Every Trader Should Know About Candlestick Patterns

Candlesticks can serve as a key to understanding not only price action, but also market sentiment for a particular stock or index. For example, you can talk about bullish sentiment if a candle is formed in which the stock goes down after opening, tests the support level, bounces off it, and closes at the maximum.

Traders who trade stocks or other financial instruments love to use trade with candlestick patterns platform as they are a great visual representation of how price has behaved over time.

A candle body can form after it opens at a low and closes at a high. In other cases, with high volatility, the body of a candlestick can be formed by fairly strong price movements in a certain range.

Many charting platforms are able to recognize candlesticks and scan stocks looking for trading candidates, but you can’t rely on computer technology alone; the trader himself must know how different candlestick patterns look like.

 Hammer Reversal Candlestick Pattern

A hammer pattern can form when market parties abruptly reject a support or resistance level. In the example below, the price moved down but found support or buying volume there. At that moment, the bulls took control of the price, as a result of which the candle closed near its opening level.

The next day, a strong bullish candle formed; this indicates that momentum is conserved. Traders and investors found this signal to be valuable and began to buy shares, which caused the price to rise. Such patterns can occur in both directions, forming hammer-shaped candles.

Bullish Engulfing Candle

A bullish engulfing pattern is formed when a stock’s price move covers the high and low of the previous day. That is, it absorbs it. Usually, this patterns tells the trader that the price, after moving down, found support or a large volume of purchases, and then moved up, breaking through the previous day’s high. Such a candle 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 bullish engulfing candlestick pattern discussed earlier. In this case, the price tests the level above the High of the previous day, and then, having found a large volume of sales there, it goes down sharply, breaking the low of the previous day. Such a formation can serve as confirmation of a steady decline in prices or evidence of a change in trend.

A bearish engulfing candle can occur at the top or during an existing trend and indicates a continuation of the down move. In PatternsWizard, a downtrend began after a perfect bearish engulfing candle formed at the top.

Doji

Doji refers to a candlestick pattern that indicates indecision in a stock’s movement. As a rule, these patterns form in zones where bulls and bears are fighting for the further direction of price movement.

A very small body characterizes a Doji candle; that is, closing prices are very close. At the same time, 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 for price control. Often after this candle is broken, there is a steady move up or down.