Understanding and recognizing candlestick patterns is a fundamental part of the trading profession in the finance industry. They enable traders to predict potential market movements and make informed decisions about their positions. This article will discuss the top candlestick patterns traders rely on for entries.
1. Doji Candlestick Pattern
The Doji pattern is a sign of indecision in the market. It is represented by a candlestick where the opening and closing prices are nearly identical or the same. When a Doji forms after a series of green (up) candles, it could signal that the bulls are losing power and a bearish reversal is imminent. Conversely, a Doji that forms after a series of red (down) candles may indicate that the bears are losing control, and a bullish reversal could follow.
2. Hammer Candlestick Pattern
This pattern resembles a hammer and forms at the end of a downtrend. It has a small body at the top, a long lower wick and little or no upper wick. The pattern indicates that the market has hammered out a bottom and a reversal to an uptrend could be starting. The longer the lower wick, the more powerful the potential bullish reversal.
3. Inverted Hammer Candlestick Pattern
The inverted hammer pattern also signals a bullish reversal but occurs in a different context to the hammer pattern. It has a small body at the bottom, a long upper wick and little or no lower wick. This pattern forms during a downtrend when the open, low and close prices are near each other with a high that sets a new high price for the trading period. The inverted hammer suggests that buyers exerted more pressure than sellers but were not able to sustain it.
4. Bullish Engulfing Candlestick Pattern
The bullish engulfing pattern is a two-candle pattern that signals a potential end of a downtrend and the start of an uptrend. The first candle is a small bearish one, and the second is a large bullish candle that engulfs the body of the first candle. This pattern suggests that buyers have overwhelmed the sellers and are in control. The larger the second bullish candle, the stronger the signal.
5. Bearish Engulfing Candlestick Pattern
The bearish engulfing pattern is a mirror of the bullish engulfing pattern and suggests the beginning of a downtrend. The first candle is a small bullish one, and the second is a large bearish candle that completely engulfs the first