A candlestick chart pattern is an important tool in technical analysis used by traders to monitor price trends in the market. Thanks to that, you can determine the appropriate time to buy and sell stocks. Candlestick patterns are a very clear way to understand supply and demand in the stock market. It is also widely used by many traders. Through this article, Forex Trading will introduce you to the basic concepts of candlestick chart pattern as well as some popular candlestick patterns.
Concept of candlestick chart pattern
The Japanese candlestick chart was invented in the 18th century by Munehisa Homma – a Japanese trader. It later became an important tool in stock market analysis. Homma uses this chart to analyze rice prices and economic factors, weather and state policies. From there, discover the rules of rice price fluctuations. He had a period of almost control over the Japanese rice market thanks to this method. His candlestick charting became popular and widely applied in Western countries.
Today, the terms “Japanese candlestick chart” or “Japanese candlestick pattern” are often used to describe price action and trading psychology of investors. Traders and investors often have to analyze daily candlestick charts to determine price trends. Also, forecast the strength of that trend and look for points to buy, sell, take profits and cut losses.
What does candlestick charting mean in forex?
Each type of candlestick chart tells a “story” about the struggle between the bull market and the bear market. Between buyers and sellers, between supply and demand, and between fear and greed. Therefore, traders use candlestick patterns to monitor the market and find suitable trading points.
It is important to remember that most candlestick patterns need to be confirmed based on the context of the previous and following candles. Investors need to combine reading Japanese candlestick charts with analysis of other patterns and indicators to achieve optimal results.
See more: Read candlestick charts: Basic & advanced material
Analyze the structure of candlestick patterns
The candlestick chart pattern is a means of displaying the opening price, high price, low price and closing price of a security, usually over a single day. Each candle on the chart represents a unit of time and consists of two main parts: the candle body and the candle shadow.
- The body of the candle, the largest part, is often coloured to indicate the closing and opening prices.
- Candlestick shadows, the two small sticks above and below the candle body, usually represent the highest and lowest prices during that period.
Typically, candlestick chart pattern use basic colours such as blue and red, or white and black:
- Bearish candles are usually coloured red or black, with the closing price lower than the opening price.
- Bullish candles are usually coloured blue or white, with the closing price higher than the opening price.
The basic candlestick chart pattern today
Candlestick patterns are created by upward and downward price movements in the market. Although sometimes these fluctuations seem random. However, sometimes they form patterns that traders use for analysis or trading.
There are many types of candlestick patterns, classified into two main types: bullish and bearish. Bullish patterns indicate the possibility of price increases, while bearish patterns indicate the possibility of price declines. However, no one model works correctly in all cases. Because they represent the price movement trend, they are not a sure forecast of future price trends. Below are some basic and popular candlestick patterns.
Candlestick chart pattern Japan Bullish Engulfing
Bullish Engulfing candlestick pattern, also known as the bullish engulfing candlestick pattern. It is also seen as an expression of buyer’s preference over sellers in the market. This is shown through a cluster of candles consisting of two parts: a small red candle, and a green candle with a long candle body. Can cover the entire previous red candle. This model shows that the market is in an uptrend phase.
Candlestick chart pattern Bearish Engulfing
The Bearish Engulfing candlestick pattern is also known as the bearish engulfing candlestick pattern. This model appears when there is a preference for sellers over buyers in the market. This is shown by a cluster of candles consisting of two parts: a small green candle, followed by a red candle with a long body. It will completely cover the previous green candle. This pattern shows that sellers are dominating the market and prices may continue to decline.
Evening Star candlestick chart
The evening star candle pattern (Evening Star candlestick) is one of the models that shows the strongest reversal. The candlestick chart pattern Evening Star is composed of 3 candles instead of 1 or 2 candles like other candlestick patterns. The structure includes 1 large bullish candle, 1 small red or green candle and 1 large bearish candle. This usually happens at the top of an uptrend. The pattern shows a slowdown in buyers. It follows that the seller regains control. Evening Star shows the market a tendency to sell more so it can continue to grow.
Bullish Harami candlestick pattern
In contrast to Bearish Harami, Bullish Harami appears in a falling market. Bullish Harami is characterized by the first candle being a large bearish candle. This is followed by a small bullish candle located completely inside the body of the previous candle. This is a signal to technical analysts that the trend is pausing. If there is then a subsequent bullish candle, expect more price increases.
Bearish Harami candlestick pattern
Bearish Harami is a pattern that appears in a rising market. This pattern is formed by two candles, with the first candle being a large bullish candle. This is followed by a small bearish candle located completely inside the body of the previous candle. Bearish Harami does not provide many strong signals for trading.
Yet it is a pattern that traders can follow. Combined with other technical indicators to make decisions. This model shows us the hesitation on the part of buyers. If the price then continues to rise, the uptrend may also continue. However, if it is followed by a bearish candle, it could be a signal for a further decline.
Candlestick chart pattern Bearish Harami Cross
Bearish Harami Cross is a candlestick pattern that appears during an uptrend. It consists of a bullish candle followed by a Doji candle. Doji is a candlestick pattern with the closing price and opening price being almost the same. However, it is usually just a straight horizontal line. The Doji candle is completely inside the body of the previous candle. Similar to the Bearish Harami, this pattern provides signals that the previous trend may be about to reverse.
Bullish Harami Cross candlestick chart
The Bullish Rising Three candlestick pattern, also known as the 3-step bullish candlestick pattern, consists of 5 candles. The first candle is known as a strong bullish candle. Next are the bearish candles from the second to the fourth. The last candle in this pattern is a strong bullish candle.
Besides, understanding hammer candlestick reversal is also necessary for better understanding. Hammer candlestick is a Japanese candlestick pattern used to signal a strong bullish reversal. It usually appears after the market tries to determine a bottom. This pattern has a simple structure with just one candle shaped like a “hammer”.
See more: Exness – Trade With The World’s Leading Broker Exness
How to apply candlestick patterns in Forex effectively?
Japanese candlestick charts have many popular applications thanks to their intuitiveness, ease of use, and immediacy. Popular applications of Japanese candlestick patterns include:
- Widely used as a key technical indicator.
- Assists in identifying support and resistance lines accurately.
- Is an accurate tool to measure market sentiment.
- Provides signals about price reversal points, accumulation zones, and signs to buy or sell.
Conclude
Technical analysis based on the candlestick chart pattern is only part of the technical analysis process before making trading decisions. Investors should use Japanese candlesticks in combination with other methods to have a comprehensive view of the market. Hopefully, through this article by Forex Trading, you can clearly understand how to read Japanese candlestick charts in stock trading and apply them in practice.
FAQs
Which candlestick pattern is most accurate?
Candlestick patterns reflect the trader’s psychology during the trading period. There is no “most accurate” model. Each pattern is just an indicator of what the trader thinks about the trend. However, some traders prefer and often apply specific models.
What is the 3 candlestick rule?
There is a belief that three candles open and close gradually higher or lower than the previous candle. Because it can predict the upcoming trend reversal. Some traders consider this sequence to be a confirmation of a reversal. Two popular three-candle reversal candlestick patterns are “Three White Soldiers” and “Three Black Crows”.
How are CandleSticks understood?
A candle has a body and shadow, sometimes also called a candle and wick. The candle wick is the highest and lowest price of the asset. The top and bottom of the candle are the opening price and closing price.
