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Top 3 Most Reliable Candlestick Chart Patterns

This blog post provides a simple description and accuracy rate of each pattern, and will not teach how to trade. If you are not familiar with Candlesticks terminology, I recommend you read our Blog Post called Candlestick Basics before proceeding.

Reversal Chart Patterns are not all equally reliable; some are proven more reliable than others. Also, unfortunately, you will find so many inaccurate descriptions of the patterns all over the web today that could lead to confusion. So I´d like to advise you to always diligently perform your researches by using trustworthy websites like Investopedia.com for example.

Trading has changed drastically due to the modern electronic tools and machines, and inevitably so has the patterns:

“Not all candlestick patterns work equally well. Their huge popularity has lowered reliability because they’ve been deconstructed by hedge funds and their algorithms. These well-funded players rely on lightning-speed execution to trade against retail investors and traditional fund managers who execute technical analysis strategies found in popular texts. In other words, hedge fund managers use software to trap participants looking for high-odds bullish or bearish outcomes. However, reliable patterns continue to appear, allowing for short- and long-term profit opportunities.”

INVESTOPEDIA.COM

The following top 3 most reliable reversals work particularly well to predetermine price inclination and momentum according to Thomas Bulkowski´s analysis who wrote “Encyclopedia of Candlestick Charts” where he built performance rankings for reversal and continuation patterns with accuracy ratings to define the more reliable from the least.

Three Black Crows

This is a bearish reversal chart pattern, consisting of 3 long bearish candles with short lower wicks, where the openings of candles are above the previous day closing. Usually occurs at the peak of up trending high prices (new highs) or after a period of consolidation. The pattern suggests the market has reversed and will continue to downtrend with a 78% accuracy rate according to Bulkowski´s analysis. The opposite of this pattern is the three white soldiers.

1. Uptrend — High Prices

2. Day One: A long bearish candlestick short lower wick;

3. Day Two: Another long bearish candlestick, a gap up, opening price higher than the closing price of day 1 and short lower wick;

4. Day Three: Yet another long bearish candlestick, another gap up, opening price higher than the closing price of day 2.

Two Black Gapping

This a bearish continuation pattern. Gapping means the stock opened at a significantly higher or lower price than previous day´s closing, and according to Investopedia it must be within previous day´s range or else it would be considered a FULL GAPPING (outside of the previous day´s range). It appears after a noticeable top or a peak, after a gap down look for two bearish candles with the second candle showing a lower high to confirm the markets decline and continuation of the downtrend or lower lows. According to Bulkowski´s

1. Noticeable Top or Peak (Uptrend)

2. Day One: Gap down, bearish bar in a downtrend, opening price gaps lower than the previous candlestick;

3. Day Two: bearish bar opens lower than Day 1´s opening but higher than its low. Closing below day 1´s closing.

PS: Candlesticks 1 & 2 can be any kind of candle except Dojis.

Three Line Strike

The bullish Three Line Strike reversal pattern despite the name it consists of 4 candlesticks or lines as the name suggests. The first 3 are red candlesticks in a downtrend, and the last one is a green candlestick that engulfs the previous three. This is a rare pattern that suggests higher prices with accuracy of 84% according to Bulkowski.

1. Downtrend

2. Day One: a bearish candle;

3. Day Two: bearish candle that opens above the closing of day 1 and closing price is below day 1 closing;

4. Day Three: a bearish candle that opens above the closing of day 2 and closing price is below day 2 closing;

5. Day Four: a bullish candlestick that opens below the closing of day 3 and closes above the closing price of day 1. Engulfing all previous candlesticks.

Bonus two:

Evening Star reversal chart pattern predicts lower prices with 72% accuracy rate and Bullish Abandoned Baby reversal chart pattern predicts higher prices with a 70% accuracy rate according to Bulkowski. You can find a description of both patterns (and otheres) in our Blog.

The Winco Team

Disclaimer: This blog post is not intended to be a source of investment, financial, technical, tax, or legal advice. All of this content is for informational purposes only.

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