Types of Candlestick Patterns

Using Candlestick Patterns to Confim Trends

You may have already been introduced to a number of techniques that you can use to safeguard your equity whilst increasing your profit potential. However, once you have detected a new possible entry point for a trade, you will discover that it is good practice to seek additional confirmation before taking further action.

Many experts recommend that one good way to undertake this task is to examine the Japanese candlestick patterns on the daily trading charts of any asset of interest. You can utilize candlestick patterns to detect and confirm key price formations, many of which are discussed in this book e.g. retracements, reversals, breakouts and fakeouts etc.

For instance, you can make great use of candlesticks to help you determine and distinguish between reversals and retracements. You will find that there are a significant number of important candlestick patterns. You have already been introduced to some but here are the descriptions of a few more that are very popular:

Types of Candlestick Patterns

6.2.1 – Morning Star

This formation is represented by a three candlestick structure that signifies the start of a new bullish channel.  The first candlestick is usually a long bearish one, the second slumps slightly lower while the third is a bullish candlestick that closes above the center of the initial candlestick, as displayed in the ensuing diagram.

morning star

6.2.2 – Dark Cloud Cover

This is a bearish reversal pattern comprising a large bearish candle that casts a shadow over a preceding bullish one. To create this pattern, the final day candle in the sequence must open at a high and then close below the midpoint of the body of the preceding day – see next diagram

dark cloud cover

6.2.3 – Hanging Man

You will find that this pattern has a small body and is created towards the completion of a bullish trend. Investors do not assess that the body color is of high significance but tend to be more concerned that the extended lower tail is almost double the size of the body and that a minimum wick exists, as shown by the following  figure. You will find that this formation is evaluated as a bearish indicator signifying there has been an assertive effort to sell an asset that was firmly rejected towards the finish of the current time-frame.

hanging man

6.2.4 – Shooting Star

This structure is generated when the opening, closing and lowest prices of a candlestick are very near to one another. Another key attribute of a shooting star is that it has an extensive wick which is normally double the length of the body, as illustrated by the central candlestick in ensuring diagram. This is a major bearish sign indicating that a bullish trend has just been vividly rebuffed by investors.

shooting star

6.2.5 – Doji

This formation is produced when both opening and closing prices are located towards the center of the pattern. The Doji has both a wick and tail which can be fairly long and nearly equal in length, as displayed on the following diagram. By itself, the Doji is not considered to be either a bearish or bullish indicator and as such it is usually analyzed as part of a series of three successive candlesticks.

doji

6.2.6 – Hammer

This structure is generated during the final stages of a robust bearish trend and, as such, usually identifies the birth of a new bullish channel. The hammer possesses a minute body which is created at the completion of the active time-frame. There is no upper wick but a noteworthy lower tail which is almost double the distance of the body, as demonstrated in the next figure. Essentially, the Hammer indicates that the price has rebounded upwards after testing a key support level.

hammer

6.2.7 – Inverted Hammer

This formation indicates the birth of a new bullish channel which is produced towards the completion of a strong bearish trend. The candlestick has opening and closing prices very near to one another with no tail but a wick that is nearly double the distance of the body, as shown by the subsequent diagram.

inverted hammer

You will discover that those candlestick formations possessing either long tails or wicks with nearly no body tend to be the most effective, e. g. hammer, hanging man, morning star, hammer and inverted hammer. You are encouraged to identify these structures on charts displaying the more dependable longer time-frames.

You may deploy these candlestick patterns as follows. For example, if you have been struggling to initialize any new positions by utilizing your trading strategies, then you should hunt for one of the patterns listed above. For instance, envisage that you have discovered a hammer on a daily chart. You should then investigate the reasons for its development by analyzing all the relevant news commentaries, fundamental and technical factors. From this study, you may be able to ascertain if a major reversal is being created or merely a corrective dip.

Occasionally, if you have other various reasons of initiating a new position then you should consider examining the candlestick formations on the trading chart of the relevant asset for extra verification. For example, suppose that you were intending to execute a long trade after researching a trading chart but observed that a shooting star candlestick was being created. Under these circumstances, you should reassess your decision and await further developments before proceeding further.

Using this candlestick technique can assist you in verifying your active positions, identify new trades or stop you entering trades that will ultimately convert into losses. Nevertheless, you must understand that candlestick patterns have restricted use when high priority economic news is scheduled for release.

How can you evaluate the effectiveness of incorporating candlestick verification into trading strategies? This objective can be accomplished as follows. First, compute the expectancy value of your strategy on its own and then repeat the procedure after introducing an extra step of candlestick confirmation.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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