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It’s important for you to understand that there are several different types of Candlestick Patterns out there that you can use to help you predict future price movements. We will cover the basic candle patterns that can help you identify trading opportunities.
With those candles you can build a trading strategy and trade more efficiently, they will help you confirm a potential trend reversal using other indicators. Learn more below.
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Chart Patterns are one of the most popular ways to identify a trading opportunity, they allow you to examine current movements to forecast future market movements.
There are multiple trading strategies you can use, regardless of your trading style, you can select from hundreds of technical indicators built in your trading platform, you can also add indicators from the market tab, but there is one more element that you will need to be successful and this is your ability to identify chart patterns.
Transitions between rising and falling trends are often signaled by price patterns, a price pattern is a recognizable configuration of price movement that is identified using a series of trendlines and/or curves.
In order to become a more successful trader you will need to easily spot these patterns on a graph chart; this will help you identify trading opportunities and also it will help you confirm or reject some of the signals you obtain from other technical indicators.
Reading candlestick patterns is a valuable skill for traders and investors. Start by understanding the basic components: the body and the wicks. The body represents the price range between the opening and closing prices, while the wicks indicate the high and low prices during the period. Look for patterns like doji, engulfing, and hammer, which can signal reversals or continuations in price trends. Consider factors such as volume and trend direction for confirmation. By studying these patterns, you can gain insights into market sentiment and make more informed trading decisions.
Candles consist of a body, upper shadow and a lower shadow, then depending on the direction of the candle, where those shadows and bodies are we can determine what was the opening price, closing price, highest and lowest level reached by the candle. Depending on the shape of the candlestick we can determine different patterns and build a strategy around them.
Spinning Tops
Let’s start with Spinning Tops used by a candlestick patterns trader.
These are candlesticks that have a long upper and lower shadow, and small bodies. The Spinning Top candles indicate that the market is undecided about the direction of the pattern, buyers and sellers are fighting but no one is able to get a winning hand.
As a trader you can conclude that even though the candle opening and closing price did not change significantly during its period the price had high volatility.
Doji
A rare candle is a Doji by a candlestick patterns trader.
If you see one you’ll know it’s a Dojo, these candles have extremely small bodies and in some cases the same opening and closing price which will make the candle body very flat.
Doji candles suggest an undecided market or a fight between buyers and sellers. Prices move above and below the opening price during the session, but it closes at or very near the same opening price. Neither buyers or sellers were able to gain control and the result is a tie.
There are FOUR special types of Doji candlesticks and each one can help you identify and predict the behavior of the following candles.
The length of the shadows can vary and the resulting forex candlestick looks like a cross, inverted cross, or plus sign depending which shadow is longer.
When a Doji candle forms on your chart, make sure you check the previous candlesticks.
The Harami Candlesticks
Let’s talk about Harami candlesticks. It’s a candle inside the previous candlestick, it helps you find potential trend reversals, the key to identifying this pattern is that the closing price of the second candle has to be within the previous candle range, there are two types of Harami; bullish and bearish.
Engulfing Candlestick
The way you identify this pattern is by looking for a small candle followed by a bigger one that covers the full small candle (engulfing the whole previous range) and moves in the opposite direction. There are also two types of Engulfing candles you can identify; Bullish Engulfing and Bearish engulfing.
Dark Cloud Cover
These are staggered candles, they indicate a potential bearish signal and you can identify them as two candles about the same size and shape that are staggered, the first candle is moving upwards and the second candle moves downwards.
Piercing Pattern
These are also staggered candles, and they indicate a bullish signal, and they can be identified as two candles of the same size staggered. The first candle needs to be downwards and the second one should be moving upwards.
Make sure that you are using these candlestick patterns in conjunction with other technical Indicators, use them as a confirmation with Relative Strength Index, Stochastic, Momentum or your preferred technical indicator.
Determining the most reliable candlestick pattern is subjective and depends on various factors. However, some widely regarded patterns are considered more reliable than others. For example, the engulfing pattern, which occurs when a candlestick completely engulfs the previous one, is often seen as a strong signal of a trend reversal. Similarly, the hammer and shooting star patterns, with their distinct long wicks, can indicate potential price reversals. It’s crucial to combine candlestick patterns with other technical indicators and analysis to enhance reliability and accuracy in trading decisions.
Bullish candlestick patterns indicate potential upward price movements in the market and are often sought after by traders. Some popular bullish patterns include the hammer, which has a small body and a long lower wick, suggesting a possible trend reversal from bearish to bullish. The bullish engulfing pattern occurs when a larger bullish candle completely engulfs the previous bearish candle, signaling a shift in momentum. Other patterns like the morning star and bullish harami also suggest potential bullish moves. Traders often use these patterns in combination with other indicators to increase the probability of successful trades.
Candlestick reversal patterns are formations that suggest a potential change in the prevailing price trend. These patterns can help traders identify opportunities for trend reversals and make informed trading decisions. Some common candlestick reversal patterns include the doji, which occurs when the opening and closing prices are nearly the same, indicating market indecision. The engulfing pattern, where a larger candle engulfs the previous one, can also signal a reversal. Additionally, the evening star and shooting star patterns are known for their bearish reversal implications. It’s important to combine these patterns with other technical analysis tools for confirmation before taking action.
We hope that the information provided in this article was interesting to you and mostly that you can use this information to improve your trading skills around candlestick patterns. We strive to present this information in a way that is easy for you to digest. If you enjoyed this article make sure to visit our resources page to find more information that can help you become a better trader and test those strategies on a trading account.
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