Since candlesticks are the basic building block of most technical analysis, the ability to read the patterns they make is a valuable trading skill. Here, we’ll go over everything you need to know to make money with ladder candlestick patterns.
First though, let’s start with a definition.
What Is a Ladder Candlestick Pattern?
A ladder pattern is a 5-candlestick formation that may signal a reversal. It consists of three large candles moving with the current trend, a small candle with a wick in the opposite direction of the trend, and a large candle that moves against the trend preceded by a gap against the trend and close beyond the wick of the fourth.
The ladder pattern has both bearish and bullish versions, known respectively as the ladder top and ladder bottom patterns. It is also similar to the breakaway pattern. For all of these patterns, the final candle becomes the beginning of the potential reversal.
Of course, candlestick patterns do not guarantee specific outcomes. Instead, they offer clues as to what is going on in the market.
So the question is, what do ladders really tell you?
What Ladder Patterns Mean
Unlike some patterns, English speakers do not use the Japanese name for this one.
Instead, the term “ladder” probably comes from the way the pattern seems to step up or step down leading into the final candle. As far as candlestick pattern names go, it is easy to remember and describes the pattern well. Plus, the “top” or “bottom” conveys that it gives a bearish or bullish reversal signal.
In trading terms:
- During the first three periods, price drove strongly in the direction of the trend.
- During the fourth period, price moved against trend for some time but eventually closed in the direction of trend.
- Before the fifth period began, price moved against trend and made its way to the other side of the open of the prior period.
- During the fifth period, price drove strongly in the opposite direction of the trend and cleared the high or low of the prior period.
This sets the stage for reversal, as the trend may have run out of gas.
How To Recognize Ladder Candlestick Patterns
Traders are attracted to patterns partly because they stand out.
However, it’s easy to see things on the charts that aren’t truly there (or anticipate events that never come to fruition). That’s the main reason you should wait for all candles to close before making decisions based on candlestick patterns.
In theory, a ladder pattern must:
- Begin with three long candles moving with pre-existing trend
- Have a short candle that 1) moves with trend and 2) has a wick moving against trend.
- End with a long candle that 1) opens with a gap against trend, 2) moves against trend, and 3) closes beyond the wick of the fourth.
In practicality, many traders will make some exceptions.
- The first three candles don’t all necessarily have to be long candles, as long as they represent a significant cumulative change in price.
- Each of the first four candles may open inside the preceding one, as long as each successive open and close furthers the trend.
- The fourth candle doesn’t necessarily have to be a short candle, as long it isn’t a long candle and has the required wick.
- The fifth candle doesn’t necessarily have to open with an inside gap, as long as it is a long candle and closes beyond the wick of the fourth candle.
Depending on who you ask, any of these standards may be more or less important. Technically, it would be more accurate to classify some of these variants as a different candlestick reversal pattern, such as the breakaway.
This is okay, as the implication means more than the classification. And similar patterns tend to have similar implications.
That’s not to say that these standards are altogether inconsequential (as we’ll elaborate on soon). You should definitely consider some non-negotiable, like where the direction of the candles in relation to trend or where the fifth candle closes. Just keep in mind that context trumps criteria.
Ultimately, it’s up to you to decide how seriously to take each guideline.
After all, the goal of candlestick pattern analysis is to interpret underlying price action (not just label patterns correctly).
To this end, you need to understand where they fit.
Where Ladders Fit in the Chart Narrative
The markets are often characterized as a battle between the bulls and the bears.
Ladder patterns show that those trading with trend pressed their advantage on candles one through three, stalled out on candle four, then surrendered the momentum completely by the end of candle five.
On the chart, it looks like the climb up or down may have come to an end.
The first day saw a powerful trending move, which was followed by two more days just like it. Once the fourth day began, things became dicier, as some trend-side traders began taking profits. After a moderate push against trend, price steadily fought its way back to close in the direction of trend. Overnight though, price began to go against trend once again and eventually pushed back beyond the fourth day’s open. On the fifth day, those trading against trend forced price beyond the previous day’s counter-trend push.
Over the coming days, the range between the open of the first candle and the wick of the fourth candle is likely to become a crucial decision zone. If those looking for reversal can defend this price band, they have a better chance at making the trend change stick.
(This is only a hypothetical illustration, as a ladder pattern could represent a number of real-world scenarios.)
In the short-term, it amounts to a (long overdue) return fire.
The question traders need to ask themselves is,
“Do those trading against trend have enough firepower to make the trend change stick?”
