Candlestick patterns and analyzing candlesticks on a chart.👀✍️
A candlestick pattern is a type of price chart used in technical analysis that shows the price movement of an asset over a specific period of time.
Each candlestick provides four key pieces of information: the opening, high, low and closing prices for that period. These patterns can help traders predict potential market direction and identify trends, reversals or continuation patterns.
Candlestick structure:
Body: represents the range between the opening and closing prices. If the closing price is higher than the opening price, the body is usually green (or white), indicating a bullish move. If the closing price is below the opening price, the body is red (or black), indicating bearish movement.
Wick (shadows): thin lines coming from the top and bottom of the body represent the highest and lowest prices reached during the period. The upper wick shows the distance from the close (or open) to the high, and the lower wick shows the distance to the low.
Common candlestick patterns:
Candlestick patterns can signal potential reversals, continuations, or indecision in the market. Here are some of the most commonly observed patterns:
1. Bullish patterns (indicating potential upward movement):
Hammer: a candle with a small body and long lower wick found after a downtrend. It suggests that sellers moved the price lower, but buyers intervened by reversing the downward momentum.
Bullish engulfment: the large green candle completely engulfs the previous smaller red candle, indicating strong buying pressure after a period of selling.
Morning Star: a three candle pattern starting with a bearish candle followed by a small indecisive candle (often a doji) and ending with a bullish candle, signaling a possible reversal from a downtrend to an uptrend.
2. Bearish patterns (indicating a potential downward movement):
Shooting Star: a candle with a small body and long upper wick, usually appearing after an uptrend. It signals that buyers tried to push the price higher but were overpowered by sellers.
Bearish Takeover: A large red candle completely engulfs the previous smaller green candle, indicating strong selling pressure after a period of buying.
Evening Star: This pattern, opposite to the morning star, indicates a possible reversal of the uptrend into a downtrend.
3. continuation patterns:
Doji: a candlestick where the opening and closing prices are almost the same, resulting in a very small or missing body. This signals indecision and may precede a continuation of an existing trend or a reversal, depending on the surrounding candles.
Three white soldiers: a bullish continuation pattern in which three consecutive long green candles follow a downtrend, indicating strong buying momentum.
Three Black Crows: a bearish continuation pattern with three consecutive long red candles following an uptrend, signaling increased selling pressure.
How to use candlestick patterns:
Trend Identification: Use candlestick patterns to confirm current trends or to signal a potential reversal. Hammer or Shooting Star patterns are particularly useful for identifying reversals.
Support and Resistance: Candlestick patterns can help confirm key support and resistance levels. For example, the appearance of a Hammer at a support level can mean that price is unlikely to fall further.
Combining with other indicators: although candlestick patterns provide valuable information, it is best to use them in conjunction with other technical indicators (such as moving averages or RSI) to strengthen your analysis and reduce false signals.
By effectively interpreting candlestick patterns, traders can get a clearer picture of market sentiment and make more informed trading decisions.
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