Neutral Patterns

Neutral patterns are ones that induce a price move, but the direction is unclear. The
most common neutral triangle patterns are the Ascending Triangle, Descending
Triangle, Symmetrical Triangle, and Symmetrical Expanding Triangle.
See examples below

Neutral patterns
Chart Pattern Price Targets
Let’s focus on flags, pennants, and the head & shoulders patterns to start.
Flags & Pennants
Checklist

 Break: For a bullish flag or pennant, a break above resistance signals that the
previous advance has resumed. For a bearish flag or pennant, a break below
support signals that the previous decline has resumed.

 Volume: Volume should be heavy during the advance or decline that forms the
flagpole. Heavy volume provides legitimacy for the sudden and sharp move that
creates the flagpole. An expansion of volume on the resistance (support) break
lends credence to the validity of the formation and the likelihood of continuation.

 Targets: The length of the flagpole can be applied to the resistance break or
support break of the flag/pennant to estimate the advance or decline.

Here is an example of setting up a trade for both a bullish and bearish pennant (a flag is
the same concept just the shape of the consolidation is a rectangle versus a triangle as
seen in the examples above).
Head and Shoulders
(Same guidelines are applied to the inverse pattern)
Checklist
Trend recognition: It is important to establish the prior uptrend for this to be a reversal
pattern. Without a prior uptrend to reverse, there cannot be a head & shoulders reversal
pattern.
Left shoulder: When price is in an uptrend, the left shoulder forms a peak that marks
the high point of the current trend. After peaking, a decline begins to complete the
formation of the shoulder. The low of the decline usually remains above the trend line,
keeping the uptrend intact.
Head: From the low point of the left shoulder, an uptrend begins that exceeds the
previous high and marks the top of the head. After peaking, the low of the subsequent
decline marks the second point of the neckline. The low of the decline typically breaks
the uptrend line, putting the uptrend in jeopardy.
Right Shoulder: The advance from the low of the head forms the right shoulder. This
peak is lower than the head (a lower high) and usually in line with the high of the left
shoulder. While symmetry is preferred, sometimes the shoulders can be imperfect. The
decline from the peak of the right shoulder should break the neckline.
Neckline: The neckline forms by connecting the two low points.The first low marks the
end of the left shoulder and the start of the head. The second low marks the end of the
head and the start of the right shoulder. Depending on the relationship between the two
lows, the neckline can slope up, slope down or be horizontal. The slope of the neckline
will affect the pattern’s degree of bearishness — a downward slope is more bearish
than an upward slope.
Volume: As the Head and Shoulders pattern unfolds, volume plays an important role in
confirmation. Volume can be measured as an indicator (OBV, Chaikin Money Flow) or
simply by analyzing volume levels. Ideally, but not always, volume during the advance
of the left shoulder should be higher than during the advance of the head. Together, the
decrease in volume and the new high of the head serve as a signal. The next signal
sign comes when volume increases on the decline from the peak of the head, then
decreases during the advance of the right shoulder. Final confirmation comes when
volume further increases during the decline of the right shoulder.
Neckline Break: The head and shoulders pattern is not complete and the uptrend is not
reversed until neckline support is broken. Ideally, this should also occur in a convincing
manner, with an expansion in volume.
Price Target: After breaking neckline support, the projected price decline is found by
measuring the distance from the neckline to the top of the head. This distance is then
subtracted from the neckline to reach a price target.
See detailed example below.

The same can be applied to an inverse head & shoulders which is a bullish reversal
pattern. See below for trade setup examples.

