WHAT ARE CANDLESTICKS?
UNDERSTANDING CANDLESTICK PATTERNS
Candlesticks are formed as follows: The highest point of a candlestick shows the highest price traded during that time period, and the lowest point indicates the lowest price traded during that time period. The body of a candlestick represents the opening and closing prices during that time period (thicker body of candlestick). Wicks represent the highest and lowest points traded during a time period, which is beyond the opening and closing price by the candlestick close.
Candlestick patterns are typically used as a technical indicator for identifying potential trend changes or reversals, which are formed by either one candlestick or by a series of two or three. For example, doji candlesticks indicate indecision in a market that may be a signal for a potential market reversal or change in trend. The key feature of a doji is that the opening and closing prices are relatively the same, making the body a flat horizontal line. When considering the strength of said possible indication of market reversal or trend change, remember the longer the upper and/or lower wicks on said doji the stronger the move.
BULLISH CANDLESTICK PATTERNS:
A hammer is a candlestick pattern that occurs when an asset trades significantly lower than its opening, but rallies within the period to close near its opening price. This pattern forms a hammer-shaped candlestick in which the lower wick is at least twice the size of the body.
The inverse hammer candle is the exact opposite of a hammer pattern and appears at the bottom of a downtrend and signals a potential bullish reversal. It indicates a buying pressure, followed by a selling pressure that was not strong enough to drive the market price down.
A Bullish Engulfing Pattern is formed by 2 candlesticks. It appears in a downtrend and can be identified when a small red candlestick showing a bearish trend, is followed the next day by a large green candlestick, showing a bullish trend, the body of which completely engulfs the body of the previous day’s candlestick.
Three White Soldiers
The pattern consists of three consecutive long-bodied candlesticks that open within the previous candle’s real body and a close that exceeds the previous candle’s high.
Morning Star Pattern
A sign of hope in a market downtrend consisting of three candles: one short-bodied candle wedged between a long red and long green candle. It signals that the selling pressure of the first day is subsiding, and a bull market is on the way.
Rising Three Methods
A bullish continuation candlestick pattern that occurs in an uptrend and whose conclusion sees a resumption of that trend. The decisive (fifth candle) is proof that sellers did not have enough momentum to reverse the uptrend.
A two-stick pattern, made up of a long red candle, followed by a long green candle. It is a reversal signal after a downtrend which indicates strong buying pressure.
NEUTRAL CANDLESTICK PATTERNS:
The Doji is a commonly found pattern that has an open and close that are virtually equal, forming a candlestick that looks like a cross. A Doji is often found at the bottom and top of trends and is considered a sign of possible reversal in the markets.
A Spinning Top is symmetrical with upper and lower wicks of approximately equal length. The bulls sent the price higher and the bears sent the price lower, but in the end the price closed near where it opened.
BEARISH CANDLESTICK PATTERNS:
A type of bearish reversal pattern, made up of just one candle. It has a long lower wick and a short body at the top of the candlestick with little or no upper wick.
An Evening Star is a bearish candlestick pattern consisting of three candles: a large white candlestick, a small-bodied candle, and a red candle. It is associated with the top of a price uptrend, signifying that the uptrend is nearing its end.
A bearish engulfing pattern is seen at the end of some upward price moves. It is marked by the first candle of upward momentum being engulfed by a larger second candle indicating a shift toward lower prices.
The formation is bearish because the price tried to rise significantly during the day, but then the sellers took over and pushed the price back down toward the open.
Three Black Crows
Three Black Crows consists of three consecutive long-bodied red candlesticks that appears when bears overtake the bulls.
Falling Three Methods
A bearish continuation candlestick pattern that occurs in a downtrend and whose conclusion sees a resumption of that trend. The decisive (fifth candle) is proof that buyers did not have enough momentum to reverse the uptrend.
Dark Cloud Cover
The dark cloud cover is a bearish reversal pattern where a red candle opens above the close of the prior green candle, and then closes below the midpoint of the green candle.