Most Profitable Candlestick Patterns Traders Should Know
Candlestick is a popular technical analysis tool traders use for price interpretation. Traders use this information to decide whether to buy or sell based on the signal generated. Candlestick tells about the change in the market sentiment, which no other technical tools provide.
Most traders rely only on price action and not merely technical indicators to take trade. Candlesticks represent the price behaviour of the market participants. It displays the high, low, open, and closing prices of the financial assets in different time frames. The shape and size of a candlestick suggest the strength and momentum of the prevailing trend in the market.
Candlestick patterns can be divided into continuation and reversal patterns. However, there is another sentiment that works in a range-bound or a sideways market. For, simplicity we consider it as a “Neutral “market condition. In this state, neither bulls nor bears dominate the markets. This trading market condition is displayed by a Doji candlestick on the technical chart.
A Doji candlestick is formed when the open and close price is equal in a trading session.
Source: Trading view
Morning Star: Bullish Reversal
Morningstar is a three-candlestick pattern, which is a bullish reversal pattern. It involves three candlesticks. The first candle should be red, the second candle can be of any colour, and the third candle should be of green colour.
Hint: If the second candle is a Doji of any colour red or green followed by the green candle, it is a highly reliable pattern.
Source: Trading view
In the above chart, Tata steel formed the “ Morning Star” pattern, which is a bullish reversal pattern. The prior trend was bearish. The first candle is a red candle, which indicates the sellers were in control. The second candle is a green Doji, followed by a green candlestick. After taking the confirmation at the third candle as it breached the high of the first one, a trader can enter into a long trade. Traders are advised to adopt proper risk management with defined stop loss and target price.
Evening Star- Bearish Reversal
The Evening star is a three-candlestick pattern, which is a bearish reversal pattern. It involves three candlesticks. The first candle should be of green colour, the second candle can be of any colour, and the third candle should be of red colour.
Hint: If the second candle is a Doji of any colour red or green followed by a red candle, then it is a highly reliable pattern.
Source: Trading view
As can be seen in the above chart, the prevailing trend is bullish. However, After the Doji is formed followed by a red candle we can see a sharp decline in the price. Before the formation of the’ Evening star’ formation small candles were formed, but no prominent doji was visible. Therefore, it is advisable to wait for the formation of a typical Doji as discussed above for the confirmation of the pattern.
In a nutshell, there are various candlestick patterns that can be used to generate trading signals. However, one with Doji, and involves two or more candles are considered to be more reliable.