Candlestick charting really took off in the last decade in the trading community. Soon it had converted many traders into die hard fans. Candlestick charts are one of the easiest ways to judge the market sentiment with a quick glance. There are many candlestick patterns that can reveal the trend reversal in advance. Something the traders love about candlestick charting. One of the most popular trend reversal candlestick pattern is the Hammer. If you haven't ever traded using candlesticks, you should start thinking about it as candlestick patterns can be real helpful in confirming a trading signal. What is a Candlestick chart? Candlestick chart is almost like a bar chart with some major differences. A candlestick is formed with the opening and closing price of the security or the currency pair and the high and low for that timeperiod.
A Hammer represents the bottom of the trend. It occurs at the end of the downtrend. Hammers have small bodies and long shadows. Hammers have infact long lower shadow and a small upper shadow. What a hammer reveals is that after the price of the security opened on the market, sellers drove it down further.
However, by the end of the day, the buyers were able to recoup most of the price lost during the day and were able to close off at or almost equal to the high of the day. Now, if the price action just after a hammer is formed is more down, it is an indication that the hammer formed was not a true hammer becuase in case of a true hammer, the price action is not going to go down further. When confirming a hammer, volume should also be taken into consideration. Hammers formed on heavy volume are considered to be geniune.
The other candlestick pattern as important as the hammer is the Hanging Man. Hammer is formed in the downtrend and the hanging man is formed in an uptrend. You will find the hanging man at the very top of the price action. This means that the uptrend is about to end and an downtrend is underway. Traders should take action accordingly. If a hanging man is formed and the price actions till continues upwards, it means there was no hanging man. Hanging man can only be formed at the very top of the price action. It should be confirmed with the volume information.
Two more important candlestick patterns that you need to know how to identify are the Bullish and Bearish Engulfing Candlestick Patterns. Both are also very good trend reversal patterns. A Bullish Engulfing Pattern is formed when the candlestick body has an open lower than the previous low of the last candlestick and the close is higher than the previous close of the last candle.
In simple terms, the candlestick body engulfs the previous candlestick's body. Why is this pattern bullish? It represents a major defeat for the bears. Bullish Engulfing patterns are highly accurate but if the subsequent price trades below them than the pattern failed.
On the other had, the Bearish Engulfing Candlestick Pattern is formed at the very end of an uptrend and it marks the impending reveral and the start of a downtrend. This engulfing pattern also depends on two consecutive candles formed with the first candle body being engulfed by the subsequent candle body. The first candle body will be small and the second candle body will be large. The firt candle opens higher than the second candle's close and its close is lower than the second candle's open thus the second candle engulfs the first candle body.
In the last decade use of candlestick patterns have become highly popular among the traders. These candlestick patterns are just a few of the many that can be used in confirming a change in the price action. Combining technical indicators with these candlestick patterns can be very powerful.
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