Candlestick patterns are a charting tool used to analyze the market and predict future trends and movements. Each candlestick represents 4 key price points in a single timeframe, open, close, high, and low. These indicate different prices at which the asset was valued, during separate times throughout the period.
Each candlestick consists of 3 main parts. The body, which represents the opening and closing range. The shadow, which represents the highest and lowest prices that a certain asset was valued at. And finally, the color represents whether traders made or lost profits.
Traders can take benefit of candlestick patterns to make informed and calculated decisions in which asset to invest for maximum profits. They also help traders know when to enter and exit a trade to make maximum amounts of profit with as few losses as possible.
This article will discuss some of the few candlestick patterns that traders should be familiar with to stay informed about current market trends and how they might change soon.
As mentioned above, candlestick patterns are used by traders to chart and predict future market movements. They consist of four aspects that indicate four key price points, namely:
The price at which a certain asset was valued at the start of the timeframe.
The highest price the specific asset reached during the time.
The lowest price at which the asset was valued during the timeframe.
The price at which the asset was valued at the final moments of the period.
The color of the candlestick is also important to note since it indicates if the traders made profits in that specific period.
In simple words, bullish reversal patterns indicate that the prices are going from a downtrend to an uptrend, meaning that it is a good time to invest and purchase the specific asset. There are numerous types of bullish patterns, some of which will be discussed here.
Hammers are relatively easy to recognize as compared to the majority, like in the name, they possess a shape similar to that of a hammer, with a shorter wide part, and a lower stick almost double the length of the upper wide part, with little to no stick visible from the top. They usually indicate that the prices have reached a minimum and are now reversing. It indicates the prime time to purchase the specific stocks.
Similar to a hammer, however, this one has a long upper shadow and a smaller lower shadow. This is slightly less bullish as compared to a regular hammer pattern.
This is also another pattern that involves two candlesticks. However, this comprises of a long red candlestick, which is then followed by another long, but this time a green candlestick, the next day. Usually there is a significant difference between the closing price and the opening price of the red and green candlesticks respectively.
This pattern occurs after a downtrend and includes two different candles, the first day involves a small red candle that follows the downtrend, and the second day involves a larger green candle that completely engulfs the candlestick from the previous day and closes in the opposite direction. This indicates that the traders should go long and keep their shares.
This is a 3-candle pattern, which involves a short red candle, sandwiched between two longer, red and green candles. The central candle is known as the “star” and does not necessarily have any overlapping opening or closing prices.
Contrary to the prior, bearish patterns indicate that a trend is moving from an uptrend to a downtrend. These help the trader to decide to sell a specific asset and exit long positions. Some of the patterns mentioned here are;
Shooting stars are identifiable by their long, wide parts at the top and small sticks at the bottom. They symbolize that higher selling prices have been rejected.
It is the same as bullish engulfing, except that bearish engulfing predicts an incoming downtrend.
It involves three days’ worth of market data. The first day involves a large green candle, followed by a small-bodied candle the next day, and finally, a large red candle that closes at a point slightly higher than the midpoint of the first day.
It is highly similar to the hammer, involves the same short body and a shadow doubling the length of the body. However, the only difference being that it occurs after an uptrend. It indicates that the prices were at a low, but traders managed to bring the prices back up again.
this pattern involves three similar-looking long-bodied red candles with little to no shadows, which progressively go lower due to market pressure.
These indicate pauses or breaks in a market trend. They can be either bullish or bearish, and often predict future movements and help traders manage and prevent risks. There are several continuation patterns.
Flags: Small rectangular patterns that slope against the prevailing trend, indicating a short-term consolidation before the trend continues.
Pennants: Similar to flags but with converging trendlines, suggesting a brief consolidation before a breakout in the direction of the existing trend.
Triangles (Ascending, Descending, Symmetrical): These patterns form as price action narrows, signaling a potential breakout in the direction of the prevailing trend.
To be able to successfully interpret market trends and make profits from them, traders must be able to use other tools like moving averages, RSI, and others. Along with understanding the market context and aligning them with key market resistance levels. And, like in every other field, practice makes perfect, so traders must try and be as proficient in understanding them as possible.
To summarize, candlestick patterns are a technical analysis tool that traders can take advantage of and make informed decisions of whether to hold a certain position or to sell a certain security. However, the market should be analyzed with the help of other tools like moving averages and numerous others.
