Price Action Trading Through Candlestick Patterns

 

Price Action Trading Through Candlestick Patterns

Candlestick : A candlestick shows the open, high, low and close of the instrument for a particular time period. If we are looking at a daily chart time frame then each candlestick reflects the open, high, low and close for that particular day.

Now Let us take an example of a bullish and bearish candlestick to see this more clearly and understand through the below mentioned picture.

 

Check the above mentioned image and see the candlestick on the left is a bullish candle because its close is higher than its open. 

The candlestick on the right side is a bearish candle  because its close is lower than its open. The colored section of the candlestick is called the body of the candle and high and low marks with the wick. The standard color for the candlestick body is green for bullish and red for bearish.

The thin lines spiking above and below the body display the high/low range and are called wicks. The top of the upper wick is the high and bottom of the lower shadow is the low.

A candlestick chart is simply a chart which traders use to understand price action. Price Action can give traders of all financial markets clues with respect to trends and reversals. The group of candlesticks can form patterns which occur throughout charts that could indicate reversals or continuation of trends. Candlesticks can also form individual formations which could indicate buy or sell entries in the market.

Now let us understand Bullish candlestick patterns which indicate when to buy the market. Generally bullish 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.

1. Hammer : The hammer candlestick pattern is formed of a short body with a long lower wick, and is found at the bottom of a downward trend. A hammer shows that although there were selling pressures during the day, ultimately a strong buying pressure drove the price back up. The color of the body can vary, but green hammers indicate a stronger bull market than red hammers.

 

1. Bullish Engulfing Pattern : The bullish engulfing pattern is formed of two candlesticks. The first candle is a short red body that is completely engulfed by a larger green candle. Though the second day opens lower than the first, the bullish market pushes the price up and completes an obvious win for buyers.

 

1. Piercing Pattern : The piercing candlestick is also a two-stick pattern, made up of a long red candle, followed by a long green candle.There is usually a significant gap down between the first candlestick’s closing price, and the green candlestick’s opening. It indicates a strong buying pressure, as the price is pushed up to or above the mid-price of the previous day.

 

1. Tweezer Bottom : The tweezer bottom candlestick pattern is a bullish reversal pattern that can be spotted at the bottom of a downtrend. It consists of two candles, where the first candle is in line with the bearish trend, while the second candle reflects more bullish market sentiment as the price bursts higher, in the opposite trend.

 

1. Morning Star : The morning star candlestick pattern is considered a sign of hope in a downtrend market. It is a three candlestick pattern, one short-bodied candle between a long red and a long green candle. Traditionally, the ‘star’ will have no overlap with the longer bodies, as the market gaps both on open and close. Morning Star signals that the selling pressure of the first day is subsiding, and a bull market is about to start.

 

1. Bullish Harami : A bullish harami is a candlestick pattern which suggests that a bearish trend may be coming to end. Some traders may look at a bullish harami as a good sign that they should enter a long position on any instrument. The bullish harami pattern can serve as an early warning sign of a potential trend reversal in the market. The Bullish Harami candlestick pattern is a reversal pattern appearing at the bottom of a downtrend. It consists of a bearish candle with a large body, followed by a bullish candle with a small body enclosed within the body of the prior candle. As a sign of changing momentum, the small bullish candle gaps up to open near the mid-range of the previous candle.

 

In the next blog  we will continue with the bearish candlesticks pattern.

 

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