Candles exhaust themselves to give light to men, and so do the candlestick charts.
We might have come across candlestick chart a lot many times. But we barely pay attention to it, as most of us find it difficult to fetch a clue of the market movements ahead. The blue and red bars swinging up and down bore us and we shut the chart in all disguise.
Experts say that the very first signal of market reversal could be traced only on candlestick chart. One can easily catch the tops and bottoms of the market; such is the power of candlestick. Our clients can view live Candlestick chart using NOW software.
With this blog we would like to throw light on the basics of candlestick patterns. It is advisable for our readers to read thoroughly on the candlestick techniques before applying them in the real market.
Also Read : Some Candlestick Patterns To Help Make Better Decisions
Anatomy of a Candlestick:
Each candlestick represents High, Low, Open and Close for a given period of time.
The thick part of the candlestick is called the Real Body. It shows the opening and closing prices. If the real body is black or red, it means opening was higher than closing and prices have moved down. If it is white or green, than it shows closing were higher than opening and price have gone up.
The thin lines are known as shadow. Its top represents a high and its bottom shows a low.If the candlestick line has no upper shadow or lower shadow, it is said to have shaven head or shaven bottom respectively.
Since we know the basics of a candlestick formation, we are about to step into the core of this blog, “The Reversal Patterns formed by candlestick”.
The patterns which we will be describing ahead, will mean that there is a possibility of change in the existing trend. These patterns are just a clue of the change in the sentiments of market participants. These patterns are named in such a way that one can easily interpret weather the candlestick pattern is Bullish or Bearish.
Let’s look at them one by one…
1. Hammer and Hanging Man: A long shadow and small real body if spotted at the top or bottom of the chart pattern it can be a Hammer or Hanging man respectively. A hammer formation at the bottom of the pattern shows the bear run is probably over and it is time for the Bulls to command the markets moves. As the name “Hanging Man” itself sounds pessimistic or Bearish.
There are three criteria recognised for both the patterns:
1. The real body is at upper end of the trading range. The color of the real body is not important.
2. A long lower shadow should be twice the height of the real body.
3. It should have no, or a very short, upper shadow.
2. Engulfing Pattern: The engulfing pattern is a major reversal signal with two opposite colour real bodies composing this pattern.
There are two engulfing patterns
a. Bullish engulfing pattern: The bears commands the market, and all of a sudden a white or green real body candlestick completely covers the prior Black or Red real body candlestick. This signifies the buying pressure has overwhelmed the selling pressure.
b. Bearish engulfing pattern: In an existing strong uptrend movement in the market, a big black real bodied candlestick covers the prior white candlestick, it is labelled as Bearish engulfing pattern.
There are three criterias for the for an engulfing:
1. The market has to be in clearly definable uptrend or downtrend.
2. Two candlestick comprise the engulfing pattern. The second real body must engulf the prior real body.
3. The second real body of the engulfing pattern should be the opposite color of he first real body. However if the previous real body is too tiny or small, then the color of the real body will have no significance.
3. Dark cloud cover and Piercing pattern: Just like Engulfing pattern, Dark cloud cover and Piercing pattern are also two candlestick pattern.
Dark Cloud Cover
● Dark cloud cover is a bearish pattern
● The first day of this candlestick pattern is strong white real body
● The Second day’s price opens above the prior session’s high
● However, by the end of the day’s session, the market closes near the low of the day and well within the prior day’s white body.
● The more the penetration within the prior’s days white candle (minimum 50%), the more are the chances of reversal of the market.
Also Read : The Japanese Candlestick for Smart Trading : Part II
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● Piercing pattern is bullish pattern
● The formation is similar to that of the Dark cloud cover, but it formed at the bottom of the bearish trend
● Here a white candle should pierce at least 50% of the prior Black candlestick real body.
As of now we have discussed only three out of many patterns. We will shortly be bring them too in our subsequent blogs.
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