What is a candlestick? A candlestick is a way of displaying information about an asset price movement, candlestick charts or one of the most popular components of technical analysis, enabling traders to interpret price information quickly and from just a few price bars.
This article focuses on a daily chart where in each candlestick details a single day's trading. It has three essential features. The body which represents the open to close range, the wick or shadow that indicates the intraday high and low. The color which reveals the direction of market movement, green or widebody suggests a price increase while a red or black body shows a price decrease over time. Individual candlesticks form patterns that traders can use to recognize significant support and resistance levels. There are a great many candlestick patterns that indicate an opportunity within a market. Some provide insight into the balance between buying and selling pressures while others identify continuation patterns or market indecision before you start trading.
It's important to familiarize yourself with the basics of candlestick patterns and how they can inform your decisions. Six, bullish candlestick patterns. Bullish patterns may form after a market downtrend and signal the reversal of price movement. They are an indicator for traders to consider opening a long position to profit from an upward trajectory. Hammer. The Hammer candle stick pattern is formed of a short body with along lower wig and is founded the bottom of a downward trend. A hammer shows that although there were selling pressures during the day, ultimately a strong buying pressure drove the price back up. The color of the body can vary, but green hammers indicate a stronger bull market than red hammers. Inverse Hammer. Uh, similarly bullish pattern is the inverted hammer. The only difference is that the upper wick is long. While the lower wicked short, it indicates a buying pressure followed by a selling pressure that was not strong enough to drive the market price down.
The inverse hammer suggests that buyers will soon have control of the market bullish. Engulfing the bullish engulfing pattern is formed of two candlesticks. The first candle is a short read body that is completely overwhelmed by a more extensive green candle. Though the second day opens lower than the first. The bullish market pushes the price up culminating in an obvious win for buyers piercing line. The piercing line is also a two stick pattern made up of a long red candle followed by a long green candle. There is usually a significant gap down between the first candlesticks, closing price and the green candlesticks opening. It indicates a strong buying pressure as the price is pushed up to or above the mid-price of the previous day. Morningstar, the morning star candlestick pattern is considered a sign of hope and a bleak market downtrend. It is a three stick pattern, one short bodied candle between a long read in a long green.
Traditionally the star will have no overlap with the longer bodies as the market gaps both on open and close. It signals that the selling pressure of the first day is subsiding and a bull market is on the horizon. Three white soldiers, the three white soldiers pattern occurs over three days. It consists of consecutive long green or full candles with small wicks which opened and closed progressively higher than the previous day. It is a powerful bullish signal that occurs after a downtrend and shows a steady advance of buying pressure. Six Bearish candlestick patterns, bearish candlestick patterns usually form after an uptrend and signal the point of resistance. Massive pessimism about the market price often causes traders to close their long positions and open a short position to take advantage of the falling price hanging man. The hanging man is the bearish equivalent of a hammer. It has the same shape but forms at the end of an uptrend.
It indicates that there was a significant selloff during the day, but that buyers were able to push the price up again. The large sell off is often seen as an indication that the bulls are losing control of the market shooting star. The shooting star is the same shape as the inverted hammer, but it's formed in an uptrend. It has a small lower body and along upper wick. Usually the market will gap slightly higher on opening and rally to an intra day high before closing at a price just above the open, like a star falling to the ground. The Evening Star is a three candle stick pattern that is the equivalent of the bullish Morningstar. It is formed of a short candle sandwiched between a long green candle in a large red candle stick. It indicates the reversal of an uptrend and is particularly strong when the third candle stick erases the gains of the first candle.
Three Black Crows. The Three Black Crows candle stick pattern comprises of three consecutive long red candles with shorter nonexistent wicks. Each session opens at a similar price to the previous day, but selling pressures push the price lower and lower with each close. Traders interpret this pattern as the start of a bearish downtrend as the sellers have overtaken the buyers during three successive trading days. Dark cloud cover, the dark cloud cover candle stick pattern indicates a bearish reversal, a black cloud over the previous day's optimism. It comprises two candlesticks, a red candle stick, which opens above the previous screen body and closes below its midpoint. It signals that the bears have taken over the session, pushing the price sharply lower. If the wicks of the candles are short, it suggests that the downtrend was extremely decisive for continuation candlestick patterns. If a candlestick pattern doesn't indicate a change in market direction, it is what is known as a continuation pattern.
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These can help traders to identify a period of rest in the market. When there is market indecision or neutral price movement Doji. When a market's soap and and closer almost at the same price point, the candle stick resembles a cross or a plus sign. Traders should look out for a short to nonexistent body with wix of varying length. This dogies pattern conveys a struggle between buyers and sellers that results in no net gain for either side alone. A Doji is neutral signal, but it can be found in reversal patterns such as the bullish Morningstar and bearish evening star spinning top. The Spinning Top candle stick pattern has a short body centered between wicks of equal length. The pattern indicates indecision in the market resulting in no meaningful change in price. The Bulls sent the price higher while the bears pushed it low. Again, spinning tops are often interpreted as a period of consolidation or rest following a significant uptrend or downtrend on its own.
The spinning top is a relatively benign signal but they can be interpreted as a sign of things to come as it signifies that the current market pressure is losing control falling. Three methods, three method formation patterns are used to predict the continuation of a current trend be at bearish or bullish. The bearish pattern is called the falling three methods. It is formed of a long read body followed by three small green bodies and another red body. The green candles are all contained within the range of the bearish bodies. It shows traders that the bulls do not have enough strength to reverse the trend. Rising three methods. The opposite is true for the bullish pattern called the rising three methods candle stick pattern. It comprises of three short read sandwiched within the range of two long Greens. The pattern shows traders that despite some selling pressure buyers are retaining control of the market practice reading candle stick patterns. The best way to learn to read candlestick patterns is to practice entering and exiting trades from the signals they give. If you don't feel ready to trade on live markets, you can develop your skills in a risk free environment by opening a new demo account when using any candle stick pattern. It is important to remember that although they are great for quickly predicting trends, they should be used alongside other forms of technical analysis to confirm the overall trend.