A brief understanding on reading a candlestick pattern
Candlestick charts are a type of technical chart that condenses data from many time frames into a single price bar. As a result, they are more helpful than typical open, high, low, and close (OHLC) bars or simple lines connecting closing price dots.
Candlesticks form patterns that, when completed, can indicate price direction. This colourful technical instrument, which goes back to 18th-century Japanese rice dealers, gains depth with proper colour coding.
Candlesticks are traditionally employed on a daily basis, with the concept being that each candle records a whole day’s worth of news, data, and market activity.A light candle (green or white) indicates that the buyers won the day, whilst a dark candle (red or black) indicates that the sellers prevailed.
Let’s take a look at the basics of candlesticks to be able to read its patterns.
How To Read a Candlestick Pattern
A daily candlestick displays the opening, high, low, and closing (OHLC) values of a market. The rectangular real body, or simply body, is coloured with a dark colour (red or black) to indicate a price decrease and a light colour (green or white) to indicate a rise in price.
The lines above and below the body are known as wicks or tails, and they reflect the greatest high and low of the day. When the sections of a candlestick are combined, they may frequently signify changes in a market’s direction or show big prospective moves that must frequently be confirmed by the next day’s candle.
Examples of Candlestick Patterns
Doji and Spinning Top
A doji is a candlestick shape in which the open and closure are identical or almost similar. A spinning top is similar to a doji, but with a much smaller body and virtually identical open and closure motions.
Both patterns indicate market hesitation, as buyers and sellers have essentially battled to a halt. However, these patterns serve as a warning that the hesitation will soon fade and a new price trend will emerge.
Bullish/ Bearish Engulfing Lines
A bearish engulfing line is a reversal pattern that occurs following an upswing. The crucial point is that the body of the second candle “engulfs” the body of the previous day in the opposite direction. This implies that, in the case of an uptrend, purchasers made a brief attempt to move higher but concluded the day considerably below the close of the previous candle.
A bullish engulfing line develops after a decline and is the corollary pattern to a bearish engulfing line.
Hammer
A hammer indicates that a downward trend is coming to an end (hammering out a bottom). The extended lower tail suggests that sellers attempted to sell lower again, but were refused, and the price reversed most or all of the day’s losses.
The key reading is that this is the first time purchasers have emerged in force during the current down trend, indicating a shift in directional mood. The next day, a bullish candle confirms the pattern.
Hanging Man
A hanging man pattern, which is a corollary to the bullish hammer formation, indicates a significant possible reversal lower. The candle represents the fact that, for the first time in many days, selling interest has entered the market, resulting in a lengthy tail to the downside. Confirmation of a brief signal is provided by a dark candle the next day.
Long Tails & Small Bodies
Candlesticks with a little body, such as a doji, suggest that the buyers and sellers battled to a draw, with the close essentially identical to the open. Small bodies show market ambivalence about the current market direction.
Take careful notice of important hesitation candles, for either the bulls or the bears will finally triumph. This is the moment to sit back and monitor the price action, ready to act if the market displays its hand.
Long tails are another important candlestick indicator to look for, especially when accompanied with tiny bodies. Long tails show a failed attempt by buyers or sellers to push the price in their preferred direction, only to have the price fall back to around the open.
Conclusion
The easiest way to read a candle pattern is to determine if it is bullish, bearish, or neutral (indecision). Observing a candlestick pattern form may be both time-consuming and aggravating. If you spot a pattern and have confirmation, you have a solid foundation for a trade.
Candlestick analysis has been around for decades and works in the same way that other types of technical analysis do: traders follow it. Candlesticks can be used in conjunction with other types of technical analysis, such as momentum indicators, but they are ultimately a stand-alone type of charting analysis.
Since they record a whole day of market information and price activity, daily candlesticks are the most effective method to see a candlestick chart.
Candlesticks are excellent forward-looking indicators, but confirmation by consecutive candles is sometimes required before defining a specific pattern and trading on it. Candlestick patterns, in particular, regularly emit indications of hesitation, warning traders to a probable shift in direction.
