If you’re looking to get started in trading, or even an experienced trader, it’s important to know the most popular and reliable candlestick patterns. Candlestick patterns are graphical formations that give traders clues about the future direction of prices. There are many candlestick patterns, but the most common ones are the engulfing, shooting star, hanging man, evening star, and Doji. Keep reading to learn more about candlestick graph patterns for trading.
Candlestick patterns are graphical representations of price action over time. Candlestick patterns can be used to identify bullish reversals and bearish reversals, and trend continuations. In general, the longer the body of the candlestick and the more candles that form its pattern, the more significant the reversal or continuation is likely to be. Many traders also use candlestick patterns in conjunction with other technical indicators to help confirm trading signals.
The Engulfing Pattern
The engulfing pattern is a two-candle reversal pattern that signals a potential change in trend. The first candle is bullish, and the second candle completely engulfs the first candle’s body, creating a long wick on the top. The engulfing pattern is not as reliable as some other candlestick patterns. Still, it can confirm a reversal signal or enter, into a trade, after confirmation from another trading indicator.
The Shooting Star
The shooting star is a candlestick pattern that forms when a security’s opening price is significantly higher than its closing price. The shooting star is a bearish candlestick pattern that indicates that the bulls have been beaten back and that the market is likely to move lower. The shooting star is formed when a large black candlestick follows a small white candlestick with a small body and a long upper shadow. This indicates that the bulls have been forced to buy near the highs and that the bears are in control. The shooting star signals that selling pressure outweighs buying pressure and could indicate a future downturn. The pattern can be found at the top of an uptrend and should not be traded as a buy signal.
The Hanging Man
The hanging man is a candlestick pattern that can be used to spot potential reversals in a market. It’s made up of one long black candle and one small white candle. The length of the black candle should be greater than the length of the white candle, and the body of the black candle should be at or near the high of the day. The white candle should have a body that is at least twice as large as the body of the black candle, and it should open within the real body of the black candle and close at or near its high.
The Evening Star
The evening star is a candlestick pattern that signals the end of a bullish trend and the beginning of a bearish trend. The pattern consists of three candles: the first candle is bullish and closes near its high; the second candle is bearish and closes near its low; and the third candle is bullish and closes near its high, resulting in a star formation. The evening star typically indicates that sellers are starting to take control of the market, leading to a reversal in prices.
The Doji Star
The Doji star is a candle formation that can be used to predict reversals in the price of a security. The pattern comprises two candles, the first being a long white candle and the second being a Doji candle. The Doji candle has a small body, and its opening and closing prices are almost equal. The Doji is a pattern that indicates indecision or equilibrium between buyers and sellers. The Doji is formed when the open and the close are equal, and the high and the low are equal. The Doji is a sign that the market is about to move in either direction. This signals that bulls and bears are evenly matched at the moment, and a reversal could be imminent.
Candlestick patterns are essential because they can help traders decide when to buy or sell a security. These patterns can identify potential reversals or continuations in a security’s price trend.