Candlestick patterns are part of technical analysis in stock trading, forex, and another commodity trading. There are several variations of this pattern and it helps investors and traders to read price predictions for a certain period.
Candlestick patterns or Candlestick patterns were popularized in Japan in the 17th century. At that time, the pioneer of analysis technique Munehisa Homma created this pattern to see the movement of rice prices.
Although it looks complicated, how to read it is not too difficult to learn. The reason is, in technical analysis, there is one assumption that states that history must repeat itself in the pattern of price movements in the future.
Understanding Candlestick Patterns
As explained earlier, the Candlestick pattern is one way to see the potential price in trading. So, what does Candlestick mean? Candlestick patterns are an ancient Japanese charting method for increasing calculation accuracy.
This method reflects the impact of investor sentiment on prices. This analysis is usually done to determine the right time to enter and exit a trade.
This method is “mandatory” for investors and traders to understand because it is one of the smartest strategies in investing. However, it should still be noted that the analysis with this pattern belongs to the directional category.
That is, this analysis also relies on the trader’s subjective intuition in understanding various patterns. This method can produce consistent profits if it is accompanied by the experience and flying hours of the trader.
How to read Candlestick
To learn the various types of Candlestick patterns, you must first know how to read them. Three things form the basis of how to read this pattern, namely the four price positions, the red and green colors, and the direction of the axis.
Here’s the review:
- Candlestick contains four price positions
Before we continue discussing candlestick patterns, let’s first understand how to read a candlestick. In a candlestick, there are four indicators, namely:
- Open: the price at which the trade opened today
- Low: today’s lowest price
- High: today’s highest price
- Closed: the price after yesterday’s trade closed
The size of the candlestick body also shows how far the price has moved during the duration of the candle.
What do the red and green candlesticks mean?
Meanwhile, there are two colors, namely red and green. The meaning of red and green in a candlestick certainly indicates a bullish or bearish candlestick.
When the candlestick is green, it indicates the open price is higher than the closed price. This pattern is often called a bullish candlestick.
But when it’s red it indicates the open price is lower than the closed (bearish candlestick).
When the candlestick is green, the candlestick certainly moves up. Vice versa.
If we hover the pointer over the candlestick, it will display information about the candlestick stock trades or commodities on a certain day, for example, at what number, at what number, the lowest and highest, and at what number closed.
Some trading applications have a feature to change the color of the candlesticks. So, the green and red colors can be replaced.
- Candlestick Wick
Meanwhile, there is also a candlestick or wick “wick” which some people often refer to as the shadow. The wicks inform price fluctuations that move according to the duration of the candlestick.
You also have to pay attention to the comparison of the body and axes. When the value of the commodity or forex experiences volatility, then the axis will be much longer than the body.
When a long wick is seen pointing downwards, it indicates market participants are pushing prices down, but they are not strong enough to hold prices low.
At the same time, other market participants made purchases which eventually pushed prices up. This phenomenon is often called a bullish reversal.
Vice versa, when the axis is above, it indicates that traders or investors are making more profit than those who decide to hold. This marks a bearish reversal.
After knowing how to read candlesticks, at this point we will discuss candlestick patterns that will show bullish or bearish signals when viewed from one segment without a candle next to it. Here’s the review.
Types of Candlestick Patterns
There are several types of candlesticks. For those of you who want to learn more about stock analysis, try to explore this pattern analysis which is part of technical analysis.
Here are the different types of Candlesticks.
1. Single Candlestick
The Single Candlestick consists of seven types of patterns. Here’s the explanation:
1. Spinning Top Pattern
The body size is small but the axis (shadow) above and below is elongated. This indicates that there is uncertainty among market participants. If it appears during an uptrend, then many market participants take profit-taking and vice versa.
2. Marubozu Pattern
This Marubozu means the bald head, so this candlestick has no wick (shadow). Marubozu signals a strong movement from the side of market participants who want to buy or sell.
3. Doji Pattern
Not much different from the spinning top candlestick pattern, but a little more complex. The Doji almost looks at bodies, and this indicates the phenomenon of the inability of market participants, whether buying or selling, to be in control.
You could say, Doji is a pattern where the price of a commodity or stock is consolidating. Here, market participants are expected to wait and see and observe the candlesticks on the following day.
4. Hammer Pattern
As the name implies, a hammer is a hammer. So, this one candlestick pattern is like a hammer. The hammer has a small body and a long downward axis, this pattern indicates a bullish signal in a bear market (price reversal from down to up).
