The 3 Most Profitable Candlestick Patterns And How To Use Them

Written by Julie Brownlee on June 17th, 2016

The 3 Most Profitable Candlestick Patterns And How To Use Them

There’s no doubt that as a trader, finding a strategy that yields profits over the long-term is paramount.

The problem is finding a strategy.

You could literally spend years putting the vast number of fundamental and technical analysis tools to the test.

But is there an easier way to uncover a profitable strategy?

Many traders rely on candlesticks to help them uncover opportunities in the market.

So how can you use this popular trading tool to make you money?

Let’s take a closer look…

 

Using Candlesticks As Part of Your Trading Arsenal

 

When you look at price action on charts, you can do this in a number of different ways.

As well as line charts and bar charts, you can use candlesticks.

What makes candlesticks appealing is the large amount of information presented in an easy to read format.

If you want to find out more about how candlesticks work, check out this article.

As well as displaying a wealth of information about a security’s price, the patterns that candlesticks form can also tell you a lot.

In research conducted by Gaginalp and Laurent in 1998, they uncovered three candlestick patterns worth putting to the test.

Their research concluded that these specific patterns can predict what’s going to happen in the short-term to the price of a security.

And, more importantly, these candlestick patterns produced positive results around three-quarters of the time in their study.

So what are these three profitable candlestick patterns and how can you use them in your trading strategy?

Let’s run through them…

 

 

Candlestick Pattern #1:
Three Black Crows

 

This is a bearish reversal pattern.

In other words, it can indicate that the current upward trend is about to do an about turn into a downward trend.

With the Three Black Crows, you’re looking for three successive bearish candlesticks with long bodies, with the closing price lower each day and the opening price within the body of the candle from the session before.

The pattern looks like this:

Three Black Crows

Here’s what it looks like in action:

Three Black Crows Pattern

Source: Chart-formations.com

As you can see, once the Three Black Crows pattern appears, the price of the security falls, reversing the upward trend.

It tells you that the bulls are losing their drive higher and the bears are taking over

How To Use It

If you’re in a long trade and this pattern appears, it’s a warning to you to consider selling out and closing your position.

You could also use this pattern as an opportunity to put on a short trade to take advantage of the new downward trend.

To yield the best results, you’re best to use this pattern when the price of a security has been in a sustained upward trend.

 

Candlestick Pattern #2:
Three White Soldiers

 

This pattern is the inverse of the Three Black Crows.

It’s a bullish reversal pattern. It can show you that the current downward trend is about to reverse into an upward trend.

With this pattern, you want to see three successive bullish candlesticks with long bodies, with the closing price higher each day and the opening price within the body of the candle from the session before.

The pattern looks like this:

Three White Soldiers

Here’s what it looks like in action:

Three White Soldiers Pattern

Source: Investopedia.com

As the chart shows, once the pattern of the Three White Soldiers appears, the price of the security rises, reversing the downward trend.

In other words, the bears are losing their fight to push the price lower as the bulls push the price higher.

How To Use It

If you’re in a short trade and this pattern appears, it’s a warning to you to consider closing your position.

You could also use this pattern as an opportunity to put on a new long trade to take advantage of the new upward trend.

The Three White Soldiers pattern works best when the price of a security has been in a sustained downward trend.

 

Candlestick Pattern #3:
Three Inside Up

 

Like the Three White Soldiers, this is a bullish reversal pattern.

Spot this and there’s a good chance the current downward trend is going to change into an upward trend.

With this pattern, you’re looking for the appearance of three distinctive consecutive candlesticks:

  • The first candlestick’s body should be long and showing a fall in price. This tells you the price is still in a downward trend.
  • The second candlestick should be about half the size or less than the first candle and is rising in price. You’re looking for it to close at around the midway of the price of the first candlestick.
  • And the third candle should be long, showing a strong rise in price. It should close at a higher price than the open of the first candlestick. If it closes above the high of the second candlestick, this makes the pattern even stronger.

The pattern looks like this:

Three Inside Up

Here’s what it looks like in action:

Three Inside Up Pattern

Source: Tradimo.com

As you can see, once the pattern appears, the security’s price rises, reversing the downward trend.

This tells you that the bulls are winning the fight over the bulls and go on to push the price higher.

How To Use It

If you’re in a short trade and you spot this pattern, it’s time to consider closing out your trade.

You could also take this as an opportunity to put on a new long trade to take advantage of the ensuing upward trend.

The Three Inside Up pattern works best when the price of a security has been in a sustained downward trend.

 

What You Need To Know Before Using These Patterns

 

Whilst these three candlestick patterns have shown to be highly predictive, you need to bear in mind that nothing is fool-proof in the world of trading.

Before you start using these patterns as part of your trading strategy, practise spotting them and watch what happens.

When you use reversal patterns, they tend to produce the best results after a sharp upward or downward trend.

As with all technical analysis tools, it’s a good idea to use these patterns in conjunction with other indicators to give you further confirmation before you make your move in the market.

Until then, here’s to profitable trading. 

Julie Brownlee | The Money Lab

Julie Brownlee
Editorial Contributor
The Money Lab