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What are Candlestick Patterns?

Time to read: 5 min

May 28, 2021

A candlestick is a form of price chart used in technical analysis that depicts the high, low, open, and closing values of an asset over a given time period. It was invented by Japanese rice merchants and traders to watch market prices and daily momentum hundreds of years before it became popular in the United States. The widest part of the candlestick is known as the “real body,” and it shows investors whether the closing price was greater or lower than the opening price.

The Elements of a Candlestick

The shadows cast by the candlesticks depict the day’s high and low, as well as how they compare to the open and close. The shape of a candlestick varies depending on the relationship between the day’s high, low, opening, and closing prices.

Candlesticks are utilized by technical analysts to identify when to enter and exit trades since they indicate the impact of investor sentiment on stock markets.

Candlesticks are an excellent trading tool for any liquid financial instrument, such as stocks, foreign currency, and futures.

Long green candlesticks show a lot of buying pressure, which usually means the price is going up. They should, however, be considered in the context of the market system rather than individually. Long red candlesticks imply that there is a lot of selling pressure. This indicates that the price is falling.

The Basic Candlestick Patterns

The patterns are categorized into bullish and bearish. Bullish patterns suggest that the price will likely increase, while bearish patterns suggest that the price will likely decrease. Candlestick patterns are trends in price movement, not guarantees, so they don’t always work. Let’s look at a few of the Bullish and Bearish Candlestick Patterns.

Bullish Candlestick Patterns

Bullish Candlestick is a signal for traders to consider opening a long position to take advantage of any upward trend.

Hammer

Hammer- The hammer candlestick pattern is observed at the bottom of a downward trend and consists of a short body with a long lower wick. A hammer showed that, although pressure was sold through the day, the price ultimately dropped again due to strong purchasing pressures. The body color may be different, but green hammers signal a stronger market for bulls than red hammers

Inverse Hammer

Inverse Hammer- The inverted hammer is a similar bullish pattern. The only distinction is that the upper wick is longer than the lower wick. It denotes a period of buying pressure followed by a period of selling pressure that was insufficient to force the market price down. The inverse hammer indicates that buyers will take control of the market in the near future.

Bullish Engulfing

Bullish Engulfing – Two candlesticks constitute the bullish engulfing pattern. A smaller red candle gets fully consumed by a larger green candle in the first candle. Despite the fact that the second day begins lower than the first, the bullish market drives the price upward, resulting in a clear gain for buyers.

Bearish Candlestick Patterns

After an uptrend, bearish candlestick patterns appear, signaling a point of resistance. Traders that are pessimistic about the market price would typically liquidate their long bets and initiate a short position to profit from the price decline.

Hanging Man

Hanging Man-The bearish version of a hammer is the hanging man; it has the same shape as a hammer but appears toward the end of an uptrend. It suggests that there was a large sell-off during the day, but that buyers were able to bring the price back up. The sharp drop is frequently interpreted as a sign that the bulls are losing control of the market.

Shooting Star

Shooting Star- The shooting star is similar to the inverted hammer, except it is developed in an upward trend, with a short lower body and a long upper wick. Typically, the market will begin slightly higher, climb to an intra-day high, and then close at a price just above the open — like a falling star.

Bear Engulfing

Bear Engulfing – At the end of an uptrend, a bearish engulfing pattern appears. The first candle has a small green body, which is devoured by a long red candle that follows. It denotes a price peak or slowdown and is a warning indicator of a coming market downturn. The trend is more likely to be substantial the lower the second candle descends.

Disclaimer: There are potential risks relating to trading and investing and you should not trade with money that you cannot afford to lose however, for those that educate themselves and adopt appropriate risk management strategies, the potential update can be significant. Please note that all opinions, research, analysis, and other information are provided as general market commentary and not as specific investment advice.

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