In order to identify bullish or bearish candles, one should primarily know what data each candle holds. We need to learn how to read candles.
A candle has four features known as, Open, High, Low, Close (OHLC).
1 - High
2 - Open
3 - Close
4 - Low
During the formation, the candle starts its journey at the Open price, generally the Open price is equal to the Close price of the previous candle, however in some cases where the market is volatile gaps may form. The journey goes on when buyers and sellers take over the price movement during the market hours, if sellers take charge the price goes down, when buyers take over the control, the candle starts going up, this is when wicks are formed. A candle may be referred to as a battleground of buyers and sellers. When the time period of the candle expires, and the candle closes below the Open price, it turns red, showing that the sellers took control over the price to their side. High and low are the highest and lowest levels of the price during this battle in the market.
What are the bearish candlestick patterns?
Now that you have learned about the candlestick formation. Let’s identify the bearish patterns.
The Dark Cloud Cover
The dark cloud is a bearish candlestick pattern which shows the strength of sellers and completely absorbs the previous green/light (bullish) candle. The opening price of the candle is higher than the opening price of the previous bullish candle, the closing price of the candle is lower than the opening price. To trade this pattern, a trader should wait for the next candle to form, which as a rule tests the opening price or in extreme bearish the closing price of the dark cloud as a resistance, and acts as a confirmation.
Three black crows
The term black is used as previously candles had only two color schemes, black and white, whereas black referred to a bearish candle and white to a bullish candle. However the pattern is still valid until nowadays whereas various platforms allow use of different colors, most notably - green and red. Three black crows demonstrates the extreme power of sellers, who are willing to get the price lower. This power is so extreme that it has enough force to reverse the trend. As a general rule, the last two candles should have the opening price lower or at the same level of the closing price of each previous candle. However this rule has an exception during high market volatility.
Similar to the Dark cloud, although this candle completely absorbs the previous bullish candle.
The opening price of this candle usually is higher than the closing price of the previous bullish candle, which indicates a gap between the opening price of this candle and the closing price of the previous candle. The previous bullish candle is completely absorbed by the bearish engulfing demonstrating the strength of sellers. The engulfing demonstrates the strength of sellers and the weakness of buyers, meaning that buyers in this period do have enough purchasing power to even close the candle at breakeven. The foregoing trend reversal is expected whenever this candle is formed.
When trading these candles always place your SL 10 pips above the closing price of the bearish candlestick. Adjust take profit levels according to the previous resistance and support levels.
These were the 3 main bearish candlestick patterns you should watch whenever you are trading any asset. During trading of these patterns it is essential to use Stop-loss and Take-profit as in every market the trend may reverse at any time when important supports are reached. Best to use these patterns with oscillators and indicators, for example: RSI, MACD, Momentum, Williams R%. Train your knowledge on Overbit’s demo account to firm your trading skills.