The Anatomy of a Candlestick

Firstly, let’s have a look at a visual look of a candlestick:
Above we can see a bullish and a bearish candlestick, with opening and closing prices
in opposite directions.
The main body is the broader part of the candlestick that shows the opening and closing
prices. In a bullish candle, the opening price is below the closing price, indicating the
price has risen over the trading session’s period.
On the other hand, the opening price is above the closing price in a bearish candle,
showing that the price has decreased during the trading period.
The length of the candle’s body represents the market pressure. An extended length
indicates strong movement, while a short length represents minor price movement.
Now, let’s learn how to read the red and green candlesticks in any crypto pair.
Typically, the green color (or buying pressure) of a candle represents a bullish
candlestick, and red indicates a bearish candlestick. However, you can change the color
at any time according to your choice and trading template.
The wick is the thinner part of the candlestick, attached above and below the candle
body. The wick above the candlestick’s real body indicates the highest price level during
the trading time frame.
Opening High and Closing Low Price (OHLC) Explained
An OHLC (open-high-low-close) candlestick chart type shows the open, high, low and
closing prices for a particular time period.
The open level is the price at which the previous candle closes. This price will move up
or down, and will create a new high or low. When the candle closes, it will point to a new
closing price. The future price of a candlestick stock depends on how these levels
(OHCL) appear.
Let’s take a look at an example.
Let’s say that Bitcoin’s price has moved above $30,000 on a particular day, making a
high above the crucial $30,000 level. However, the price then moves lower and closes
the daily candle below $30,000 by forming a Doji or pin bar pattern.
What does this mean for you?
It simply means that buyers tried to take the price above the $30,000 level but failed,
and sellers thus took control over the price. This is a clear indication that the price has
failed to achieve stability above $30,000, and that it may be a good idea to sell now.
Identifying Candlestick Patterns
Each candlestick forms patterns that traders can use to recognize major support and
resistance levels. A great way to start is to first identify the candlestick patterns. Here’s
what you need to know.
When Does a Candlestick Pattern Start to Show?
Candlestick patterns are a combination of some candlesticks representing a story about
buyers and sellers for a particular time. However, price movement in financial markets
depends on both supply and demand, and on traders’ emotions (which create “market
sentiment,” or the market’s overall tone or mood). As soon as the price reaches a
resistance or support level, candlestick patterns will start to emerge.
Therefore, when a price moves to a significant zone, candlestick patterns will become
very important.
For example, Bitcoin’s high psychological level of $60,000 in the spring of 2021 became
a strong resistance level that attracted many buyers and sellers.
Let’s look at the BTC/USD graphic below.

Bitcoin creates an indecisive candle near the significant round number of $60,000,
indicating a starting point of a pullback. Its price then falls with an impulsive bearish
pressure toward the downside.
So, what will you do if you find an appropriate candlestick pattern at a critical support or
resistance level?
You should closely track buyers’ and sellers’ activity, and enter a trade once the
direction is set. The best solution is to wait for an appropriate candlestick pattern at
either a support or resistance level, and enter your trade after a rejection.
Understanding Candlestick Chart Patterns and Trends
Trends are usually represented by the ups and downs of an asset’s price on the
candlestick chart. The high and low points of several small trends are grouped to form a
more significant trend.
Upward Trends: These appear when a chart has new low points, higher than the
previous lows, and new high points that are higher than the previous highs. During an
upward trend, traders are confident to trade, and the market is generally bullish.
Downward Trends: As opposed to upward trends, a downward trend’s chart has new
high points, lower than previous high points, and new low points that are also lower than
previous low points.
Consolidation Trends: The prices in a consolidation trend don’t move consistently in
one direction. Instead, the movement switches between high and low, with the high and
low points being relatively close to one another and forming a “channel.”
How to Read Candlestick Charts
Candlesticks charts are like books in which a trader can easily read the price from left to
right. They’re not technical to read, but there’s a learning curve to analyzing the chart.
There are no specific rules, but it’s recommended that you start reading candlesticks
from the far left until you see the first candlestick. Focus on the speed of the trend and
candlestick formation at its end.
Let’s take a look at a practical example to understand better.

