Understanding

Candlestick
Patterns

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 INTRODUCTION

Candlestick patterns are essential When analyzing candlestick patterns

tools for forex traders. Each for trend reversals, look for specific
candlestick provides important formations that indicate a potential
information about the price action change in trend direction. It's
and can help in making trading important to observe the shapes and
decisions. sizes of consecutive candles to spot
potential reversals accurately.

While identifying candlestick patterns

CANDLESTICK BODY AND WICKS
is essential, traders often seek
confirmation before making trading
In candlestick charts, the rectangular decisions. The concept of a "follow
part of the candle is called the body. through" day or candle is crucial in
Usually, a green (or white) body confirming the validity of a pattern
represents a bullish candle, indicating and minimizing false signals.
price increase, while a red (or black)
body represents a bearish candle,
indicating price decrease.

The lines from the top and bottom of

the body are called wicks or shadows.
They show the highest and lowest
prices reached during the specific
time period.

Furthermore, traders use support and

resistance levels as crucial reference
points to validate candlestick
patterns. These levels can strengthen
the confidence in potential price
movements indicated by specific
patterns.

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COMMON CANDLESTICK HAMMER/HANGING MAN
PATTERNS
The hammer and hanging man
Understanding candlestick patterns is patterns are both single candlestick
essential for interpreting price patterns that signify potential trend
movements in the financial markets. reversals. The hammer is formed at
Both single and multiple candlestick the bottom of a downtrend, indicating
patterns provide valuable insights into a potential bullish reversal, while the
potential changes in market hanging man is formed at the top of
sentiment and can signal potential an uptrend, signaling a potential
price reversals. Single candlestick bearish reversal.
patterns offer a glimpse into market
sentiment, while multiple candlestick
patterns offer deeper insights and
often carry stronger signals. Traders
should be familiar with both types of
patterns to enhance their analysis of
price action.

SINGLE CANDLESTICK
PATTERNS

Single candlestick patterns provide

valuable insights into potential
According to most traders, for a
changes in market sentiment and can
candle to be classified as a hammer/
signal potential price reversals. In this
hanging man, the lower shadow of the
section, we will explore some of the
pattern is required to be at least two
common single candlestick patterns
times longer than that of the candle’s
that traders should be familiar with.
body.

HAMMER AND HANGING MANDIFFERENCE

source: www.quora.com/

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INVERTED HAMMER/
DOJI STAR
SHOOTING STAR

An important reversal pattern that may

The inverted hammer, as a single indicate a change in trend when observed
candlestick pattern, can be seen as the in a downtrend.
opposite of the hammer and hanging man
patterns.

It forms at the bottom of a downtrend,

indicating a potential bullish reversal or as
a shooting star at the top of an uptrend,
indicating a bearish reversal.

It is distinguished by a long upper shadow

and a small body near the bottom of the source: www.dailyfx.com/
candle, just as the hammer and hanging
man have a long lower shadow and a small
body at the top.
LONG-LEGGED DOJI

Indicates strong indecision with buyers

and sellers battling for control without any
clear winner. Represented by a long
extended upper wick and a long extended
lower wick.

DRAGONFLY DOJI

Suggests a potential trend reversal and is

formed when the open, high, and close are
Inverted Hammer/ shooting star all the same. Usually appears at the
bottom of a downtrend showing rejection
DOJI PATTERNS of lower prices thereby indicating a
bearish signal.
Doji patterns occur when the opening and
closing prices are virtually equal. They GRAVESTONE DOJI
indicate indecision in the market and can
signal potential reversals. There are Forms when the open, low, and close are
different variations of doji patterns, each the same and often indicates a bearish
with its own implications for market reversal. The opposite is true between the
sentiment. dragonfly and gravestone doji

It is very unlikely to see the perfect Doji in

the forex market. In reality, traders look for
candles that resemble the below patterns
as closely as possible and more often than
not, the candles will have a tiny body.
Below is a summary of the Doji candlestick
variations.

