Candlestick pattern are the baseline of any crypto, stock, or any other asset’s chart. A candlestick is a visual representation of the price movements of a financial asset, such as a stock, commodity, or currency pair, over a specific period. It is formed by plotting the open, high, low, and close prices of the asset for a given time intervals, such as a day or an hour, on a chart.
CANDLESTICK COLORS
The candlestick is made up of a rectangular body, which represents the opening and closing prices of the asset, and two thin lines, known as wicks or shadows, which extend from the top and bottom of the body to represent the highest and lowest prices traded during that period. The color of the body indicates whether the closing price was higher or lower than the opening price, with a green or white body representing a price increase and a red or black body representing a price decrease.
What do candlesticks tell you?
Candlesticks are a very unique feature of a cryptocurrency and stock trading – each candle does not only tell you about OHLC (Open, High, Low, and Close) but also tells you a story, decoding this story properly can help you determine possible price movement based on past patterns. For example, a candle with almost nobody and large wicks(called “doji candle” ) on both sides suggests that neither buyers nor sellers were able to gain control during the period, and as a result, the market is likely to be in a state of equilibrium.
Reading Candlesticks with Context of the Market
However, it is worth noting that just like a story is different from each character’s perspective – any candlestick’s story might differ in different market contexts leading to an extremely contracting result for example When a Doji pattern appears after a downtrend, it can signal a potential reversal to the upside, as the market is showing signs of indecision after a period of selling pressure. In this context, a Doji can be considered a bullish signal, indicating that buyers may be entering the market and the price may begin to rise.
PREFACE
Before we dive into the world of candlesticks, their patterns, and their outcomes – it is important to know about a few key terms or vocabulary that we are going to use in this article about candlesticks, their meaning, and what they are indicating :
- Bullish candle – a candle green in color ( which is formed when the price surpasses the previous candle’s price )
- Bearish candle – a candle red in color ( which is formed when the price stays below the previous candle’s price )
- Body: The rectangular portion of a candlestick is called the “body.” It represents the range between the opening and closing prices of an asset during a given period.
- Wick or Shadow: The wick or shadow represents the price range outside of the body of the candlestick. The top wick represents the highest price reached during the time period, while the bottom wick represents the lowest price.
ENGULFING CANDLE
An engulfing candlestick in simple terms means a candle that engulfs ( surrounds ) the previous candle of the opposite candle – this sort of candle can indicate the price to reverse and is indeed the most credible candlestick pattern for a crypto or stock asset.
Bullish engulfing candle
A bullish engulfing candle opens and closes above the previous candle – the engulfing candle itself is bullish( green ) while the candle it engulfs is bearish(red), basically meaning that it exceeds that previous candle on both sides and hence engulfs it.
Bearish engulfing candle
A BEARISH engulfing candle opens and closes above the previous candle – the engulfing candle itself is BEARISH ( RED ) while the candle it engulfs is BULLISH ( GREEN ), basically meaning that it exceeds that previous candle on both sides and hence engulfs it.
How to maximize the use of Engulfing candles
Most immature traders would just trade based on engulfing candles when they learn about it – which is a terribly wrong practice since these candles are everywhere, every once in a while you would find some sort of bullish or bearish engulfing candle but to cater to the most out of these unique candles you need to draw something called a SUPPORT or RESISTANCE
To know more about support or resistance read our article: https://wisteed.com/charting-and-technical-analysis/
Correctly Using Engulfing candles for Longing ( buying setups )
First of all, draw major support as soon as you spot one – remember that each support you draw must be easily recognizable as soon as you open a chart, this technique is important because some traders completely fill their charts with these support and resistance lines and destroy the whole purpose, drawing a CLEAR support zone.
Then wait for the price to arrive at this support in realtime – patiently wait and when the price finally does reach this zone wait for a bullish engulfing candle and there you place your trade as soon as that engulfing candle closes – this is the result :
Since you and I are short on time I won’t be showing a vivid example of how a bearish engulfing candle would affect price movements based on that particular market scenario
But all you need for a bearish engulfing candle setup is a resistance – some patience for the formation of the bearish engulfing candle and then you see the crypto or stock price fall like a sharp knife falling to the ground – you do not try to catch it!
And if you are such a big fan of vivid examples – join this telegram where I share such setups for free for beginners to watch and learn. Click on this button to join the group.
Momentum Candle
Next in line is the momentum candle which is very similar to the engulfing candle – the only difference between the two is devotion and energy, let me explain: A momentum candle in either bearish or bullish colors is 2 to 3 times larger than the previous candle(s).
Proper usage of momentum candle for analyzing stocks and crypto
There are two major uses of momentum candles:
- Trending markets
- Sideways market
Continuation – Momentum candle for bullish and bearish scenarios
In an uptrending market when you see a bullish momentum(large size) candle, it indicates that the price is going to continue in an uptrend for a while – called a continuation pattern. The Opposite can be observed in a down-trending market as well.
