The candlestick method is a way of reflecting data on asset prices which allows investors to trade based on careful analysis of daily information. Candlestick charts focus on body, wick and colour. The body is open-to-close range representation, the wick reflects each day’s highs and lows, and the colour represents the movement of the market shown by a white or green body for a price increase, and a black or red body for a price decrease. These patterns are used by investors to predict risks and opportunities. Before making use of these trading tips, it’s vital to understand the basic patterns.
Bullish candlestick patterns
Bullish patterns are representative of a downward market trend, whereby long positions can be beneficial when there is an upward trend. The hammer pattern has the characteristics of a short body and long lower wick, usually located at the end of a downward trend. This pattern reflects pressures during the day, but savings in price by strong purchase pressure. The opposite of the hammer pattern is the inverse hammer. The difference between the two is that the inverted hammer has a long upper wick. This occurs when the buying pressure was not enough to recover from the selling pressure in the day.
One of the candlestick patterns that acts as a good sign during a downtrend is the morning star pattern. This pattern consists of three sticks: a short body candlestick between one long green and one long red candlestick. It represents the subsiding selling pressure and an oncoming bull market. Three white soldiers is a pattern that spreads over three days. This strong bullish pattern consists of long green or white candle with small wicks, and represents an approach of buying pressure.
Bearish candlestick patterns
Bearish patterns present themselves after an upward trend and can indicate struggles on the way, as investors take advantage of decreasing prices. One bearish pattern is the hanging man, which is similar but opposite to the bullish hammer pattern. The hanging man indicates the end of an upward trend after a large sell-off, which can show a loss of control of the market by bullish patterns. The shooting star is the opposite of the inverted hammer with a small lower body and long upper wick. The name comes from the image of a star falling to the ground after a high before the closing price.
The evening star pattern is the opposite of the morning star, as it formed by a short candle between a long red and a long green candle. This indicates a change in the upward trend. Three black crows is a pattern that consists of three long red candles after each other with very short wicks. This usually signals the start of a bearish downtrend because buyers have been passed by the sellers over three days, and can be used as a part of trading strategies to predict future changes.
Continuation candlestick patterns
When no change is evident in the market, it is then called a continuation pattern and usually indicates a quiet period in the markets. The doji pattern occurs when the opening and closing prices hardly differ and the candlestick takes the shape of a cross or plus sign. This pattern represents no gains because of problems between buyers and sellers. Another continuation pattern occurs when there is indecision in the market and minimal change occurs. While this pattern represents a period of rest, it is often followed by an upward or downward trend.
Candlestick patterns are essential as a part of your trading education and understanding, as they give you the advantage of predicting and recognising the various changes in the market.