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Candlestick Patterns Popular in Technical Analysis
This article will go over some of the most well-known candlestick patterns popular in technical analysis.
Candlestick charts are a popular technical tool for analyzing price patterns. For centuries, traders and investors have used them to identify patterns that may indicate where the price is headed. This article will provide illustrated examples of some of the most well-known candlestick patterns.
A Beginner’s Guide to Candlestick Charts is a good place to start if you’re new to reading candlestick charts.
Candlestick Patterns: How to Use Them
Traders can use a variety of candlestick patterns to identify areas of interest on a chart. These are appropriate for day trading, swing trading, and even longer-term position trading. While some candlestick patterns may indicate a buyer-seller balance, others may indicate a reversal, continuation, or indecision.
It’s important to note that candlestick patterns aren’t always a buy or sell signal. They are, instead, a method of examining market structure and a potential indicator of an impending opportunity. As a result, it is always beneficial to examine patterns in context. This can include the context of the technical pattern on the chart, as well as the overall market environment and other factors.
Bullish reversal patterns
At the bottom of a downtrend, a candlestick with a long lower wick that is at least twice the size of the body.
A hammer indicates that, despite intense selling pressure, the bulls drove the price back up close to the open. A hammer can be red or green, but green hammers may indicate a more aggressive bull reaction.
It functions similarly to a hammer, but with a long wick above the body rather than below. The upper wick, like a hammer, should be at least twice the size of the body.
An inverted hammer appears at the bottom of a downtrend and may indicate a possible upward reversal. The upper wick indicates that price halted its downward movement, despite the fact that sellers eventually drove it down near the open. As a result, the inverted hammer may indicate that buyers will soon take control of the market.
The three white soldiers pattern is made up of three consecutive green candlesticks that all open within the body of the previous candle and close at a level higher than the previous candle’s high.
Ideally, these candlesticks should not have long lower wicks, indicating that the price is being driven up by continuous buying pressure. The size of the candles and the length of the wicks can be used to predict whether the trend will continue or retrace.
A bullish harami is characterized by a long red candle followed by a smaller green candle that is entirely contained within the previous candle’s body.
The bullish harami pattern can last two or more days and indicates that selling momentum is slowing and may be coming to an end.
Bearish reversal patterns
The bearish equivalent of a hammer is the hanging man. With a small body and a long lower wick, it typically forms at the end of an uptrend.
The lower wick indicates that there was a significant sell-off, but bulls were able to retake control and drive the price up. Keeping this in mind, a sell-off following a prolonged uptrend may serve as a warning that the bulls may soon lose control of the market.
The shooting star is constructed from a candlestick with a long upper wick, little or no lower wick, and a small body, preferably near the low. The shooting star is similar to the inverted hammer in shape, but it forms at the end of an uptrend.
It means that the market reached a high before sellers took control and drove the price back down. Some traders prefer to wait for the pattern to be confirmed by the next few candlesticks.
The three black crows are formed by three consecutive red candlesticks that open within the body of the previous candle and close at a level lower than the previous candle’s low.
The bearish equivalent of three white soldiers. Ideally, these candlesticks should not have long higher wicks, indicating continuous selling pressure driving the price down. The size of the candles and the length of the wicks can be used to assess the chances of continuation.
The bearish harami is characterized by a long green candle followed by a small red candle with a body that is entirely contained within the previous candle’s body.
The bearish harami can last two or more days, appears at the end of an uptrend, and may indicate that purchasing pressure is easing.
The dark cloud cover pattern is formed by a red candle that opens above the close of the previous green candle but closes below its midpoint.
It is frequently accompanied by high volume, implying that momentum is shifting from the upside to the downside. Traders may want to wait for a third red candle to confirm the pattern.
This pattern appears in an uptrend when three consecutive red candles with small bodies are followed by the uptrend continuing. Ideally, the red candles should not cross the previous candlestick’s range.
A green candle with a large body confirms the continuation, indicating that bulls have regained control of the trend’s direction.
Instead, the inverse of rising three methods indicates the continuation of a downtrend.
When the open and close are the same (or very close to each other), a Doji is formed. The price can fluctuate above and below the open, but it always closes at or near the open. As a result, a Doji may indicate a point of indecision between buying and selling forces. Nonetheless, the interpretation of a Doji is highly contextual.
A Doji can be described as follows, depending on where the open/close line falls:
Bearish candle with a long upper wick and an open/close near the low.
Indecisive candle with a lower and upper wick and an open/close near the middle.
Depending on the context, a bullish or bearish candle with a long lower wick and an open/close near the high.
The open and close should be exactly the same, according to the original definition of the Doji. But what if the open and close aren’t the same but are rather very close? This is known as a spinning top. However, because cryptocurrency markets can be extremely volatile, an exact Doji is uncommon. As a result, the spinning top and the Doji are frequently used interchangeably.
Price gaps-based candlestick patterns
Price gaps are used in many candlestick patterns. When a financial asset opens above or below its previous closing price, it creates a price gap between the two candlesticks. Because cryptocurrency markets operate around the clock, patterns based on price gaps do not exist. Even in illiquid markets, price gaps can occur. However, because they occur primarily as a result of low liquidity and wide bid-ask spreads, they may not be useful as actionable patterns.
Candlestick patterns are important for any trader to understand, even if they do not directly incorporate them into their trading strategy.
While they are unquestionably useful for market analysis, it is important to remember that they are not based on any scientific principles or laws. Instead, they communicate and visualize the buying and selling forces that ultimately drive markets.
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