The candlestick pattern is one of the strongest tools in technical analysis. Independent candles and combinations thereof, in interlocking designs, guide a trader in a direction to spot possible reversals and continuations in trends. Although there exist many different kinds of candle formations, there are a few of them known by all whose excellent skills for predicting movements in prices have left no person unfamiliar with them. The most common powerful candlestick patterns any trader should know are the Engulfing Pattern, Doji, Hammer and Hanging Man, Morning Star and Evening Star, and Shooting Star. Knowing such patterns and interpreting psychology is necessary for a good trade.
The Engulfing pattern is a two-candle formation; depending on its position in the trend, it can present either a bullish or a bearish sign. Thus, a bullish engulfing pattern comprises a small red candle that is bearish and a bigger green candle, which is going to be bullish and would engulf the whole body of the previous candle. In this case, this would mean that the buyers overwhelmed the sellers, which simply means that the downtrend has reversed into an uptrend. This is, after all, a bearish engulfing pattern – a reversal. It’s the opposite little green candle that gets engulfed by a huge red one; thus, following the uptrend, the sellers had taken the lead, so the trend was very likely to be turned downward. The psychology of the Engulfing Pattern is based on the premise of control. A bull-engulfing candlestick represents when the seller’s power was taken back, and conversely, by bearish engulfs a condition is confirmed showing that this power has started turning in the seller’s favour.
A Doji can also be included amongst the primary market indecisiveness indicators with the help of Candle-stick forms it may reflect when the starting or closing value remains almost near which leads to the resulting candle appearing like having some insignificant body surrounded with long Shadows. It shows that neither the bulls nor the bears could push the price much during that particular period. A Doji on its own doesn’t indicate a trend reversal, but it does signal potential changes in sentiment. After a strong uptrend or downtrend, a Doji candle might be an indication of losing energy in the moving trend and possible reversal. The Doji only shows that the market has equated out between both parties and balanced the same; any such balance never helps both in controlling the price at their end and brings confusion, thus forcing the market, if some subsequent trends occur in one direction. There are other patterns like Engulfing, Hammer, Doji, Morning Star, and Shooting Star that are so strong individually that if they form, a reversal or continuation trend would be signalled, and any technical indicator by volume would confirm it. Hammer and Hanging Man are closely related to each other. A small body emerges at the top, and the shadow corresponding to the bottom is considerably longer. What they mean is unique depending on the trend that it follows. The Hammer occurs in a downtrend; really a reversal upside. That is to say, even after extreme selling pressure, there was still buying strength that could force the price back up, indicating that demand had started surpassing the supply. The Hanging Man appears almost at the end of the uptrend and warns that upward reversals can reverse downward here. It can also be a naked bearish reversal candle as it could also work in that, after the session, and after its initial upward push, prices then move down to close low around opening ones to indicate the bulls fail to support this in turn allowing strengthened selling, which can then have a momentum drive. Of these three most significant patterns that hint at trend changes, the Morning Star and the Evening Star are included.
The Morning Star often occurs at the end of a downtrend. It is a three-candle consisting of a large bearish candle, a very small candle and any shape Doji signifying indecision against a strong bullish candle as the third indicator to confirm this trend reversal. This pattern indicates that the bears are on top of the first candle, while the second candle was somewhat indecisive, and the third brought out the bullish signals again. The Evening Star is the opposite of the Morning Star and occurs at the top of an uptrend. It starts with a large bullish candle, followed by a small-bodied candle which indicates indecision, and then a big bearish candle which shows that bears are back on top. Psychoanalysis- The Morning Star as well as the Evening Star pattern demonstrate that the sentiment of a Morning Star pattern is shifted from being negative towards positive, whereas in the case of an Evening Star pattern, it was shifted from positive towards being negative. More of the pattern has the effect of representing another swing in power for one group of traders to assume at the handover of power back to another whose turn might come about to form a reversal into a future move of price direction. Shooting Star represents a single bar in an upward trend and forewarns possible reversal downwards.
Among the above five patterns are the following: Engulfing, Doji, Hammer/Hanging Man, Morning Star/Evening Star, and Shooting Star. These are actually pretty useful technical analysis tools. It will be a good guide to a trader regarding the sentiment of the market and what the market can bring in terms of price movements. Still, while the five patterns alone are great, they are not to be used in a solitary manner.
