Double Candlestick Patterns: Definition, Example, Types, And Backtest
Double candlestick patterns are common, and this article explains what they are and which candlesticks can be called double candlestick patterns. They are used to predict continuation or reversal patterns, and we show you which ones are good and how profitable and reliable they are.
Key Takeaways
- Double candlestick patterns, composed of two specific candlesticks, are used in technical analysis to signal potential trend reversals or confirmations, with popular examples being Bullish Engulfing and Bearish Engulfing patterns.
- These patterns can be used as stand-alone patterns or with other indicators like volume, volatility, and general market sentiment, rather than being used in isolation.
- However, their effectiveness depends on many factors such as the trader’s proficiency in pattern recognition, risk management, and how it’s used with other technical indicators.
- We have quantified all candlestick patterns into quantified trading rules and backtested them. We also have the code for Amibroker and Tradestation. You will find it in our candlestick course.
What are Double Candlestick Patterns?
Dual candlestick patterns are comprised of two individual candles that together form a pattern or formation. Hence, you need data for two trading days to form a pattern.
An example of a double candlestick pattern is the Engulfing pattern, either bearish or bullish. Below is an image and example of a double candlestick pattern:
The image above contains two bearish engulfing patterns. The first candlestick is hollow or white, meaning the close is higher than the open, while the second candlestick is filled or black, meaning the close is lower than the open. The bullish engulfing has the opposite colors and pattern. Ironically, the bearish pattern is the best for longs, at least in the stock market.
Beyond engulfing patterns, we have additional twin-candle configurations like Kicking Pattern, Haramis, and piercing line patterns (too name a few).
What Does a Double Candlestick Pattern mean?
A double candlestick pattern is formed by the appearance of two sequential candlesticks on a chart. Together, these two patterns might indicate a profitable and tradable pattern, but they must be backtested first.
The logic and idea behind a two pattern formation is this: The first candlestick, known as the signal candle, gives an indication of where the market currently stands, while its partner, the confirmation candle, can either support that direction or hint at a forthcoming change – a reversal.
Consider, for instance, the bullish engulfing pattern. It happens when you see a bearish candle followed by another one that’s bullish and significantly larger, so it engulfs the first one. The theory is that this pattern signifies there could be upward price momentum ahead.
Conversely, the Bearish Engulfing pattern occurs when sellers take charge and engulf the bullish candle with a bearish engulfing candle immediately after the bullish one.
While identifying such patterns may seem straightforward, the truth is that it’s easy to be fooled by first impressions and visual confirmations. This is why we recommend using quantifiable rules so that you can backtest the ideas.
How many double candlestick patterns are there?
There are at least ten double candlestick patterns that have garnered wide recognition. These formations include both bullish and bearish setups, each defining its potential impact on market direction.
Are double candlestick patterns more reliable than single candlestick patterns?
Double candlestick patterns are not necessarily more reliable than single candlestick patterns. There is only one way to find out, and that is by backtesting.
What are the Most Common Types of Double Candlestick Patterns?
The most common types of double candlestick patterns are in order of frequency:
- Bullish Harami – 285 observations
- Bearing Engulfing – 276 observations
- Bearish Harami – 250 observations
- Bullish Engulfing – 208 observations
- Dark Cloud Cover – 192 observations
- Bullish Piercing Pattern – 122 observations
We backtested all 75 candlestick patterns for the S&P 500 from 1993 until today, and the number of observations above is based on that study.
Let’s look at all double candlestick patterns:
1. Tweezer Tops
The Tweezer Tops indicate a possible shift in market momentum, marking the start of a bearish reversal after an existing uptrend.
Two contrasting candles identify this pattern: the initial candle aligns with the prevailing bullish trend, but it is followed by a second candle that exhibits bearish characteristics, hinting at an upcoming trend change.
2. Tweezer Bottoms
The Tweezer Bottoms indicate a possible shift in market momentum, marking the start of a bullish reversal after an existing downtrend.
It is identified by two candles that share strikingly similar lows, signaling support and possibly the end of downward selling pressure.
3. Bearish Engulfing Pattern
A Bearish Engulfing pattern indicates that the market is increasingly dominated by bearish sentiment, signifying a possible trend reversal from an uptrend to a downtrend.
To detect this engulfing pattern on charts, observe for a sequence where a smaller bullish candlestick precedes and is fully covered by the subsequent larger bearish candlestick, indicating strong selling pressure.
4. Bullish Engulfing Pattern
The Bullish Engulfing pattern features the second candle entirely encompassing the real body of its predecessor. This pattern signals a possible transition from a bearish to a bullish trend.
5. Kicking Pattern
The Kicking Pattern consists of a pair of candlesticks, where the first one follows the existing trend and then a second starts with an opening gap heading in the reverse direction, thereby providing a potent signal for trend reversal.
This pattern may be somewhat more intricate compared to other formations.
6. Bullish Harami
Another widely recognized double candlestick pattern is the Bullish Harami. It features a small bullish candle completely encapsulated by the body of a preceding larger bearish candle, hinting at an impending reversal in price. It’s a bit similar to the Bearish Engulfing pattern.
7. Piercing Line
The Piercing Line pattern, a bullish signal indicating the likelihood of a price reversal, comprises two candlesticks.
It begins with an extended bearish candle and is succeeded by a bullish candle which not only opens beneath the prior low but also concludes above the midpoint of the first candle’s body, giving it the appearance that it’s thrusting through or piercing the previous negative trend. Hence the name.
