Candlestick patterns stand as fundamental tools in the arsenal of any technical analyst. It’s because they can offer invaluable insights into market trends and potential price movements.
They can help traders interpret possible market trends and also signal bullish or bearish movements. And these trends and patterns, in turn, help traders to form their trading decisions.
Today, we will be talking about a simple candlestick pattern that’s commonly used for identifying trades in the direction of the trend.
But before that, here’s a quick look at what candlesticks are and how to identify the patterns they form.
Candlesticks & Candlestick Formations
Candlesticks serve as the cornerstone of chart analysis, revealing crucial patterns that aid traders in decision-making processes. These patterns, formed by the arrangement of two or more candles, provide invaluable cues for entry, stop-loss, and exit levels within a trade.
While some patterns emerge from a single candle, others manifest through multiple candles, each carrying distinct significance.
Strength is represented by a green or bullish candle. On the other hand, weakness is represented by a red or bearish candle.
A general rule of thumb is to look for a prior period while reading candlesticks.
If you are looking at a bullish pattern, the prior trend should be bearish. And likewise, if you’re looking for a bearish pattern, the prior trend should be bullish.
Below is a quick cheat sheet showing five types of bullish and bearish candlestick formations.
Bullish & Bearish Candlestick Formations 
With that in mind, let’s get talking about a simple way to spot and trade these formations in the direction of the trend.
Trading Candlestick Formations
Now, the best way to go about spotting candlestick formations is to know them by memory.
You can do that by reviewing the above cheat sheet and practicing how to find those formations on your charts.
Alternatively, if you’re on the SmartTrader trading platform, a simpler way to identify these patterns is to click on the ‘Candlestick Tools’ button, which allows you to activate all the bullish / bearish candlestick formations and gives you all the formations that meet the formula on your selected chart.
Here’s how it would look on the chart:
Green Candlesticks Highlighting Bullish Formations 
Once this is done, one way to trade these candlesticks is to spot them at the bottom of retracement.
That means identifying the green candlesticks that are at the lowest levels during a given time and setting a trade on them for higher levels.
So, once you spot a green candlestick from where the trend on the chart is reversing, you can place a trade for higher levels (as the pattern is indicating an uptrend).
The opposite goes for red candlesticks. Here you will identify the red candlesticks that are at the highest levels on the charts during a given period of time and set a trade on them for lower levels.
Here’s an easy way to understand this…
- Look for candlestick formations in an Uptrend if you’re looking to Buy
- Look for candlestick formations in a Downtrend if you’re looking to Sell
- For a better chance of success, trade the candlesticks at the end of retracements (as compared to trading the ones that are already in a trend)
So, that was one of the many simple ways in which you can trade using candlestick formations.
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