Candlesticks Pattern By Professionals #Candle #Trading

What Is a Candlestick Pattern?

KEY TAKEAWAYS

Candlestick patterns are technical trading tools that have been used for centuries to predict price direction.

There are dozens of different candlestick patterns with intuitive, descriptive names; most also have a corollary pattern between the upside and downside. For instance, an “abandoned baby top” has its corollary in an “abandoned baby bottom;” “tweezer bottoms” have their upside corollary in “tweezer tops.”

Traders supplement candlestick patterns with additional technical indicators to refine their trading strategy (e.g., entry, exit).
Candlesticks are based on current and past price movements and are not future indicators.

Examples of Candlestick Patterns

The examples below include several candlestick patterns that perform exceptionally well as precursors of price direction and potential reversals. Each works within the context of surrounding price bars in predicting higher or lower prices. They are also time sensitive
in two ways:

They only work within the limitations of the chart being reviewed, whether intraday, daily, weekly, or monthly.

Their potency decreases rapidly three to five bars after the pattern has been completed.
Doji and Spinning Top

A doji (plural is also doji) is a candlestick formation where the open and close are identical, or nearly so. A spinning top is very similar to a doji, but with a very small body, in which the open and close are nearly identical.

Both patterns suggest indecision in the market, as the buyers and sellers have effectively fought to a standstill. But these patterns are highly important as an alert that the indecision will eventually evaporate and a new price direction will be forthcoming.

Here are some visual examples of doji and spinning tops:

Doji spinning top

Bullish/Bearish Engulfing Lines
An engulfing line is a strong indicator of a directional change. A bearish engulfing line is a reversal pattern after an uptrend. The key is that the second candle’s body “engulfs” the prior day’s body in the opposite direction. This suggests that, in the case of an uptrend, the buyers had a brief attempt higher but finished the day well below the close of the prior candle. This suggests that the uptrend is stalling and has begun to reverse lower. Also, note the prior two days’ candles, which showed a double top, or a tweezers top, itself a reversal pattern.

A bullish engulfing line is the corollary pattern to a bearish engulfing line, and it appears after a downtrend. Also, a double bottom, or tweezers bottom, is the corollary formation that suggests a downtrend may be ending and set to reverse higher.

Engulfing Lines

Hammer

A hammer suggests that a down move is ending (hammering out a bottom). Note the long lower tail, which indicates that sellers made another attempt lower, but were rebuffed and the price erased most or all of the losses on the day. The important interpretation is that this is the first time buyers have surfaced in strength in the current down move, which is suggestive of a change in directional sentiment. The pattern is confirmed by a bullish candle the next day.

Three bullish hammers
Hanging Man
A hanging man pattern suggests an important potential reversal lower and is the corollary to the bullish hammer formation. The story behind the candle is that, for the first time in many days, selling interest has entered the market, leading to the long tail to the downside. The buyers fought back, and the end result is a small, dark body at the top of the candle. Confirmation of a short signal comes with a dark candle on the following day.


Hanging man

Abandoned Baby Top/Bottom

An abandoned baby, also called an island reversal, is a significant pattern suggesting a major reversal in the prior directional movement. An abandoned baby top forms after an up move, while an abandoned baby bottom forms after a downtrend.

The pattern includes a gap in the direction of the current trend, leaving a candle with a small body (spinning top/or doji) all alone at the top or bottom, just like an island. Confirmation comes on the next day’s candle, where a gap lower (abandoned baby top) signals that the prior gap higher was erased and that selling interest has emerged as the dominant market force. Confirmation comes with a long, dark candle the next day.

Abandoned baby top
Take Special Note of Long Tails and Small Bodies
Candlesticks that have a small body—a doji, for example—indicate that the buyers and sellers fought to a draw, leaving the close nearly exactly at the open. (Such a candlestick could also have a very small body, effectively forming a spinning top.) Small bodies represent indecision in the marketplace over the current direction of the market.

This suggests that such small bodies are frequently reversal indicators, as the directional movement (up or down) may have run out of steam. Careful note of key indecision candles should be taken, because either the bulls or the bears will win out eventually. This is a time to sit back and watch the price behavior, remaining prepared to act once the market shows its hand.

Another key candlestick signal to watch out for are long tails, especially when they’re combined with small bodies. Long tails represent an unsuccessful effort of buyers or sellers to push the price in their favored direction, only to fail and have the price return to near the open. Just such a pattern is the doji shown below, which signifies an attempt to move higher and lower, only to finish out with no change. This comes after a move higher, suggesting that the next move will be lower.