Importance of candlesticks in technical analysis
- Candlestick is a major part of Price actions
- It is like Heart of Technical analysis
- Helps to identify market sentiments and emotions
- It has detailed multiple patterns made of a combination of candlesticks. It helps technical analysts to gauge the market sentiment.
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Types of Candlestick Pattern
There are multiple types of candlestick patterns, these can form from just one Single candlestick, two candlesticks, or even three candlesticks. These patterns can bifurcate as Bullish, Neutral & Bearish patterns.
Some of the important candlestick patterns are:
- Engulfing (2 candles pattern)
- Harami (2 candles pattern)
- Dark Cloud Cover & Rising Sun (2 candles pattern)
- Hammer (Single Candle pattern)
- Doji (Single candle pattern)
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Bullish Engulfing Pattern
This pattern forms when the body of a candlestick opens low compared to the previous one and closes high of the previous candlestick. It got its name engulfing candle because it engulfs or takes over the last candle. These patterns can be considered as a reversal pattern if it has formed at the bottom of a downward rally. Here buyers enter and overtake sellers. Because sellers were pushing the price down, they won for a moment when the price opened below the previous candle. Then buyers came suddenly and moved the price not only up but even higher than the previous candle. This is a strong indication that from now onwards, the price will move up.
Bearish Engulfing patterns
This pattern usually forms during an uptrend. In this candlestick, the open is higher than the previous close and the closing is lower than the previous candlestick. The previous bullish candle is being engulfed by a bearish candlestick that’s why it is named bearish engulfing. This pattern can be considered as a strong reversal pattern if it has formed during an uptrend. What happened here is at the start, buyers were trying to push the price higher. But sellers came and pulled the price lower than the previous candle, indicating the possible upcoming downward moment.
Harami means pregnant women in Japanese. These patterns are considered neutral and reversal both, but mostly it is a neutral pattern. In a bullish engulfing pattern that forms at a downtrend where candlestick opened and closed in between the length of the previous candle. It fails to break either the low or even high of the previous candle. This doesn’t provide any strong indication of any further moment and vice versa scenario is bearish Harami pattern. We should wait for confirmation before entering into any trade when we observe this candlestick pattern.
Dark Cloud Cover & Rising sun
In dark cloud cover, it feels like the price will remain on an uptrend. Due to some reasons like bad news, the price reverted in the next move. In the bearish dark cloud, the cover price opens as usual higher. But after that, there will be any negative news related to the market or stocks that led it to close below 50% of the previous candle. In the rising sun, price opens below the previous candle. Here it seems like the price will continue to move in a downtrend. But there may be some positive news in the market or related to particular stock it closes above 50% of the previous candlestick.
Doji candles are indecision candles. These candles have long shadows and small bodies. Doji tells us that there was a strong fight between buyers and sellers, but there was no outcome of this fight. Buyers tried to pull prices higher results in the upper leg direction, and sellers tried to push the price down. This led to a downward long leg, and there the price closes at the point where it has opened, this led to small or nobody. Doji is usually seen during consolidation, one has to wait for confirmation and see either price gets reversed or the rally continues. There are other subtypes of Doji such as Gravestone, long-legged, Dragonfly.
- Candlesticks are useful in identifying current market sentiments and emotions.
- It has its pattern formed by a combination of candles to identify trends.
- Candlesticks are capable of showing trend reversal or continuation much better than any other indicators.
- There are not many cons of candlestick but still, it depends on a trader’s ability to read it and apply it in the right way.
- Single candlesticks show the current market situation but not the whole picture of the market.
- Traders cannot take trade just based on the candlesticks patterns, they have to reassure trades using other parameters as well.
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