Candlestick patterns are a technical analysis that can help many traders because they can predict future price movements. Candlesticks are popular charts, as they have been used for more than 100 years. They were first created in the 18th century for Japanese rice trading. Then, they made their way into the Western World in the 20th century, by Sokyu Honma. However, they started to be more popular with the book” Japanese Candlestick Charting Techniques,” written by Steve Nison. Candlestick patterns show the historical price movement of an asset over a set period.
These candlestick patterns fall into three main categories: bearish, bullish, and continuation. Traders can experience many candlestick patterns, so it is a good idea to know them, as this can impact the overall trading experience. You have a lot of sources to read and get started, like candlestick patterns pdf, and in this article, we will also help you understand more.
Components of a candlestick pattern
- Body: The body represents the section of the candlesticks that indicates the open and closing price of an asset in a particular interval. Short bodies suggest indecision, while long bodies show strong selling or buying pressure.
- Shadow (Wicks): A candlestick can contain one or two shadows or wicks that indicate a price’s high or low points. They are situated above or below the body and reflect the market volatility, as they show the highest and lowest prices reached.
- Color: Color is also vital for a candlestick pattern, as it displays a little of the direction in which it is headed. Green is the color for bullish candlesticks, which demonstrates that the closing price is higher than the opening one. So, there is a bullish momentum. A bullish candlestick can also be marked with white. On the other hand, if the color is red or black, then investors are dealing with bearish candlesticks that reflect downward pressure, as the closing price is lower than the opening price.
How are candlestick patterns used?
When reading a candlestick pattern, you need to wait for the intervals of the candle to close. Then, you can see whether the low, high, closing, and open points of the candle are combined with the color. For bullish candlesticks, the close price is at the top, while the open price is at the bottom. In a bearish trend, things are reversed.
Wicks are the highest and lowest prices reached, but sometimes, in a candlestick, there can only be one wick. A candlestick can change its color before it closes, and it can move from white and black to green and red. So, it is important to wait until the price closes so that you can see whether you are dealing with a bearish or bullish candle. Candlestick patterns can be used in plenty of financial markets, including stocks, forex, commodities, and indices, and the list can continue.
Example of bullish candlestick patterns
Hammer
A hammer candlestick has a small body with a long lower wick. This pattern can have little or no upper wick. It is often present when the market is in a downtrend, and a bullish outcome might arise. The wick needs to be around two or three times the length of the body so that it can form a hammer pattern.
Inverse hammer
An inverse hammer is an upside-down regular hammer that, in this case, doesn’t really have a lower wick but a long upper wick.
Bullish engulfing
A bullish engulfing candlestick pattern combines two different candles. One is red and shows a downtrend. Then, this pattern is followed by a green pattern that engulfs it, showing that buyers can return in a strong position.
Piercing line
A piercing line is similar to the bullish engulfing candle pattern, with the difference that the bear candlestick has a longer body. Even though the market was seeing an upward trend, the bears had complete control of it until the bulls came in and increased the price.
Three white soldiers
The three white soldier candlestick patterns come after a downtrend and take over the market. They contain three consecutive green bull candles and show that the market is going to reverse to an uptrend.
Example of bearish candlestick patterns
Hanging man
The hanging man candlestick pattern is similar to the hammer, but it indicates a potential reverse in the market, from an uptrend to a downtrend. This shows that buyers have lost control, so there will possibly be a swift transition toward a downward market.
Shooting star
The shooting star pattern is similar to the hanging man, but in this case, the top of the body has a bigger upper wick. This pattern usually forms during an uptrend and signals a possible reversal.
Bearish engulfing
The bearish engulfing is the opposite of the bullish engulfing candle pattern. In this pattern, the bullish momentum is engulfed by a red or black bear candle. In this stage, more sellers are starting to enter, which causes the market to fall. This is why the demand decreases, the supply increases, and things are slowly heading into a downtrend.
Tweezer tops
The tweezer tops contain two candle patterns standing next to each other, each with short bodies and long wicks. The buyers have twice tried to maintain the bullish market and take it to new heights, but their attempts have not been successful.
Should you rely on candlestick patterns?
Candlestick patterns can help your trading journey, as you can better determine when to buy or sell, reducing the chances of losses and increasing your profits. Still, not all patterns work 100% of the time, and you should keep this in mind to have a better experience. The idea of a candlestick pattern is to better determine where the market is going, thus reducing the chance of missing an opportunity.
This trading pattern was initially developed in Japan, using high, opening, closing, and low prices to form various patterns. This is why it is nowadays used on a global scale.
