Being an investor is not an easy task, as you have to learn how to make the most out of market fluctuations and changes in order to protect your portfolio and ensure it remains profitable. This is precisely why financial experts advise traders to learn about and use technical analysis tools in order to manage their list of holdings more efficiently.
The most important aspects are the study of past market data and information, monitoring the price points and volume, the support levels, momentum, cycles, breakouts, and the chart patterns that tend to occur. Learning their intricacies and becoming accustomed to the best times and ways to implement the knowledge are long-term goals that you will only achieve through continuous involvement in the marketplaces.
Among them, the candlestick pattern is one of the most well-known. In fact, this metric is fundamental for the development and deployment of a robust strategy. However, that doesn’t mean that it is all that simple and straightforward to get the hang of it, as there are over one hundred different formations ranging from the easiest and most uncomplicated to the ones that are considerably complex.
What are candlesticks?
Candlestick charts are a type of financial graph that is used to measure and offer indications concerning the price movements of different types of assets, including currencies, securities, and derivatives. Price is the most vital component of the trading world, as it allows traders to come up with tailored approaches for their ventures.
The candles are essentially graphic representations of price fluctuations and changes as they occur over a set time. They form due to the opening, closing, high, or low prices. If the opening price goes above the closing one, candlesticks are drawn. If the reverse happens, the candlestick is shown. These scenarios are distinguished by the colors associated with them, with the former being ascribed black or red while the latter is depicted in black and white.
The hollow or filled part of the candle is known among investors as the “real body”, with its size depending on the lines resting over or under it. These lines are known as “tails”, “shadows”, and “wicks” and represent the prices themselves. However, it’s important to remember that not all candlesticks have this feature.
Doji:
To become adept at trading and increase your likelihood of success, you need to become accustomed to the features and intricacies of all candlestick patterns, what they predict, and how their estimations impact your endeavors. The Doji candlestick is perhaps the most easily recognizable of the bunch because it looks like a cross or a plus sign. It indicates indecision in the marketplace, but on a rare occasion that you can observe clusters of Doji candles, you can take it as a sign that a trend reversal is in the making.
The word “doji” comes from Japan, the birthplace of candlestick charts, and means “the same thing”. Doji formations come in three different types: long-legged, dragonflies, and gravestones.
Engulfing:
Engulfing patterns show that the marketplace is about to move towards either a bullish or a bearish price action and do so quite strongly. The candles are so large that they completely engulf the ones that came before them, hence their name. This type of candlestick is considered one of the most reliable among investors, and most begin changing their strategies the moment they see strong indications that this pattern is in the making.
The bullish engulfing pattern, for instance, takes place when the small black candle is followed by a large white candlestick the next day. When there are at least four black candlesticks preceding the engulfing pattern, the probability of a reversal is even more potent. It’s important to look at the candlesticks that occurred in the past, not just the ones making up the pattern.
Evening Star:
The Evening Star resembles three separate candles representing the bearish, small body and bullish patterns. The market sentiment this pattern announces is that of a bearish reversal. They typically show up when an uptrend approaches its end and are the direct opposite of the morning star pattern, which appears when a period of value slowdown is about to end. The Evening Star pattern is somewhat rare, but it nonetheless remains a highly trustworthy indicator in the eye of most traders.
The first day of the Evening Star consists of a white candle showing price growth. Then there’s the second candle, which shows a lower and more moderate price increase. Finally, the third candle, which is red, opens at a lower price compared to that of the previous day and closes around the middle of the first day.
Shaven Head:
As the name suggests, the Shaven Head candlestick has no upper shadow whatsoever. It can be either black or white, and its lack of wick makes it similar to the Hammer pattern, a bullish pattern that has very little upper shadow, if at all. The candle with a shaved top displays the beginning of robust bullish momentum, particularly when it occurs toward the end of a downtrend or as part of an uptrend that is still going strong.
The shaved bottom candlestick, on the other hand, has no lower wick and predicts a powerful bearish momentum that is on the way. When it happens at the end of an uptrend or during a bearish episode, investors find it to be particularly reliable. If you want to make the most out of this pattern, you should know that it is most reliable when it appears at the resistance levels. You must also wait for confirmation before rushing to place a trade because false signals can and do sometimes occur.
Being a trader takes a lot of patience and research. If you believe that you can just jump into marketplaces and start trading right away, you may be surprised to realize how much work and effort are needed to build a robust portfolio. But doing your research and learning about technical analysis is the only way to see gains and reduce the incidence of losses as much as possible.
