Candlestick Patterns – Decoding Market Psychology

What are Candlestick Patterns?

 

 

Candlestick patterns are visual representations of price action that help traders understand market sentiment and predict potential reversals or continuations. Each candlestick reflects price movements within a specific timeframe, showing the open, high, low, and close prices.

 

 

Candlestick charts are widely used in stocks, forex, and cryptocurrencies due to their effectiveness in identifying trend strength, reversals, and breakout opportunities.

 

 

How Candlestick Patterns Work

 

 

1. Understanding the Components of a Candlestick

 

 

Each candlestick consists of:

 

 

- Body: The range between the opening and closing prices.

 

 

- Wick (Shadow): The highest and lowest prices within the timeframe.

 

 

- Color: A bullish candle is typically green (or white) (close > open), while a bearish candle is red (or black) (close < open).

 

 

2. Types of Candlestick Patterns

 

 

Candlestick patterns are categorized into reversal patterns, continuation patterns, and indecision patterns.

 

 

Reversal Candlestick Patterns

 

 

Reversal patterns indicate potential trend changes and are valuable for spotting market turning points.

 

 

1. Bullish Reversal Patterns

 

 

Hammer

 

 

- A small body with a long lower wick, appearing after a downtrend.

 

 

- Indicates buyers are stepping in, signaling a possible price reversal.

 

 

Bullish Engulfing

 

 

- A small red candle followed by a larger green candle that completely engulfs the previous one.

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