Reversal – bullish and bearish momentum candle scenarios
In an uptrending market when you see a bearish momentum(large size) candle, it indicates that the price is going to reverse into a downtrend now – called a reversal pattern. The Opposite can be observed in a down-trending market as well.
Momentum candles in a sideways market
In a sideways market where the price has not moved a lot recently, a bullish momentum candle is a perfect indication that this is the moment the price touches new peaks. Similar but opposite effects can be observed when a bearish momentum candle appears.
Trading momentum candles the right way
However, as I mentioned the market context’s importance previously, I will stress it again!
If the market was previously in an uptrend and a sideways market has appeared chances are that a downtrend is on the cards – even if a bullish momentum candle does appear, it might be a fakeout (or a fake breakout ) – similarly if the market has been in a downtrend lately and a sideways market occurs – then your best bet is a bullish momentum candle which breaks the period of consolidation and moves the price upwards.
DOJI CANDLE
Next in line is the infamous doji candle – a doji candle has an extremely small body and wicks on both sides, this type of candle is easy to trade but hard to find. Doji candle indicates reversals in a trend when the body is extremely small and the wicks are large this indicated that there is an imbalance in the market, buyers and sellers or bulls and bears are pushing for dominance
How to trade based on doji candlestick patterns
If the price has been in a downtrend for quite a bit – it means the sellers were in control – as soon as a doji candle of any color appears – it means that buyers have entered the market and the price is likely to reverse. For better results what you can do is wait for a few more bullish candles and then enter – this increases the level of confirmation.
The psychology behind DOJI – is it really reliable?
Doji candle is accurate, reliable, and popular because the psychology behind these candles is crystal clear and resonates which common sense that if buyers were in control, they would be exhausted and sellers might take over and vice versa, doji candle acts as an indication that the rivals of current dominators have entered and price might move in their desired direction.
Shooting Star and the Hammer
Shooting star and hammer are two candlesticks that indicate reversal – these candles have medium-sized or small bodies and larger wicks – wicks are at least 2 times larger than the body. The hammer and shooting star candles indicate a reversal in price when they appear at the end of a trend.
How to predict the price using the Hammer candlestick pattern
Hammer has a small bullish body or green body and a large wick below the body – this indicates that sellers took the price to a massive low but buyers came in and took control of the candle aggressively – if buyers did not take this control, it would be a momentum candle indicating continuation. You can anticipate hammers in a prolonged downtrend and use it as an indication that the price is going to reverse.
How to predict the price using the shooting star candlestick pattern
Shooting star has a small bearish body or red body and a large wick above the body – this indicates that buyers took the price to a massive low but buyers came in and took control of the candle aggressively – if sellers did not take this control, it would be a momentum candle indicating continuation. You can anticipate hammers in a prolonged uptrend and use it as an indication that the price is going to reverse.
Check out this Twitter handle where daily such patterns are shared for free.
Tweezers Candlestick Pattern
The tweezer candlestick is a technical analysis pattern used to identify potential trend reversals in financial markets. It consists of two candlesticks that have the same high or low price, creating a visual pattern that looks like a pair of tweezers.
How to trade the Tweezers Candlesticks Pattern
If the tweezer candlestick pattern appears at the end of an uptrend, it can indicate that buyers are losing momentum and that the trend is about to reverse. Conversely, if the pattern appears at the end of a downtrend, it can indicate that sellers are losing momentum and that the trend is about to reverse.
Marubozu candlestick Pattern
Marubozu candlestick is a type of candlestick pattern used in technical analysis to identify potential trends in financial markets. It is a single candlestick pattern that has a very long body with little to no wicks or shadows on either end.
Bullish Marubozu candlestick
A bullish Marubozu candlestick has a long green body with no upper or lower shadows, which indicates that buyers were in control throughout the entire trading session. It suggests that the buying momentum is strong and the trend may continue upward.
Bearish Marubozu candlestick
A bearish Marubozu candlestick, on the other hand, has a long red body with no upper or lower shadows, which indicates that sellers were in control throughout the entire trading session. It suggests that the selling momentum is strong and the trend may continue downwards.
The significance of the Marubozu candlestick pattern lies in the fact that it represents a strong trend with a significant price movement, which can be useful for traders to identify potential entry and exit points in the market. However, like any other technical analysis tool, it should be used in conjunction with other indicators and analysis methods to make informed trading decisions.
END NOTE
These are just a few examples of the many candlestick patterns that traders and analysts use to make informed trading decisions. It’s important to note that while candlestick patterns can be useful, they should not be relied upon as the sole indicator of market movements and should be used in conjunction with other analysis tools and indicators.
