Profit Today With Candlestick Patterns: A Trading Essential

 

What Are Candlestick Patterns?

Candlestick patterns are a visual representation of price movements of a particular asset over a specified period of time. The candle stick consists of a body and two shadows ( also called wicks ). The body represents what the price started at and what the price ended at for that particular price period while the wicks represents the highest and lowest price attained by the asset in that price period. 

Candlestick Patterns are usually of 2 types : Bullish and Bearish Candlestick Patterns. A bullish candle stick indicates price has increased over the time period and that the market sentiment might at least for the moment be bullish. Conversely, a bearish candle stick indicates that price has decreased over the time period and that the market sentiment might at least for the moment be bearish

For the longest time this has been the preferred mode of viewing price action by traders compared to traditional modes such as line graphs. The reason for this is the increased level of information derived from the candlestick pattern.

Common Candlestick Patterns

• Doji

The Doji happens when the open and close prices are almost the same. By itself, it’s not super clear what’s coming next, but when you spot a Doji at the end of a trend, it could be a hint that things are about to change. Think of it like a pause in the action before the next move.
Example: After a long uptrend, you see a Doji, and that might mean the market is unsure whether to continue going up or start coming down.

• Hammer and Hanging Man

Both these candles look similar—small body at the top, long wick at the bottom—but they tell different stories depending on whether the market is trending up or down. The Hammer usually shows up after a downtrend and suggests a potential bounce back up. It’s like a stock getting pushed down but then bouncing back up. The Hanging Man is a warning sign during an uptrend, suggesting the bulls are getting tired and a drop could be near.

Example: After a downtrend, you see a Hammer candle. It’s like the stock tried to go lower but ended up going up, possibly signaling a turn around.

• Engulfing Pattern

The Engulfing pattern is a two-candle setup. In a Bullish Engulfing, a small red candle (bearish) is followed by a larger green candle (bullish) that “engulfs” the first one. This usually means that the buyers have taken control, and the price might be ready to go up. The Bearish Engulfing is the opposite. You see a small green candle followed by a large red one, showing that the bears are in charge and the price could be headed down.

Example: If you’re looking at a stock that’s been going down, and you spot a small red candle followed by a much larger green one, it’s like the bulls are saying, “Alright, it’s our turn now!”

• Morning Star and Evening Star

The Morning Star is a three-candle pattern that signals the end of a downtrend and the start of a potential rise. It’s like the market wakes up in the morning, gets its energy back, and starts moving up. You’ll see a big red candle, followed by a small candle, and then a big green candle. The Evening Star is the reverse: it happens after an uptrend, and it’s a sign that the price might be about to drop.

Example: After a long downtrend, you see a Morning Star, and that’s a good sign that the stock could be turning around and heading upwards.

• Shooting Star

The Shooting Star is a bearish pattern that shows up during an uptrend. It looks like a small candle with a long wick at the top. It’s like the bulls tried to push the price up, but the bears took control by the end of the session and brought it back down. When this is followed by a red candle, it’s a signal that the price could start falling.

Example: Imagine a stock has been going up, and then you see a Shooting Star. It’s like the stock tried to reach for the stars but got shot down. If the next candle is red, it might be time to think the price could start heading down.

These candlestick patterns give you a visual idea of what the market might be thinking. They aren’t foolproof, but when you spot them, they can help guide your trading decisions. Always remember though just like any form of technical analysis; never rely on them in isolation. Combine the biases formed from candlestick patterns with other forms of technical analysis.

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