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How to use candlestick patternsThere are countless candlestick patterns that traders can use to identify areas of interest on a chart. These can be used for day trading, swing trading or even longer term position trading. While some candlestick patterns can give an idea of the balance between buyers and sellers, others can indicate a reversal, continuation, or indecision. It is important to note that candlestick patterns are not necessarily buy or sell signals in and of themselves. Instead, they represent a way to look at market structure and a potential indicator of an opportunity in the making. Therefore, it is always useful to look at patterns in context – this can be the technical pattern on a chart, but also the broader market environment , along with other factors. In short, like any other market analysis tool, candlestick patterns are most useful when combined with other techniques. These may include the Wyckoff Method, Elliott Wave Theory, and the Dow Theory. It can also include technical analysis (TA) indicators such as Trend Lines, Moving Averages , Relative Strength Index (RSI), Stochastic RSI, Bollinger Bands, Ichimoku Clouds, Parabolic SAR or MACD. Related: Top Stock Investment Newsletters Bullish Reversal Patterns1. Hammer (hammer)A candle with a long lower wick at the bottom of a downtrend, where the lower wick is at least twice as long as the body. A hammer indicates that although selling pressure has been high, the bulls have been able to drive price back up near the opening point. Hammers can be either red or green – however, green may indicate a more forceful bull reaction. 2. Inverted hammerAlso called in English “inverse hammer”, it is like the figure of the hammer, but with a long wick above the body instead of below. As with the hammer, the top bit should be at least twice as long as the body. An inverted hammer occurs at the bottom of a downtrend, and can indicate a potential reversal to the upside. The upper wick shows that the price stopped its continuous downward movement, although in the end the sellers managed to push the price down, close to the opening point. Therefore, the inverted hammer may suggest that buyers have a chance to gain control of the market. 3. Three white soldiersThe Three White Soldiers pattern consists of three consecutive green candlesticks – all of which open within the body of the preceding candlestick, and close at a level above its top. Ideally, these candles should not have long lower wicks, indicating that constant buying pressure is pushing the price up. The size of the candles and the length of the wicks can be used to judge the probability of a continuation or possible pullback. Bearish reversal patterns4. Hanging ManThe hanging man is the bearish equivalent of a hammer. It usually forms at the end of an uptrend with a small body and a long lower wick. The lower wick indicates that a large sell-off has occurred, but the bulls have managed to regain control and drive the price higher. With that in mind, and after a prolonged uptrend, the sell-off can act as an indicator that the bulls may be about to lose control of the market. 5. Shooting StarThe shooting star is made up of a candle with a long upper wick, a small or no lower wick, and a small body, ideally close to the lowest price. The shooting star is similar in shape to the inverted hammer, but it forms at the end of an uptrend. It indicates that the market peaked, but then the sellers took control and drove the price down. Some traders prefer to wait for the next candles to develop to confirm the pattern. 6. Three black crowsThe three black crows are made up of three consecutive red candles that open within the body of the previous candle and close at a level below the low of the previous candle. The bearish equivalent of three white soldiers. Ideally, these candles should not have much higher wicks, indicating continued selling pressure driving the price down. The size of the candlesticks and the length of the wicks can be used to judge continuation possibilities. ConclusionCandlestick patterns are essential for any trader to at least get familiar with, even if they don’t directly incorporate them into their trading strategy. While they can certainly be useful in analyzing the markets, it is important to remember that they are not based on scientific principles or laws. Instead, they convey and visualize the buying and selling forces that ultimately drive the markets. >>>Access more profitable trading tips joining the Capitalist Exploits Insider Newsletter submitted by /u/kayakero to r/CapitalistExploits |