8. Dark Cloud Cover
The Dark Cloud Cover pattern is a bearish reversal pattern that emerges from two sequential candlesticks.
It begins with a lengthy bullish first candle, which is then succeeded by a bearish candle. This second bearish candle starts trading above the prior bullish candle’s peak but concludes its session at or below the halfway mark of the initial candle, thereby creating a “dark cloud” indicating potential negativity in market sentiment.
9. Bearish Harami
The Bearish Harami pattern, reflecting the opposite of the Bullish Harami pattern, serves as a bearish reversal pattern. It is composed of a large bullish candlestick followed by a smaller bearish candlestick that is contained within its range.
This formation suggests that there might be an impending shift from an uptrend to a downtrend.
10. Matching Low
Finally, the Matching Low pattern emerges as a bullish signal following a downturn, hinting at an impending bottom. Both the initial and second candle exhibit closing prices that are nearly identical, implying a waning in the momentum of the prevailing bearish trend.
Are Double Candlestick Patterns Bullish or Bearish?
Double candlestick patterns can be both bullish or bearish. It depends on the specific formation.
Their designation as bullish or bearish depends on their particular characteristics and definitions. Examples such as Bullish Engulfing and Tweezer Bottoms presumably represent bullish patterns that may signal an upcoming reversal from a downtrend.
On the flip side, Bearish Engulfing and Tweezer Tops are considered bearish patterns, hinting at the possible turnaround of an existing uptrend.
Are Double Candlestick Patterns and Candlesticks the same?
A double candlestick pattern is a formation of two candlesticks, while candlesticks are on a stand-alone basis.
What is the difference between a single and a double candlestick?
The difference between a single and double candlestick is that a single is created by just one candle, while a double candlestick pattern emerges from two specific candles aligned to create an identifiable pattern.
How to use double candlestick patterns in technical analysis?
You use double candlestick patterns in technical analysis by defining the patterns you want to trade or look at. Preferably, you want to put it down into quantified trading rules that you can backtest to get facts and statistics.
A double candlestick pattern can be a reversal or a continuation pattern, hence you want to make backtests to find out what’s working at what kind of profitability a particular setup yields.
Nevertheless, you can improve the patterns by adding an indicator or a trend filter.
How do you find Double Candlestick Patterns in charts?
You find double candlestick patterns in charts by making trading rules and definitions. For example, a Bullish Engulfing pattern involves spotting a smaller bearish candle that is immediately overtaken by a subsequent larger bullish candle—a signal that may suggest an impending rise. However, there is only one to find if this is a profitable and tradable pattern to trade, and that is by backtesting.
How do you trade double candlestick patterns?
You trade double candlestick patterns by picking the ones that have proved profitable in backtesting. You don’t want to use anecdotal charting without any essential clues as to whether it’s profitable.
Take the Bullish Engulfing pattern as an instance: traders must observe a bearish candle that is smaller in size being enveloped by a subsequent bullish candle that is larger. You code trading rules that fit such a description and backtest it to establish facts from fiction.
Most likely, upon spotting patterns, you want to throw in another variable to make the signals more robust.
Are Double Candlestick Patterns Profitable?
Double candlesticks are profitable. We backtested all of them to rank them, and we can confirm that both the engulfing patterns and Dark Clod cover, for example, are very profitable. We have code for both in plain English, Amibroker, and TradeStation.
If applied proficiently, double candlestick patterns may serve as an important trading diversified for you.
What are the advantages of a Double Candlestick Pattern?
The advantages of a double candlestick pattern are that some of them are very profitable, they are reliable, and you can make stand-alone trading strategies with them. They are very good at spotting trend reversals, but lousy at conforming trends.
All such candlestick patterns can also be backtested.
What are the disadvantages of a Double Candlestick Pattern?
The disadvantages of a double candlestick pattern are that they can be hard to get right, they are hard to put into code, and some of the patterns are pretty useless in predicting anything, albeit some of them are profitable.
Some patterns may produce misleading signals, especially in markets that are either erratic or lack a clear direction or volatility.
Also, most traders don’t understand the subjective nature of interpreting these patterns and get fooled by randomness. This is precisely why you want to backtest to remove the subjective element.
What is the 2 candle rule?
The 2 candle rule refers to the fact that a double candlestick pattern must have two candles.
Candlestick trading strategies – List
Here you can find all our Candlestick Patterns and strategies and a much more detailed description of candlestick trading.
Summary
Double candlestick patterns potentially flag trend reversals, very rarely trend confirmations. Backtests reveal that some of the double candlestick patterns are robust, profitable, and tradable. However, like most candlestick patterns, they work better if they are used alongside other trading indicator or trend filters.
Frequently Asked Questions
What does a double-ended candlestick mean?
A double-ended candlestick means is characterized by the second candle entirely encompassing or reversing the trend established by the first candle.
What is the most successful candlestick pattern?
The Bearish Engulfing candlestick pattern is the most successful candlestick pattern, despite its name. We backtested it on the S&P 500, and we recorded 276 trades since 1993, with an average gain of 0.56% per trade and a win rate of 71%.
What is the 2 candle rule?
The two-candle rule asserts that while the first candlestick is consistent with the prevailing market trend, the second one exhibits a move in the opposite direction and possesses shadows or a body of either equal or almost equal length.
What is a double candlestick pattern?
A double candlestick pattern features two candlesticks – not one.
