How to grow your trading account: How to interprete Candle stick patterns (part 2)

in Project HOPE4 years ago
There are different types of candlestick patterns. some of them are just made up of one candlestick while others are made up of two or three candlesticks combined. Some of these patterns serve as confirmatory signals to enter or exit a trade.
Pixabay

Single candlestick patterns
These are candlestick patterns that are made up of only one candlestick. They are classified into two groups based on the trend they are spotted in. They are

  1. Hammer and hanging man
  2. Inverted hammer and shooting star

These candlestick patterns are all modified forms of spinning tops, however, they have different meanings with respect to the type of trend in the market,

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The hammer looks like a carpenter's hammer. It usually has a long lower shadow and a small upper body. There is little or no upper wick. In a downtrend, the hammer signals a bullish reversal.
it should be noted that the color most times do not have a significant role in its predictability of reversal.

The hanging man pattern is the same thing as a hammer however it is seen in an uptrend. when seen in an uptrend, it almost always signifies a bearish reversal.

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The inverted hammer just looks as the name implies. the body is at the lowest end of the candlestick. they are seen in a downtrend and they imply a possible reversal of the trend.
A shooting star is seen in an uptrend. they indicate a bullish reversal. The inverted hammer and shooting star look identical but are found in totally different conditions in the market and so they mean two different things entirely. This is the same for hammer and hanging man.
Personally, I have discovered some things about these patterns that increase their predictability of reversal. Note that these are my personal observation
They include;

  • small body less than ten percent of the whole candlestick
  • There must be a previous trend(not a ranging market).
  • a long body that is equal to or greater than 7 times the size the body will likely cause a reversal
  • no upper shadow or very little upper shadow(less than 2% of the length of the total candlestick)
  • their predictability increases when spotted on key levels (support and resistance)
  • Those seen on larger time frames are more prone to major reversal than those seen on shorter time frames.

In summary, these single candlestick patterns above almost always indicate the possibility of a reversal. Hammers and inverted hammers are seen in a downtrend while the other two are seen during an uptrend.

Dual candlestick patterns

Dual candlestick patterns are made of either two of the same type of candlestick or two different candlesticks. There are also two groups in this category.

  1. Engulfing candles
  2. Tweezers.

Engulfing candlestick patterns are candlestick patterns in which the latter candle totally covers the full range of the previous candle. It should be noted that the candles must be in opposing directions. Engulfing candlesticks can be either bullish or bearish engulfing.

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Bullish engulfing means that the bullish candle is the latter candle that engulfs the bearish candle. In other words, it happens when a bearish candle is immediately followed by a larger bullish candle. This just means that the bulls are stronger than the bears.

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Bearish engulfing means a bullish candle is being engulfed by a bearish candle. it happens when a bullish candle is immediately followed by a bearish candle and that bearish candle covers the full range of the bullish candle.

What does an engulfing candle signal in a market?
Engulfing candles signal a strong move in the direction of the candle that engulfs. This means that a bearish engulfing candle would imply a strong downward move in the direction of the price while a bullish engulfing indicates that price is most likely to go up.
In my years of study and trading, I have discovered that when engulfing candles are seen in key levels of support and resistance, their chances of predictability becomes higher.
when a bearish engulfing candle is spotted around areas of resistance, the price is likely to go down(85% of the times using EUR/USD as my currency pair of study ). It also applies to bullish engulfing at support zones.

In cases like this, I put my price a few pips above the high of the engulfing candle if it is a bullish engulfing or few pips below the low if it is a bearish engulfing and then sit back and wait for it to hit the order.

Tweezers

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Investopedia refers to tweezers as a technical analysis pattern, commonly involving two candlesticks, that can signify either a market top or bottom. Tweezers can either be tweezer tops or bottoms. According to Investopedia, they signal a short term reversal of which I totally agree. I liken tweezers to two spinning tops combined side by side.
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They are usually spotted after a trend is long overdue. The first candle oftentimes takes the color of the trend while the latter candle takes the opposing color. This means that in an uptrend the first candle in a tweezer top will be white or green and the second candle will be red. This is the opposite of a tweezer bottom in a downtrend. Other things to note is that the wicks of the two candle should be the same length for its probability of reversal to increase.

There are candlestick patterns that contain three candlesticks too. However, I will not be covering them in this post, however, their direction can be predicted with the knowledge gained from this post.

References

  1. Babypips
  2. Investopedia
  3. wikipedia
  4. pixabay

Thank you for reading my blog

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Thanks for the education. I use Charts but not really the candles. But I can see where this would be beneficial. Thanks again