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Candlestick patterns are useful in technical trading. Understanding them enables traders to interpret potential market trends and make decisions based on their findings. There are various candlestick patterns that can indicate bullish or bearish movements. This article will provide a brief overview of candlestick patterns and introduce the top ten formations that all traders should be familiar with in order to trade the markets confidently.
WHAT EXACTLY ARE CANDLESTICK PATTERNS?
A candlestick is a single bar that represents the price movement of a specific asset over a set period of time.
It displays the open, high, low, and close values for that time period.
Candlestick patterns use one or more candlesticks to help technical traders make predictions about the underlying asset's future movements and price patterns. These are graphically displayed on a chart, which is used for market analysis. Our guide to reading candlestick charts is an excellent place to begin learning how to interpret candlesticks for trading.
TRADERS SHOULD KNOW THESE TOP 5 CANDLESTICK PATTERNS
EVENING STAR AND MORNING STAR
The evening and morning star candlestick patterns appear at the end of upward and downward trends, respectively, and are indicative of reversal patterns.
The names are derived from the arrangement's star shape.
The first candlestick, as seen in the image below, is in the direction of the trend, followed by a bullish or bearish candle with a small body.
The third candlestick is seen in the direction of the reversal, ideally closing past the halfway point of the first.
Trading this candlestick pattern will necessitate a confirmation candle in the opposite direction of the reversal – for example, traders will look for a bearish candle after the evening star.
2. BULLISH AND BEARISH ENGULFING
A bullish or bearish engulfing candlestick pattern could indicate a trend reversal.
A bullish engulfing candlestick formation indicates that bulls outnumber bears. The green body (bulls) completely covers the first candlestick, as shown in the pattern below (bears).
A bearish engulfing candlestick pattern is small green (or bullish) candle followed by a larger red (bearish) candle immersing the small green candle.
3. DOJI
The Doji candlestick chart pattern is associated with indecision in the underlying asset's market. This could indicate a reversal or consolidation of the current trend.
This pattern can appear at the top or bottom of an uptrend, or in the middle of a downtrend.
The candlestick has a very small body that is centred between a long upper and lower wick.
4. HAMMER
The Hammer candle is thought to be a bullish reversal that occurs at the bottom of a downward trend.
This candle formation has a small body with the same open, high, low, and close values. Below the body, there is a long lower wick that should be more than twice the length of the candle body. The body can be bullish or bearish, but bullish is thought to be more favourable.
5. HARAMI BULLISH & BEARISH
A bullish or bearish forecast Harami can be used to predict reversal patterns.
The word "Harami" means "pregnant" in Japanese, and this candlestick pattern was given that name because it resembles a pregnant woman. As shown in the images below, the second candle in the pattern must be contained within the body of the first candle. This applies to both bullish and bearish Haramis.
A bullish Harami is preceded by a downtrend, and a bearish Harami is preceded by an uptrend.
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