Why do Candlesticks Work?
Price action traders rely on candlesticks because they convey a great deal of information about each
trading period in a visual format that is easy to interpret, allowing traders to compare the behavior of
price in different time periods with a quick glance at a price action chart. Each candlestick can be
“read” as a meaningful part of the developing narrative of price. They communicate the “market
sentiment”: whether (and to what extent) bears or bulls were in control, and how far traders managed
to push price in both directions. For example, a long candle’s body with no wicks indicates a
definitive shift in this struggle for
power, whereas a candle with a long upper wick beyond its body indicates a more contentious period
with an effort by bulls to push price higher that was pushed back by pressure from bears before the
close of the candle. Certain re-occurring candlestick patterns have become popular among traders as
reliable signals of future market behavior. This guide is intended as an introduction to some of these
patterns, which help traders make sense of market conditions and recognize advantageous times to
enter trades.
The ability to read candlesticks allows the price action trader to become a meta-strategist, taking into
account the behaviors of other traders and large-scale market-movers. In other words, candlestick
patterns help traders.
Bullish Candlestick patterns are Listed Down :-
Bullish candlestick patterns may form after a market downtrend, and signal a reversal of price movement. They are an indicator for traders to consider opening a long position to profit from any upward trajectory.
1* Hammer Candlestick
The hammer is a bullish candlestick- reversal . It is one of the most (if not the most) widely followed candlestick pattern. It is used to determine capitulation bottoms followed by a price bounce that traders use to enter long positions.
A hammer candlestick forms at the end of a downtrend and indicates a near-term price bottom. The hammer candle has a lower shadow that makes a new low in the downtrend sequence and then closes back up near or above the open. The lower shadow (also called a tail) must be at least two or more times the size of the body. This represents the longs that finally threw in the towel and stopped out as shorts start covering their positions and bargain hunters come in off the fence. A volume increase also helps to solidify the hammer. To confirm the hammer candle, it is important for the next candle to close above the low of the hammer candle and preferably above the body. A typical buy signal would be an entry above the high of the candle after the hammer with a trail stop either beneath the body low or the low of the hammer candle. It is prudent to time the entry with a momentum indicator like a MACD, stochastic or RSI.
2* Inverted hammer
A similarly bullish candle pattern is the inverted hammer. The only difference being that the upper wick is long, while the lower wick is short.
It indicates a buying pressure, followed by a selling pressure that was not strong enough to drive the market price down. The inverse hammer suggests that buyers will soon have control of the market.
3* Bullish Engulfing Candlestick
A bullish engulfing candlestick is a large bodied green candle that completely engulfs the full range of the preceding red candle. The larger the body, the more extreme the reversal becomes. The body should completely engulf the preceding red candle body.
The most effective bullish engulfing candlesticks form at the tail end of a downtrend to trigger a sharp reversal bounce that overwhelms the short-sellers causing a panic short covering buying frenzy. This motivates bargain hunters to come off the fence further adding to the buying pressure. Bullish engulfing candles are potential reversal signals on downtrends and continuation signals on uptrends when they form after a shallow reversion pullback. The volume should spike to at least double the average when bullish engulfing candles form to be most effective. The buy trigger forms when the next candlestick exceeds the high of the bullish engulfing candlestick.
4* Bullish Harami Candlestick
A bullish harami candle is like a backwards version of the bearish engulfing candlestick pattern where the large body engulfing candle actually precedes the smaller harami candle. The preceding engulfing red candle should be a capitulation large body candlestick that makes the lowest low point of the sequence indicating a capitulation sell-off preceding the harami candle which should trading well within the range of the engulfing candle. The subtleness of the small body keeps the short-sellers in a complacent mode as they assume the stock will drop again, but instead it stabilizes before forming a reversal bounce that takes the short-seller by surprise as the stock reverses back up.
The harami is a subtle clue that often keeps sellers complacent until the trend slowly reverses. It is not as intimidating or dramatic as the bullish engulfing candle. The subtleness of the bullish harami candlestick is what makes it very dangerous for short-sellers as the reversal happens gradually and then accelerates quickly. A buy long trigger forms when the next candle rises through the high of the prior engulfing candle and stops can be placed under the lows of the harami candle.
5* Piercing line
A bullish signal that occurs in the context of a downtrend when, after a long bearish
candle, a bullish candle opens at a new low and then closes at a level at least halfway
up the body of the previous bar; this signal is reliable as a two-bar indicator of a trend
reversal in proportion to the height of the second bullish bar. As the strength of the
reversal signal is related to the size of the second candle, this pattern is similar to
the Tweezer pattern, which is discussed later in this guide.
• The stock must have been in a definite downtrend before this signal occurs. This can be
visually seen on the chart.
• The second day of the signal should be a white candle opening below the low of the previous
day and closing more than half way into the body of the previous day’s black candle
6* Morning Star
The “morning star” is the inverse of the evening star, a 3-bar pattern in which
the “star” is a small-bodied candle, typically opening at the close of the previous
candle or opening a gap below it, indicating that a trend is transitioning from
bearish to bullish. The morning star constitutes a potential bottom to the
preceding bearish leg, and functions therefore as a buy signal.
The three candles are as follows:
- A long bearish candle
- A small-bodied bullish candle or bearish candle or a doji that opens at or below the close of the previous candle .
- A white bullish candle that opens at or above the high point of the previous candle and closes at or above
the center of the first candle.
While an evening star pattern after an uptrend signals a reversal, the opposite
a morning star pattern in a downtrend can also signal reversal, and a change in
the balance of power between bears and bulls.
7* Three white soldiers
The three white soldiers pattern is most potent when it occurs after an extended decline and a
period of subsequent consolidation. When a particular stock posts a decline followed by sideways
movement, the appearance at that point of three white soldiers signals that higher prices are likely
ahead. The first of the three white soldiers is a reversal candle. It either ends a downtrend or signifies
that the stock Is moving out of a period of consolidation after a decline. The candle on day two may
open within the real body of day one. The pattern is valid as long as the candle of day two opens in the
upper half of day one’s range. By the end of day two, the stock should close near its high leaving a very
small or non-existent upper shadow. The same pattern is then repeated on day three.
