Candlestick I: Introduction to Candlestick and its patterns

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What is a candlestick chart?

Candlestick charts shows information about the price action and the movement of the currency price over a specified period of time. It contains the market’s open, closing, low and high of that specific time frame.

Below is an analysis of a candlestick chart and its components.

On a daily chart, each candle represents a 24 hours period. It contains information of the daily open and daily closing price, the highest and lowest price during that day. On an hourly chart, each candle represents an hour and so on. Since the forex market is a 24 hours market, there is no real daily open or closing price. The chart provider will decide a time, 5pm EST for instance, as the daily open and closing time. Different chart providers may have different choices for the open and closing time. Traders may find the charts from different providers are slightly different to each other.

What are candlestick patterns?

Technical analysts found that, by observing the candlesticks, there are recurring patterns on the candlestick charts. Such patterns are like recurring pictures on the candlestick charts and they tend to occur when a trend is about to end or reverse its direction. The patterns are very good visual representation of the price movements and give traders a good grasp of what is going on in the market.

Why are candlestick patterns so important?

Why are candlesticks so important? It is because they are the best gauge of what is going on in the market at the present time. If a candlestick is very short, it implies that the range for the trading day was very tight. If this candle appears after a strong up-trend, it may suggest that sellers have now begun to enter the market more aggressively, and thus the price may be on its way back down.

Eventually, candlesticks patterns can easily be used to identify potential reversals of trends in the market – especially when used in conjunction with other indicators. By observing the candlestick patterns, traders can speculate potential reversals of trends and entering the market with strong reference to the patterns.

The following are key patterns to watch out for:

Piercing Line

Bullish reversal patterns which shows sellers are losing their dominance.

Dark Cloud Cover

Bearish pattern showing slower buying momentum.

Shooting Star

Reversal patterns that occurs after gaps. Buyers make new high but are fail to sustain then.

Harami

Harami shows a trend that is losing its momentum and may reverse. Bullish or bearish depends on the existing trend.

Evening Star

Reversal pattern shows trend has changed direction after making new highs.

Morning Star

Similar to evening star, reversal pattern shows trend has changed direction after making new lows.

Hammer/Hanging Man

Good reversal pattern after a severe trend. Signifies weakening market sentiment. Pattern is considered a hammer after a down trend and a hanging man after an up trend.

Bullish Engulfing

Usually occurs after dramatic down trends. Good indication that downside momentum is lost as a large candle is completely reversed at next time frame.

Bearish Engulfing

Common pattern after strong up trends. Signifies that buyers are losing control.

Doji/ Double Doji

Pattern implies indecision in the marketplace as the price has a big range but does not going anywhere.