Here we can see a daily Bitcoin chart in which the price has started to move higher with
a bullish engulfing pattern. Later on, the trend corrects and moves lower. The price then
forms another bullish engulfing pattern, moves higher and forms a new high.
Still, the best way to interpret the data of a candlestick chart is by using technical tools,
such as stochastic and RSI indicators and moving averages, for an accurate price
direction.
Important Note:
To read the candlestick chart accurately:
1. Use higher time frames
2. Focus on price action located at key support and resistance levels
Trading Time Frames
Time frames are an essential tool for traders. Although there are candlesticks patterns
in all time frames resulting from the price movement, there’s technically no difference
from higher to lower time frames.
However, higher time frames generally provide a more accurate price direction than the
lower time frames. Therefore, if you trade any cryptocurrencies intraday, you should
view the price direction daily or using H4 candles (four-hour intervals). When the lower
time frame and higher time frames match directions, you can find profitable trades.
Price Action
A hammer is a reversal candlestick, but does this mean you need to sell immediately as
soon as you see a hammer candlestick on a chart?
The answer is no.
Candlestick patterns at a random place on your price chart don’t necessarily provide
accurate signals. However, a candlestick pattern within a trend — and at a perfect
location — can provide you with high-probability trades.
Therefore, always look for the support and resistance levels on a chart. Moreover, it
helps if you consider the market context and the overall trading environment to increase
your odds of success.

In the above BTCUSD chart, we can see a bullish engulfing pattern at the $30,000 level.
However, after the bullish engulfing bar, a bullish shooting star appears, and it fails. This
is because it’s randomly placed, instead of at a support or resistance zone.
Here are some other considerations.
 Impulse price movement: When the price moves with a solid bullish or bearish
pressure, it aggressively creates new highs or lower lows.
 Correction movement: After a breakout, the asset will fall into a correction state
in which the correction price becomes lower.
 Volatility: In a volatile market, the price action breaks recent highs and lows but
doesn’t set any direction.
 Non-volatility: In a non-volatile market, the price aggressively moves higher or
lower, indicating solid market dominance.
The ETH/USD price chart above shows the four different types of price actions. If you
can match the context with the candlestick formation, you can easily define the possible
price movement in any asset.
How to Use a Pattern to Place a Stop-Loss and/or Take
Profit
Having a stop-loss is an essential risk management tool for crypto trading in order to
limit your losses on an open position. The key advantage of using a stop-loss order is
that it helps you cut your losses without having to monitor your assets daily. Without a
stop-loss, you’re risking your investments.
The ideal place for setting a stop-loss is below or above the candle’s low/high, with
some buffer.

For example, in the ETH/USD chart above, we can see a hanging man pattern formed
at a critical support level, indicating a potential bullish movement in the price. The ideal
stop-loss should be below the candlestick pattern with some buffer, and the take profit
would be near the resistance level.
Popular Candlestick Patterns
There’s no denying that candlestick patterns play a significant role in technical trading.
A candlestick pattern is especially useful for determining possible price movement and
market trends, based on past patterns.
Of course, there are also a variety of candlestick patterns that signal bullish and bearish
movements. But, which are the best candlesticks to use?
Head and Shoulders
The head and shoulders pattern is a trusted reversal pattern that indicates a potential
shift from an uptrend to a downtrend. It consists of three distinct peaks — a higher peak
(the head) between two lower peaks (shoulders). This pattern is completed when the
price falls below the neckline, which is a support level formed by connecting the lows of
the two shoulders. As a reversal pattern, the head and shoulders is most effective when
used in the context of an existing uptrend.
Bullish and Bearish Engulfing
The bullish engulfing candle pattern consists of a combination in which the first candle is
red (bearish). After the red candle closes, a green candle appears, engulfing the body of
the previous candle and closing above its high. On the other hand, the bearish engulfing
candle is the opposite of the bullish engulfing candle, with a green candle appearing first
and a red candle engulfing the body of the first green candle.
Did You Know?
The engulfing pattern indicates price direction changes from bullish to bearish — or
bearish to bullish — as soon as the candle closes above or below the previous candle’s
closing price.

