Traders who trade stocks or other financial instruments love to use Candlestick Patterns in their trading platform, as they are an excellent visual representation of how the price has behaved over some time.
A candlestick consists of the so-called “body” of the candle – the range between the opening and closing prices, representing the High and Low of this period. A candlestick body can form after it opens at Low and closes at High. In other cases, when there is high volatility, the candlestick body can be formed by fairly strong price movements in a certain range.
Candlesticks can serve as a key to understanding not only price movement but also market sentiment about a particular stock or index. For example, one can speak of bullish sentiments if a candlestick is formed, in which the stock goes down after opening, tests the support level, bounces off it, and closes at High.
Many charting platforms are capable of recognizing candles and scanning stocks for candidates to trade. But you cannot rely only on computer technology; the trader himself should know how different candlestick patterns look like.
Bullish engulfing candle
A bullish engulfing candlestick pattern makes when a stock’s price movement encompasses the previous day High and Low. That is, it absorbs it. Typically, this pattern tells the trader that the price, after moving down, found support or a large volume of purchases, and then made a move up, breaking through the High of the previous day. Such a candlestick can often confirm the stability of an uptrend or indicate a change in a downtrend.
Bearish engulfing candle
The bearish engulfing candlestick pattern is the opposite of the previously discussed bullish engulfing candlestick pattern. In this case, the price tests the level above the High of the previous day, and then, finding there a large volume of sales, sharply goes down, breaking through the Low of the previous day. Such a formation can serve as confirmation of a steady decline in prices or evidence of a trend change.
A bearish engulfing candlestick can occur at a top or during an existing trend and indicates a continued downward movement. On the PatternsWizard, the downtrend began after a perfect bearish engulfing candle formed at the top.
Hammer reversal candlestick pattern
A hammer pattern can form when market participants abruptly reject a support or resistance level. In the example below, the price went down but found support or buying volume there. At this point, the control over the price passed to the bulls resulted from which the candlestick closed in the area of its open level.
The next day, a strong bullish candlestick formed; this indicates that momentum is maintained. Traders and investors found this signal valuable and started buying the stock, which caused the price to rise. Such patterns can occur in both directions, forming hammer-shaped candlesticks.
Doji refers to a candlestick pattern that indicates the indecision of the stock movement. As a rule, these patterns are formed in zones where bulls and bears fight for price movement’s further direction.
A very small body characterizes the Doji candlestick; that is, closing prices are very close. Simultaneously, it may have long wicks, which indicate that the levels above and below have been tested but not accepted. This pattern indicates the uncertainty and indecision of the movement and that the bulls and bears are fighting to control the price. Often, after breaking this candle, a steady up or down movement occurs.
While a Doji candlestick cannot be considered a good trade entry (because, by its very nature, a breakout can occur in either direction), it can indicate a change in market sentiment.
The four considered Roadmap to Successful Trading, when properly recognized, can be very useful for traders and investors. They give a good indication of market sentiment. By finding such signals at support and resistance levels, you can predict a change in the direction of price movement and get an advantage for trading.