Why use Candlesticks?
- Provide traders with earlier indication of reversals: Candlestick charts are very effective in signaling potential reversals well before traditional bar or point charts and thus aid traders to time their entries and exits with better timing
- Give unique market insights: By looking at the length of a certain candlestick charts, a trader can get a sense of the force of the underpinning move, which is not possible with bar charts
- Enhancing chart analysis: Candlestick charts can be used together with any Western technical tools, provide a trader with a powerful synergy of techniques that will prove to be an edge over traders who solely employ traditional Western charting techniques.
Traders who employ technical analysis watch price action to provide them clues to a shift in the market trend or direction and market psychology. Market trends and psychology rarely change abruptly. Reversal indicators do not indicate that the trend is going to change immediately but rather, they give signs that the trend is likely going to change. Using traffic lights as an analogy, reversal indicators are like the yellow light which signal that a change is about to occur. A trader should not pick a direction as soon as he sees a reversal indicator, he should first wait for a confirmation before actually picking a direction.
Bearish Reversal Patterns:
The hanging man has a shape similar to a hammer except it comes towards the end of a wave of buying, meaning that upward momentum is coming to an end. However, since the long lower shadow is usually positive, it is necessary to wait for bearish confirmation. This confirmation can be a gap down and close or just a close beneath the hanging man.
A shooting star is a pattern that forms after an uptrend. Although it is not a major reversal signal, it gives an indication of a market top. A shooting star has a small real body at the lower end of its range with a long upper shadow. What this means is that the session opened near its low, and rallied strongly, it then started to sell off towards the end of the session and closed near its lows. An ideal shooting star formation has a real body that gaps away from the prior real body. Confirmation of a change in trend is when we have a bearish close after the shooting star.
A bearish engulfing pattern consists of two candlesticks. A smaller white candlestick would be followed with a black candlestick that is larger than it. What this means is that selling pressure has overwhelmed buying pressure. For this pattern to be significant, the market has had to be in a defined uptrend before the occurrence of this pattern.
Bullish Reversal Patterns:
The hammer is a bottom reversal pattern that comes after a wave of selling, meaning that is it indicating that downward momentum is coming to an end. The long lower shadow and the close of near the upper end of the session's highs indicates that there was a sharp sell off during the session but bounced back closing near its highs. The session closing near its high is important so the hammer should have either a miniscule or no upper shadow.
A bullish engulfing pattern consists of two candlesticks. A smaller black candlestick would be followed with a white candlestick that is larger than it. What this means is that buying pressure has overwhelmed selling pressure. For this pattern to be significant, the market has had to be in a defined downtrend before the occurrence of this pattern.
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