In the image above, we can see how an engulfing candlestick pattern forms in the
market.
The engulfing pattern at a strong support level works as a vital price reversal zone in the
following price chart.

Hammer Candlestick

The hammer candlestick has a long downside wick, and a bullish or bearish small body
to the upside. This type of candlestick usually indicates an asset’s exhaustion in the
market, meaning there will be an upcoming trend reversal. This means that sellers have
entered the market, pulling the price down, but are being countered by buyers who drive
the price up.
The ideal price location of the hammer candlestick pattern is at the end of a downtrend.
If you want to open a trade based on the hammer candlestick, wait for the candle to
close before entering a trade. Once the price breaks above the candle’s high, then it’s
time to enter.
Learn more: How to Trade with Hammer Candlestick
Shooting Star
The shooting star candlestick is the opposite of a hammer candlestick. It can be
recognized by its long upside wick and small downside body. If you find the bullish or
bearish shooting star at any important resistance level, it indicates a potential selling
opportunity to consider.
The ideal price location of the shooting star pattern is at the end of an uptrend.
Learn more: How to Use Shooting Star Candlestick Pattern to Find Trend Reversals
Hanging Man
Hanging Man is like the hammer candlestick, with open, high and close prices that are
almost the same. There should be a long shadow (wick) to the hanging man
candlestick, at least two times higher than the candle’s body.
In the bearish hanging man, the opening and high prices are the same, whereas, with
the bullish hanging man, the closing price and high prices are the same.
Learn more: How to Use Hanging Man Candlestick Pattern to Trade Trend Reversal
Triangle Patterns
Triangle patterns appear when buyers and sellers become indecisive about the market.
Hence, the price starts to squeeze.

In triangle patterns, the price moves within two parallel trend lines that begin squeezing
together. There are three types of triangle patterns in the financial market.
 Ascending triangle: A bullish formation that indicates a potential upside
breakout. The ascending triangle can be identified by a flat top and an ascending
support trend line.
 Descending triangle: A bearish formation of the pattern that indicates a
potential downside breakout. The descending triangle can be identified by a flat
bottom and a descending resistance trend line.
 Symmetrical triangle: The price begins to narrow, and may move up or down
after the symmetrical triangle breakout. The pattern can be identified by an
ascending support trend line and a descending resistance trend line.
The chart above shows a real example of a symmetrical triangle on a daily Bitcoin chart.
The price makes both lower highs and higher lows within the pattern, then breaks above
the pattern and initiates a strong bullish movement.
Pros and Cons of Using Candlestick Charts
Candlestick charts are an excellent tool traders can use to interpret possible market
trends and make strategic decisions. Still, there are limitations to be aware of.
Advantages
 A picture is worth a thousand words: Candlestick chart offer more accurate view
of the price
 Candlestick charts are easy to understand, with no need for advanced skills
 Prices are easily predictable with visible buyers’ and sellers’ activity
 Candlestick charts show potential buying and selling opportunities from solid
price levels
Limitations of Candlestick Charts
 Although Candlestick charts show buyers’ and sellers’ activity in the price, they
don’t indicate market volume
 Candlestick charts don’t rely on market fundamentals, but rather the price
reaction to them
 Candlestick patterns at random places on a price chart often provide false
directions
 Using candlestick charts without other info can lead to “paralysis by analysis”

The 16 Top Candlestick Patterns

While there are plenty of candlestick patterns, we’ll list the most popular and reliable
ones, starting with bullish patterns, which show up after a downtrend and anticipate an
upward reversal. Cryptocurrency traders usually open long positions when these
patterns appear.
1. Hammer
The hammer candlestick consists of a short body with a much longer lower shadow. It’s
called a hammer pattern because the candlestick resembles the shape of an upright
hammer. As a rule, you’ll find the hammer at the bottom of a downtrend. This pattern
indicates that bulls have resisted the selling pressure during a given period, and have
pushed the price back up. While there may be hammer patterns with either green or red
candles, the former points to a stronger uptrend than red hammers.
2. Inverted Hammer

