Candlestick patterns are important trading tools used by traders. This trading tool helps traders indicate the market trend and price movement of trade. There are different types of candlestick patterns, and in this article, we will focus on the most prominent ones used by traders.
WHAT ARE CANDLESTICK PATTERNS?
First of all, a candlestick is referred to as a single bar that symbolizes the price trend of a specific trade for a precise time. The data of the trade illustrated by the candlestick is the high, low, open, and close of the trade, at the precise time.
STRUCTURE OF A CANDLESTICK
As stated earlier, a candlestick is a single bar consisting of the open, close, low, and high price of a trade. The candlestick is made up of three parts: The Upper shadow, the body, the lower shadow, and the wick.
The Upper shadow: it is the highest part of the candlestick. it represents the opening price of a trade. Furthermore it is also known as a thin long line extending above the body of the candlestick.
The Body: this is the disparity between the opening price of the trade and the closing price of the trade. The body of the candlestick is represented by two colors green and red, however, these colors can be customized. By default, the colors are green and red. The green color represents a bullish trend, which is profit earning. The red color represents a bearish trend which indices loss of profits.
The Lower shadow: this lower shadow is the lowest point of the candlestick. it indicates the closing price of a trade. It is also known as the thin long shaped structure extended below the candlestick.
TYPES OF CANDLESTICK PATTERNS
There are a lot of candlestick patterns and each one has its specific indication. The main aim is to predict price movements, and help traders make good trade decisions. The candlestick patterns will be grouped into two.
BULLISH OR BEARISH CANDLESTICK PATTERNS
TYPES OF BULLISH CANDLESTICK PATTERNS
TYPES OF BEARISH CANDLESTICK PATTERNS
BULLISH CANDLESTICK PATTERNS
A bullish candlestick pattern indicates that the price of a trade is moving upward and increasing. There are a lot of patterns that indicate this signal.
- The Hammer
- Bullish Engulfing
- The Morning Star
The Hammer is one of the prominent bullish reversal patterns used by a trader. Similarly his price trend often occurs at the lowest point of a downtrend.
This candlestick pattern is created when the low and open process of a trade is the same. The pattern consists of the wick of the candlestick.
Note that the previous trend has to be bearish. This pattern is made up of a single candle. The candle looks like a hammer, it has a short body at the upper part of the candlestick, with a very long lower shadow, and little or no upper shadow.
This pattern is created when the price of trade has been bearish for a while. It indicates a price reversal.
After the hammer surfaces on the price chart, a bullish trend is formed.
This type of candlestick pattern shows a rise in the increase in demand for a trade. It also signals a price reversal from bearish to bullish. And this occurs when there is an influx of buyers thereby increasing the price of the trade after a prolonged bearish run.
The pattern is made up of two candles and the previous red candle is completely covered by the second green candle.
Note that the previous trend of a bullish engulfing is bearish. This candlestick pattern enables a trader to indicate a future price reversal. It also serves as an exit signal for a trader in a trade.
However, bullish engulfing candlestick patterns also indicate trend continuation. For instance, when detecting a bullish engulfing pattern in a bullish trend. It means the continuation of the present price movement.
THE MORNING STAR
This type of pattern is made up of three candlesticks that signal a bullish price reversal. The three candlesticks include one bearish candlestick, a second candlestick that can be bearish or bullish, and the third a bullish candlestick.
It is created at the draw down of a bearish trend, it gives a signal that the bearish trend is losing momentum and soon the price will reverse to bullish.
Note: When trading with the Morning star pattern, the previous trend of a trade is the bearish trend.
To confirm a trend signal, a trader can use Technical tools like the Relative Strength Index to ascertain the significance of the predicted trend.
BEARISH CANDLESTICK PATTERNS
This is the type of pattern that indicates the price of a trade to be decreasing. It means that sellers are more than buyers, thereby causing a downward trend. These candlestick patterns are formed after a bullish run.
The hanging man is just the opposite of a hammer pattern. It is the bearish price trend of a hammer; it has the same structure but the pattern appears after a bullish run.
The pattern shows that irrespective of high sellers, the buyers still won by increasing the price of the trade. This sell-off is always perceived as a blue that the buyers are losing control of the trade.
This pattern has a small lower body, with a wick above the body of the candle. Furthermore it has the same structure as that of the inverted hammer. It’s like a star falling downwards. It shows a bearish price reversal.
This type of pattern appears at the end of a bullish trend. Bearish engulfing has two candles, the first green candle covers the next long red candle.
It indicates the highest level or the drop down of a price trend. Most importantly it signals a bearish trend. If the second candle reduces the more it shows the significance of the trend.
In conclusion the candlestick patterns are known to indicate upcoming trends, and also help know the momentum of a price trend. Most successful traders use the patterns to predict the future trends of the market. It helps them stay ahead of the market and also make good trade decisions. To become a professional trader, you have to carefully understand these patterns and base your trade decisions on them. However, only a handful of candlestick patterns were mentioned in this article. There are still a lot more patterns used by traders on an everyday basis.