To answer that question, you’ll need more than just an understanding of Japanese candlesticks and candlestick patterns. You’ll want to evaluate both within the context of longer-term chart patterns as well as trend and price levels. You’ll also want to make use of your own chart markup and indicators.
Explore the history of your preferred asset(s) with respect to ladder patterns and apply your findings to your own trading style.
Now, you can test (and/or stretch) the criteria we mentioned earlier to identify the best trade setups. For instance, you may find that ladders with a longer wick on the fourth candle perform more reliably than those with shorter wicks. Or, you may find something else entirely.
This is the kind of technical analysis that brings the story in the charts into full focus.
How To Trade Ladder Patterns
Reversal points are great places to enter or exit trades, especially when you catch them early enough.
Ladder candlestick patterns serve as easy-to-spot signs of potential reversal and may even lead to cycle-defining tops or bottoms. Generally, you can assign greater weight to multi-stick patterns than single candles because they give you more information over a longer duration.
However, there are a few things you should know about trading candlestick patterns.
First and foremost, hit rates for most of them hover around 50%. According to Bulkowski’s Encyclopedia of Candlestick Patterns, ladder bottoms have a 56% hit rate while ladder tops were not analyzed. As far as trading signals are concerned, this is little better than a coin flip.
In addition, candlestick patterns do not have standardized price targets or measured moves like chart patterns do. This can make it difficult to decide when to get out of your trade or how to manage your stop loss.
Moreover, failed reversal patterns often lead to continuation or consolidation. Therefore, you need additional points of confirmation to increase your odds of success.
Some such factors include:
- Volume – Reversals are often accompanied by elevated trading volume. For ladder patterns, you want to see a spike on the fifth candle (or just after).
- Price Formations – Reversal patterns that form on the right side of important price levels or trend lines are often more reliable. Always be aware of support and resistance!
- Oscillator Shift – Oscillating indicators like the RSI or stochastics are commonly used to identify reversals by analyzing slope, percentile, and/or divergence.
The more corroborating elements are present, the more confident you can be about a ladder reversal signal.
Even so, it would be difficult to form a successful trading strategy around any given candlestick pattern. There simply isn’t enough there to develop a strong edge. Even with a great understanding of trading math, order execution, market psychology, risk management, options, and automation, you’d still have a hard time.
In essence, ladder patterns are much better idea givers than trade makers.
Better yet, you’ll probably find more success building your strategy around other tools then using candlestick patterns as the final point of confirmation.
Other Candlestick Pattern Types
The ladder is but one of many candlestick patterns.
And while learning them all is not a prerequisite for successful trading, you’d certainly benefit from getting familiar with other candlestick pattern types.
They can be categorized in several ways.
The most straightforward way may be by the number of candlesticks (ie. 2-candlestick, 3-candlestick, 5-candlestick, etc.)
More helpful though, you can group them by price direction or signal type. That is, they can be bullish or bearish and/or imply reversal or continuation. Finally, you can multiply these designations together to separate them into bullish reversal, bearish reversal, bullish continuation, and bearish continuation categories.
On the other hand, you might just tackle them in alphabetical order:
- Abandoned Baby
- Breakaway
- Counterattack Line
- Doji Star
- Engulfing
- Harami
- Harami Cross
- Hikkake
- In Neck
- Kicking
- Ladder
- Last Engulfing
- Long Day
- Mat Hold
- Matching
- Meeting Lines
- On Neck
- Separating Lines
- Star
- Stomach
- Tasuki Gap
- Three Inside
- Three Line Strike
- Three Methods
- Three Outside
- Tri-Star
- Tweezer
- Window
Sure, there are quite a few. But don’t let that intimidate you.
It’s unnecessary to memorize the name and criteria of every single pattern. The key is to learn the principles of price action and technical analysis.
In fact, you’re free to forget all of their names and specifications as long as you can look at a group of candlesticks and understand what they are trying to tell you. It’s just that the more of them you learn about, the easier this will become.
So take the time to study at least a few more of them.
Takeaways
To review:
Ladders are a type of candlestick pattern that signal a potential reversal. While not a guarantee, their appearance may indicate that market conditions are changing. Thus, they can help you find winning trades.
Of course, there are other candlestick patterns that you should learn about. Still, the ability to recognize patterns is not enough to trade successfully on its own.
Nonetheless, you’ve now added one more tool to your toolkit.
Have questions or more information to add? Contribute to the conversation in the comments below! Or, if you know someone who could benefit from this post, share it with them. You can also check out our Candlestick Patterns Guide to improve your candlestick analysis skills.