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 matching candlestick patterns.
First though, let’s start with a definition.
What Is a Matching Candlestick Pattern?
A matching pattern is a 2-candlestick formation that may signal a reversal. It consists of a large candle moving with the current trend followed by a candle moving with the trend that opens inside the body of the first and closes at the same price as the first.
***Please note, most sources list the matching high and matching low as reversal patterns. However, various quantitative analyses show that it can act as a reversal pattern or continuation pattern. That makes both establishing criteria and using additional confirmation factors especially important for matching patterns.
The matching pattern has both bearish and bullish versions, known respectively as the matching high and matching low patterns. It is also similar to the tweezers pattern. For all of these patterns, the “neckline” set by the top or bottom of the bodies essentially becomes the apex of a 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 matching patterns really tell you?
What Matching Patterns Mean
Unlike most candlestick patterns, the name actually describes it very well.
The terms “matching high” and “matching low” are direct descriptions of the formation. That makes them extremely easy to remember. This is rare, as most pattern names are not helpful at all. Some even go by the original Japanese moniker.
In trading terms:
- During the first period, price drove strongly in the direction of the trend.
- Before the second period began, price moved in the opposite direction of the trend.
- During the second period, price drove in the direction of trend and closed at the same price as the prior period.
This sets the stage for reversal, as it seems that price may have found a stopping point.
How To Recognize Matching 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 matching pattern must:
- Begin with a long candle that 1) moves with pre-existing trend and 2) does not have a trend side wick.
- End with a non-doji candle that 1) opens inside the body of the first, 2) moves with trend, 3) closes at approximately the same price as the first, and 4) does not have a trend-side wick.
In practicality, many traders will make some exceptions.
- The first candle doesn’t necessarily have to be a long candle, as long as it has a decent-sized body and no trend-side wick.
- The second candle doesn’t necessarily have to open inside the first candle, as it moves with trend.
- The second candle doesn’t necessarily have to move with trend, as long as the trend-side open and close match.
- Either candle can have a trend-side wick, as long as they are both move with trend and have the same close.
There is also some dispute as to whether it is the highs/lows or the top/bottom of the candle bodies that must match.
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 tweezers.
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. 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 Matching Patterns Fit in the Chart Narrative
The markets are often characterized as a battle between the bulls and the bears.
Matching patterns show that those trading with trend pressed their advantage on candle one, lost some of the impetus between candles one and two, then regained the momentum by the end of candle two.
On the chart, it looks like a price hit a wall.
The first day saw a powerful trending move that closed its price extreme (high/low). Yet traders awoke the next morning with a dramatic inside open, leading many to speculate about a reversal. With many unsure, price slowly began to move back in the direction of the general trend. By the end of the second day, price settled at the same price as the previous day’s close.
Over the coming days, the “neckline” created by the two closes, is likely to become a crucial decision zone.
(This is only a hypothetical illustration, as a matching pattern could represent a number of real-world scenarios.)
In the short-term, it amounts to a final stand for counter-trend traders.
The question traders need to ask themselves is,
“Can counter-trend traders match the intensity of the trend-side to force a reversal?”
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 matching 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 matching patterns in which the candles are closer to the same size perform more reliably. 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 Matching Patterns
Reversal points are great places to enter or exit trades, especially when you catch them early enough.
Matching 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, if you treat them as continuation signals, matching lows have a 61% hit rate while matching highs were not analyzed. Obviously, this is in opposition to the reversal signal narrative.
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 and continuations are often accompanied by elevated trading volume. For matching patterns, the direction of the next spike after the pattern may indicate how things will play out.
- Price Formations – Where patterns appear in relation to price levels and trend lines can also help determine future direction. Always be aware of support and resistance!
- Oscillator Shift – Oscillating indicators like the RSI or stochastics are commonly used to identify reversal or continuation by analyzing slope, percentile, and/or divergence.
The more corroborating elements are present, the more confident you can be about a matching reversal or continuation 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, matching 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 matching pattern 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 Lines
- Doji Star
- Engulfing
- Harami
- Harami Cross
- In Neck
- Kicking
- Ladder
- Last Engulfing
- Mat Hold
- Meeting Lines
- On Neck
- Separating Lines
- Star
- Stomach
- Tasuki Gap
- Three Inside
- Three Methods
- Three Outside
- Three-Line Strike
- 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:
Matching patterns 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.