Unlike the traditional bar charts, candlestick charts are more visually appealing and thus, many traders find it easier to interpret.
Each candlestick provides a simple picture of price action.
An analyst can quickly compare between the opening and closing prices as well as the high and low price.
There are a few things we must be aware of before getting how each of the three candlestick patterns that can be a definite success for your trading strategy.
How do candlesticks actually work?
Candlesticks with hollow bodies indicate buying pressure and candlesticks with filled bodies indicate selling pressure.
In case of candlesticks, long upper or lower shadows form when the market moves ahead in a particular direction during the day and then reverses before the end of the day.
Candlestick charts come with the option of coloring prices to improve ones understanding of the chart.
The Candlestick’s outline and body be coloured black or red, depending on the candlestick’s opening and closing prices and the previous day’s closing price.
Understand that each candlestick patterns packs in information regarding four vital market states – open, high, low and close.
Always note that if the closing price is higher than the opening price, the body will be displayed hollow.
If the closing price is lower than the opening price, the body will be filled in red.
Why do traders prefer these over other chart types then?
These patterns have an immense ability to pick up tops and bottoms of every market move.
Each pattern comprises of upto three candles which offers an extreme level of exposure when it comes to risk reward ratio offered.
Now let’s move on to the top three candlestick patterns you must know –
How do you identify these?
Doji is without a doubt the easiest candlestick pattern to track when it comes to their opening or closing price, that are placed quite close to each other.
Engulfing Patterns are a two candle-pattern which is considered to be quite powerful amongst traders.
Usually these occur when the recent candle or the second candle absolutely overshadows the first candle.
Technically, this would be a sign for buyers to have overpowered sellers or the other way around in a market.
Engulfing patterns could be of two types – Bearish Engulfing Pattern and Bullish Engulfing Pattern.
2 Bullish Engulfing Pattern -:
3 Bearish Engulfing Pattern -:
These occur close to the top of an uptrend or at the top of a correction move, within a bear market.
These show the impending downward trend of stocks.
How do you know when these occur?
In a bearish engulfing pattern, a second candle or a bear candle will engulf the first candle which would be smaller in size.
The wicks or tails of these candles will be covered by the bigger bear candle.
This way you know for sure when a bear engulfing pattern has worked out.
If you are unsure about what a bear market is, read more here – http://stockmarketsignals.com/blog/10-things-to-do-during-a-bear-market-strategies/