The candlestick chart transcends from the ancient Japanese rice trade to the modern day stock trades! Several investors find them to be visually more attractive than the usual bar charts. Moreover, it is easier to interpret the price actions with their representations. They appear rectangular in shape with wicks on either side and thus the name - ‘candlesticks’.
Each candlestick normally shows a day’s worth of stock price data. With time, many candlesticks can be grouped together to form recognizable patterns which investors can analyze and make decisions for stock trading as well as Forex Trading.
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How To Read A Single Candlestick:
Representing the stock price data for a single day, each candlestick gives for pieces of information - opening price, closing price, high price, and low price. A black candlestick represents a bearish scenario with the closing price lesser than the opening price, indicating high selling pressure.
On the other hand, a hollow or white candlestick represents a bullish scenario with the closing price higher than the opening price, indicating buying pressure. The lines on either ends is known as ‘shadows’. They demonstrate the entire range of price action for a particular day, from low to high. The upper shadow shows the highest price for the day while the lower shadow shows the lowest price for the day. Having a clear understanding of the basics of such a structure will enable investors to equip themselves with key stock and Forex Trading Strategies.
Bullish Candlestick Patterns:
Eventually, many groups of candlesticks form recognizable patterns which are acknowledged with a variety of descriptive names including hammer, bullish engulfing, morning star, three white soldiers, and piercing line. However, it is important to note that bullish reversal patterns are demonstrated within a downward trend and they require bullish confirmation.
One way of confirming is the observation of upward price movements coupled with high trading volumes, following the bullish patterns. Seeking assistance from professional Stockbrokers like WesternFX in Indonesia would be a great way to get started with this technique.
Here are the bullish candlestick patterns which provide the strongest reversal signals.
1) The Hammer & The Inverted Hammer:
This pattern alerts the stock trader that the stock is hitting the bottom in a downward trend. The candles’ bodies are short with longer lower shadows that indicate the price drop during the trading session. By the end of the session, however, the buying pressure increases along with the prices. To confirm the upward trend, the investors must watch the patterns closely for the next couple of days and validate the bullish reversal action by correlating it with the rise in trading volume.
The inverted hammer is also observed to form a downward trend representing a bullish reversal. It’s quite identical to the hammer except that the upper shadow is longer instead of the lower one. This shows the increase in buying pressure post the opening price which is followed by reasonable selling pressure. However, it is not enough to lower the price below the opening value. Here, the bullish confirmation is gotten by detecting a long hollow candlestick or a gap up which is coupled with heavy trading volume.
2) The Bullish Engulfing:
This one is a two-candle reversal pattern. The second one fully engulfs the real body of the first one regardless of the length of its tail shadows. It usually appears in a downward trend as a combination of one dark candle which is followed by a larger hollow candle.
On the second, one can observe the lowering of the price below the previous low. However, the buying pressure gives a thrust and pushes the price higher than the previous high eventually. This is a big win for the stock buyers. The reversal pattern here can be confirmed when the bullish movement goes higher than the high of the engulfing candle (second hollow or white candle).
3) The Morning Star:
This pattern is looked up to as a sign of hope. It is known to give a new beginning to a gloomy downward trend. Here, one can observe three different candles - a long black candle, a doji(short-bodied) candle, and a long white candle, in the same order respectively. The color of the doji can be either white or black.
Also, there isn’t any overlap between its body and that of the long black candle preceding it. This depicts the selling pressure that existed a day before is subsiding now. The body of the third candle (white) overlaps with that of the doji. This indicates the resumption of the buying pressure and the start of a bullish reversal, which can be confirmed by increased volume.
4) The Three White Soldiers:
This pattern is known to appear beyond a period of downward trend. It is comprised of three long white candles which happen to close higher progressively on each subsequent trading day. It represents a steady increase in buying pressure, each candle is observed to open higher than the former open and close near the high of that particular day. Investors are advised to exercise caution when they see long white candles which generally attract short sellers, thereby pulling the stock price further down.
5) The Piercing Line:
Like the bullish engulfing pattern, the piercing line is a two-candle bullish reversal pattern, occurring in downward trends. Here, a long black candle is followed by a white candle which is observed to open lower than the former close. Consequently, the buying pressure steers the price upward, by half or more, into the black candle’s real body.
The candlestick chart serves as a valuable technical analysis tool which helps investors refine their information and improve their decision-making capabilities within the realm of stock trading and even forex trading. Remember to always confirm the bullish reversal by subsequent price actions prior to trade initiation. WesternFX is an expert Stock Broker in Indonesia. Connect with us to employ some of the most effective stock trading and forex trading strategies, and boost your ROI!
