Candlestick chart patterns are perhaps one of the simplest ways to understand the market sentiment.
A candlestick chart is a type of chart used by technical analysts in the financial markets that illustrates the price fluctuations of particular security during a predefined period of time.
Candlestick charts are one of the most powerful technical analysis tools in a trader’s tool kit as it allows futures traders to read the candlesticks and understand the market sentiment.
The candlestick chart can tell you simple things like, whether the market is bullish on a security or if it is bearish. A candlestick can also tell you when traders are undecided on price and when traders can expect to book profits on their trades.
Yes, candlestick reading is a science and an art, which when combined with the market content, allows traders a great way to read and study the security.
Types of Candlestick chart patterns
The most commonly used and important candlestick chart patterns are described below:
Three Black Crows
A bearish reversal pattern consisting of three consecutive black bodies where each day opens higher than the previous day’s low and closes near, but below, the previous day’s low.
Three White Soldiers
Three white soldiers is a bullish chart pattern that indicates a reversal by the formation of three consecutive long white candlesticks. After a decline, the three white soldiers pattern signals a change in sentiment and reversal of trend from bearish to bullish. Further bullish confirmation is not required, but there is sometimes a test of support established by the reversal.
Shooting Star Chart Pattern
A candlestick pattern that indicates a bearish reversal. The previous day’s candle has a very large body. On the day the shooting star occurs, price opens higher than the previous day’s close. You will see price rise well above the opening price during the day. But price closes lower than the opening price at the close of trading.
The name for candlestick patterns that have a small trading range and appear in a number of candlestick chart patterns. A doji is an important indicator when it forms in an uptrend or downtrend. The interpretation is that buyers or sellers are losing conviction and the direction is about to change.
A bullish price indicator occurs in candlestick charts when the market trades considerably lower from the open. With the Hammer pattern, price rallies to close either above or close to its opening price. In this instance, the candlestick looks very much like a hammer. It appears with a long lower wick and a short body at the top with little or no upper wick.
Inverted Hammer Chart Pattern
Appearing as upside down version of the hammer pattern, this candlestick chart pattern indicates a bullish reversal. This occurs when a security trades considerably higher after open. But price gives up most of the intra-day gains to close well off from its high. Though the price is now lower, the selling pressure signals a possible reversal in momentum. A Forex trader will look for a higher opening the following day to confirm this trend