If you’re new to the world of trading, you might be wondering what all the fuss is about candlesticks. Candlesticks are one of the most popular ways to visualize market data, and for a good reason. Candlestick patterns can provide valuable insights into market sentiment and potential future price movements. In this blog post, we’ll cover an essential candlestick pattern that every trader should know.
- The hammer pattern is a bullish reversal pattern that forms after a period of decline. The long lower shadow indicates that sellers attempted to push prices lower but were unable to sustain the selling pressure. The small body shows that the bulls were able to regain control of the market and close near the highs of the session. This pattern is considered more reliable if it forms after a prolonged decline.
- The inverted hammer pattern has a small body with a long upper shadow. This indicates that buyers were unable to sustain their buying pressure and prices closed lower near the lows of the session. Again, this pattern is considered more reliable if it comes after an extended period of gains.
- The shooting star pattern is a bearish reversal pattern that consists of a small body with a long upper shadow and little or no lower shadow. This pattern indicates that buyers were able to push prices higher but were ultimately overpowered by sellers who sent prices sharply lower by the close. A shooting star is considered more reliable if it appears after an extended rally or at resistance levels.
- The hanging man pattern has a small body with a long upper shadow and little or no lower shadow. This indicates that sellers were able to push prices lower but ultimately ran out of steam near the end of the session, and prices closed higher near their highs for the day. Much like the shooting star, this pattern is considered more reliable when it appears after an extended decline or at key support levels
- The bullish engulfing pattern is composed of two candles: a small candle followed by a large candle whose body completely engulfs (or “engulfs”) the previous candle’s body. This type of candlestick typically forms at market bottoms and can signal either continuation or reversal depending on market context.
Candlesticks are one of the most popular ways to visualize market data for a reason: they provide valuable insights into market sentiment and potential future price movements. While no single indicator is perfect, understanding how these candlestick patterns work can give you a leg up on your competition.