Candlesticks chart the price fluctuations of a product. They can represent any period of time, from 1 minute to 1 month. Each candlestick displays four important pieces of information: the opening price, the high, the low and the close. They are easy to use and provide more information than line or bar charts.
The interpretation of candlesticks is based on patterns.
Bullish Candlestick Formations
Hammer – it is a very strong bullish signal when it occurs after a significant downtrend. The candle has a small body and a long wick. The body can be clear or filled in.
Piercing Line – the first candle is a long bear candle followed by a long bull candle, signaling buyers are coming into the market.
Bullish Engulfing Lines – it is a strongly bullish pattern if it occurs after a significant downtrend. The first bear candle is engulfed by a large bullish candle. It may serve as a reversal pattern.
Bearish Candlestick Formations
Hanging Man – the hanging man is identified by small candle bodies and a long wick below. It might serve as a bearish signal if it occurs after a significant uptrend.
Dark Cloud Cover – a bearish pattern which gains mores significance if the second candle’s body is below the center of the previous candle’s body.
Bearish Engulfing Lines – it is defined by a small bullish candle is engulfed by a large bearish candle. It is strongly bearish if it occurs after a significant uptrend.
Doji – a classic reversal pattern. It has the same opening and closing price, which makes it look like a cross or a T. The T shaped doji is also known as a Dragonfly Doji, while an inverted T is known as a Tombstone Doji. Might also communicate indecision, when the range between the high and the low is relatively small.
Keep in mind: understanding candlestick patterns can represent a very solid trading tool for just about any trader operating in the market, and it is essential to price action trading.
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