth) rounded bottom.
On a daily chart cup and handles can be spiky rather than rounded – more of a goblet and v-shaped handle. They can be quite skewed as well. It is not unusual for the cup aspect to look similar to a double bottom or an inverted head and shoulders pattern.
For some reason, cup and handles are far more commonly identified at the start of a bull market. While inverted cup and handles do exists they are not often spotted.
A cup and handle is often easier to see on the larger timeframes (weekly or monthly charts) because there is less “noise”. While this isn’t ideal as a tradable pattern, due to the duration, once your eye is trained to see them you will soon start to notice them on a daily timeframe, too.
Cup and handles are a fairly reliable reversal chart pattern (with the reversal taking place at the base of the ‘cup’) although I rarely have the confidence to trade the breakout bar due to the duration of the formation. They can take several weeks to form, even on a daily chart. The measured move from the base to the top of the cup can be used to project a target price – but the move is often not as immediate as it is with other chart patterns.
A cup and handle formation in a downtrend can signal a trend reversal. In an uptrend it is more likely to signal a continuation.
An inverted cup and handle formation in an uptrend can signal a trend reversal. In a downtrend it is more likely to signal a continuation.
The most critical aspect of this pattern is the importance of the start of the cup being on the same horizontal level as the end of the cup before the handle forms. Then once the handle breaks beyond this horizontal neckline the formation is complete and the measured move begins.
Cup and handles are supposed to be a rare but powerful chart pattern. They tells us that price has moved smoothly and gently to an extreme then reversed its trend – again in a slow and even manner. It tests the beginning price of the cup, reverses against it to form another, smaller arc/handle. Price does not come close to the extreme base of the cup, showing the previous trend has lost momentum and price has now reversed.

Summary
In this section we covered a number of price formations:
• Candlestick patterns
• Doji – including related bars: spinning top, hanging man, hammers and shooting stars
• Engulfing candles – either bullish engulfing or bearish engulfing
• Chart patterns
• Flags (bullish and bearish)
• Double tops and double bottoms
• Head and shoulders (and inverted head and shoulders)
• Cup and handle (and inverted cup and handle)

Chart and candlestick patterns can be a very useful addition to a trader’s arsenal. They give us confidence about what is likely to happen next. However, they should never be used as a standalone indicator as they can be wrong more often than they are right.
For this reason it is not necessary to know all the different types of formations not mentioned here. In fact if you are happy interpreting what these few patterns are telling you about price action then you really don’t need to know any at all!

So saying, it is helpful to have a shorthand so using the industry standard makes sense. It also makes communicating with other traders easier – as well as understanding your own notes (and reasons) for taking a trade.
In this lesson we looked at using candlestick and chart patterns to give us added confidence in anticipating the trend direction during possible pullbacks or reversals. If we can identify one or more then we know the move is more likely to occur than if a pattern is absent. In the next section we use our pullback and pattern recognition techniques to assess the linearity of a trend.