The inverted hammer is similar to the standard hammer pattern, but it has a much
longer upper shadow, while the lower wick is very short. This pattern suggests buying
pressure, followed by bears’ failed attempts to drag the price down. As a result, buyers
come back with even stronger pression, pushing prices higher.
3. Bullish Engulfing
Unlike the previous two patterns, the bullish engulfing is made up of two candlesticks.
The first candle should be a short red body, engulfed by a green candle, which has a
larger body. While the second candle opens lower than the previous red one, the buying
pressure increases, leading to a reversal of the downtrend.
4. Piercing Line

Another two-candlestick pattern is the piercing line, which may show up at the bottom of
a downtrend at the support level, or during a pullback with the anticipation of a bullish
movement. The pattern consists of a long red candle that’s followed by a long green
candle. The critical aspect of this pattern is that there’s a significant gap between the
red candle’s closing price and the green candle’s open price. The close should also
cover at least half of the length of the previous day's red candlestick body. The fact that
the green candle closes much higher than the open points to buying pressure.
5. Morning Star
The morning star pattern is more complex because it comprises three candlesticks: a
long red candle, followed by a short-bodied candle and a long green one. The morning
star pattern suggests that the first period’s selling pressure is fading, and a bull
market is forming.
6. Three White Soldiers

Another three-stick candle is the three white soldiers. It’s made up of three long green
candles in a row, generally with very short shadows. The primary condition is that the
three consecutive greens have to open and close higher than the previous period. This
pattern is regarded as a strong bullish signal that shows up after a downtrend.
Next, we’ll discuss a batch of bearish patterns that anticipate an uptrend reversal and
usually come at resistance zones. These patterns generally prompt traders to either
close their longs or open short positions.
7. Hanging Man
The hanging man is formed by a green or red candlestick with a short body and a long
lower shadow. It typically appears at the end of an uptrend and suggests a considerable
sell-off is coming, but bulls could temporarily push prices higher, after which they’ll lose
control.
8. Shooting Star

The shooting star is the opposite of an inverted hammer. It consists of a red candle with
a short body and a long upper shadow. Generally, the market will gap a bit higher on
the candlestick opening and will surge to a local peak before closing just below the
open. The body can sometimes be almost nonexistent.
9. Bearish Engulfing
The bearish engulfing pattern is the inverted version of a bullish engulfing, so the first
candle has a small green body and is completely covered by the next long red candle.
This pattern comes at the peak of an uptrend and suggests a reversal. The lower the
second candle continues, the more momentum the bearish move will have.
10. Evening Star

The evening star represents a specific three-stick pattern. It consists of a short-bodied

candle that comes between a long green candle and a large red candle that closes
below the midpoint of the first green candle. This pattern usually appears at the top of
an uptrend and signals a potential reversal.
11. Three Black Crows
The three black crows pattern comprises three long straight reds with short or almost
nonexistent shadows. Every new candle opens at relatively the same price as the
previous one, but goes much lower with every close. It’s regarded as a strong bearish
signal.
12. Dark Cloud Cover

The dark cloud cover pattern is like the piercing line, but is its inverse. It anticipates a
bearish reversal, and comprises two candlesticks — a red candle that opens above the
previous green body and closes below its midpoint. This pattern suggests that bears
have taken control of the market, pushing prices lower. If the shadows of the candles
are short, then traders can expect a strong downtrend.
Besides the bullish and bearish patterns that anticipate trend reversals, there are also
candlestick patterns that are either neutral or point to the continuation of a trend, be it
bullish or bearish.
They include the following:
 Doji
 Spinning Top
 Falling Three Methods
 Rising Three Methods