Candlestick Patterns
Understanding price action through candlestick formations
Introduction
Candlestick patterns are one of the most popular tools in technical analysis. They provide valuable insight into market sentiment by visually representing price action.
Traders use candlestick patterns to anticipate potential market reversals, continuations, and trend changes.
What Are Candlesticks?
A candlestick represents price movement within a specific time period. Each candlestick contains four key elements:
- Open price
- Close price
- High price
- Low price
Understanding Candlestick Structure
The body of a candlestick shows the range between the open and close prices, while the wicks show price extremes.
- Long body: Strong momentum
- Short body: Market indecision
- Long wicks: Rejection of price levels
Bullish Candlestick Patterns
Bullish Engulfing
A bullish engulfing pattern occurs when a large bullish candle completely engulfs the previous bearish candle, signaling potential upward reversal.
Hammer
The hammer has a small body and a long lower wick. It indicates strong buying pressure after a decline.
Morning Star
This three-candle pattern suggests a transition from bearish to bullish momentum.
Bearish Candlestick Patterns
Bearish Engulfing
A bearish engulfing pattern occurs when a large bearish candle engulfs the previous bullish candle.
Shooting Star
The shooting star has a small body with a long upper wick, indicating selling pressure.
Evening Star
This pattern signals a potential bearish reversal after an uptrend.
Indecision Candlestick Patterns
Doji
A doji forms when the open and close prices are nearly equal, reflecting market indecision.
Spinning Top
A spinning top indicates uncertainty and possible trend slowdown.
Importance of Context
Candlestick patterns are most effective when analyzed in context.
- Trend direction
- Support and resistance levels
- Volume confirmation
Combining Candlestick Patterns with Other Tools
Professional traders rarely rely on candlestick patterns alone.
- Support and resistance
- Trendlines
- Indicators
- Risk management
Common Beginner Mistakes
- Trading patterns without confirmation
- Ignoring higher timeframes
- Overtrading every pattern
- Ignoring risk management
Conclusion
Candlestick patterns provide valuable insight into market psychology and price behavior.
When combined with proper analysis and risk management, they become a powerful trading tool.
Read the candles, understand the story behind price.