5. Hanging Man Pattern
Well, if this is the opposite of a hammer, the shape is similar at first glance, namely a small body and a long axis downward. It’s just that the hanging man appears during an uptrend, but you should know that the accuracy of this hanging man is low.
When you come across candlestick patterns like this, don’t be in a hurry to take a stand!
6. Inverted Hammer Pattern
This candlestick pattern is the same as a hammer, only the axis is at the top and occurs during a downtrend. Looking at the axis, of course, this is a bullish signal because market participants make purchases, but there is also great pressure from those who take profit.
But make no mistake, this could be a sign that a bullish phenomenon will occur.
7. Shooting Star Pattern
Almost the same as the inverted hammer but its position is in an uptrend, therefore this candlestick pattern is likened to a shooting star. This could be a sign that stock or commodity prices are entering a downtrend.
2. Double Candlestick
After knowing how to read single candlestick patterns, now we will look at double ones. So, you have to see the appearance of the following candlestick on the right before concluding its movement.
1. Bullish engulfing and Bearish engulfing patterns
Bullish engulfing and bearish engulfing show a phenomenon where an uptrend will occur or vice versa.
This is indicated by the bearish candlestick on the left which has a smaller body than the bullish candle on the right. This candlestick indicates that market participants are starting to enter and make purchases.
If the bullish candle is on the left and the bearish candle appears to have a larger body on the right, then this is an indication of a downtrend.
2. Tweezer bottoms and Tweezer tops pattern
Tweezer bottoms are seen during a downtrend phenomenon, they are shaped like a hammer pattern (long axis downwards) except that the right and left are bearish and bullish candlesticks. This pattern indicates an upward price signal.
Meanwhile, Tweezer tops which are like shooting stars indicate the opposite. When a bullish candle meets a bearish candle in an uptrend with a long upward wick line, the price has gone up but can’t hold on and bounces back down again.
Keep in mind, tweezer bottoms and tops don’t have to have the same body. However, the “High” value must be the same.
3. Harami Pattern
In this pattern, the left candlestick has a larger body than the right. So, it is called harami (pregnant). The smaller right-hand candle indicates that the trend is about to change.
The smaller the candlestick on the left, the stronger the potential trend change.
3. Triple Candlesticks
If you understand the double pattern, let’s discuss the triple pattern. It is said that the analysis of this triple candlestick pattern is more accurate and is more often used by traders to read trends.
1. Evening Star And Morning Star
Well, in this pattern a Doji will appear in the middle. As explained above, the Doji signals the consolidation phase of a stock or commodity price.
But if it’s not a Doji, small or long candles can too.
The morning star pattern has an arrangement: bearish candle – Doji or small bullish candle – bullish candle. This pattern occurs during a downtrend and indicates that this is a good time to buy because there are signs of an uptrend.
Meanwhile, for the evening star, the arrangement is a bullish candle – Doji or a small bearish candle – a bearish candle. This is certainly a strong signal to “sell” aka sell.
2. Three White Soldiers And Three Black Crows
This is a candlestick pattern that signals a bullish or bearish confirmation.
The three white soldiers are indicated by the presence of three bullish candles that appear after the downtrend. However, the candle in the middle must have a small wick or no wick at all.
Meanwhile, the three black crowds are the opposite of the three white soldiers. There are three bears when the stock or commodity prices are in an uptrend.
3. Three Inside Up And Three Inside Down
This candlestick pattern also indicates a change in the price trend.
For three insides, the patterns you should pay attention to are: bearish – bullish – bullish during a downtrend. Meanwhile, the three inside downs are: bullish – bearish – bearish and occur during an uptrend.
Those are Candlestick patterns that you must learn to streng then technical analysis for stocks, forex trading, and another commodity trading. It’s not difficult to do this, if you like trading, you should understand this analysis.
Advantages of knowing Candlestick pattern in trading
By understanding these “candle patterns”, you can benefit from trading. Here are some of the advantages you can get from studying this pattern:
. Easy analysis
Candlestick patterns help you to identify price movements. In addition, Candlesticks have clear rules that make it easier for you to analyze the market.
Traders will quickly find out who controls the market, whether bullish or bearish by looking at the candlestick body color.
In addition, the length of the candlestick body also shows how dominant the bullish or bearish condition is if the body is short and the shadow is long which indicates market doubt.
Complementary technical analysis
Candlesticks can be used in conjunction with other technical analysis tools. In technical analysis, the use of candlestick patterns can be used as a confirmation tool that is used together with several indicators.
This is because candlesticks use the same opening, high, low, and closing prices as bar charts. This can strengthen the analysis of the candlestick.