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 NB
THE 4-PRICE DOJI
However, they can also represent short-
term outliers or reversals of a current
Represents a state of balance between
trend. So follow-up confirmation with
supply and demand, indicating potential
subsequent price action is advised before
trend reversal possibilities.
entering trades based solely on a
marubozu.
Please note that we can assume, as for all
other types of doji candles, that a very
Their presence usually indicates strong
small body is acceptable. In the case of
emotions like fear or greed are dominant,
Four-Price Doji this means that open,
so paring positions on continued moves
close, high and low prices are not
may be prudent for risk management.
necessarily all the same, but are very much
similar.

The 4-Price Doji BULLISH

MARUBOZU

MARUBOZU LINES
Marubozu candles have long bodies that Bullish Marubozu
take up the entire range between the open
and close for that period. They have no
shadows at all.

A bullish marubozu opens at the low of the

period and closes at the high, indicating
strong buying pressure that drove prices
sharply higher with no retracement. This
signals continued strength.

A bearish marubozu opens at the high of

the period and closes at the low, indicating
heavy selling pressure that pushed prices
sharply lower with no rally. This signals Bearish Marubozu
continued weakness.

MULTIPLE CANDLESTICK PATTERNS

Marubozu patterns imply an absence of
indecision in the market during that period. Multiple candlestick patterns provide deeper
Prices moved decisively in one direction insights into market sentiment and often
with no reversals. Seeing a bullish or carry stronger signals compared to single
bearish marubozu can provide a clear candlestick patterns. In this section, we will
entry signal that the prior trend is likely to explore some of the common multiple
continue in the short-term. Traders may candlestick patterns that traders should be
take positions in the direction of the familiar with
marubozu.

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BULLISH/BEARISH ENGULFING
PATTERNS

Engulfing patterns indicate potential

reversals as one large candle completely
surrounds the previous smaller candle.

In a bullish engulfing, a robust bull candle

encompasses a preceding bearish candle,
suggesting bearish pressure may be
exhausted and bulls are gaining control.
Conversely, in a bearish engulfing, a
oversized negative candle engulfs its
predecessor bull candle, implying buying
momentum has faded and bears are taking
charge, potentially signaling a trend
change. The engulfing patterns highlight
one sizable candle negating the prior
direction, warranting attention from
traders.

For the engulfing to be valid, the body of

the large candle must completely cover Bearish and Bullish Engulfing
the small candle, indicating it opened and
closed at higher/lower levels.
PIERCING/DARK CLOUD COVER
They typically occur near the end of a PATTERNS
trend, with the large candle reflecting
growing strength of the counter-trend The piercing pattern is a bullish reversal
force. pattern formed by a bullish candle that
closes above the midpoint of the previous
Follow-through movement in the direction bearish candle. If it forms during a
of the large candle the next day adds downtrend, it signals a possible turn
confidence the reversal is legitimate. towards an uptrend.

Higher volume on the engulfing candle

lends further credibility that
accumulation/distribution is taking place.

They work best when occurring at a

support/resistance level or after a period
of consolidation, as this offers a clearer
entry point.

Protective stops can be placed

below/above the small candle to limit risk
in case the big candle was just an outlier. source: https://www.learnstockmarket.in

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On the other hand, the dark cloud cover ENHANCING MARKET ENTRY
pattern is a bearish reversal pattern PRECISION
characterized by a bearish candle that
Achieving precision in market entry
closes below the midpoint of the previous
involves the accurate identification of
bullish candle. ‘Dark Cloud Cover’ candle
favorable opportunities to initiate trades. It
stick pattern is exactly the opposite of
necessitates a comprehensive
‘Piercing Line’ Pattern. It’s called a ‘Dark
understanding of both technical and
Cloud Cover’ when the pattern appears
fundamental analysis.
during an uptrend.

TECHNICAL ANALYSIS
Utilize technical indicators and chart
patterns to pinpoint potential entry points
and maximize trading efficiency.

While identifying candlestick patterns is

essential, traders often seek confirmation
before making trading decisions. The
source: https://www.learnstockmarket.in
concept of a "follow through" day or candle
is crucial in confirming the validity of a
pattern and minimizing false signals.
MORNING/EVENING STARS
Morning and evening star patterns are Furthermore, traders use technical analysis
multi-candle patterns that indicate levels as crucial reference points to
potential trend reversals. The morning star validate candlestick patterns. These levels
is a bullish reversal pattern, while the can strengthen the confidence in potential
evening star is a bearish reversal pattern. price movements indicated by specific
patterns for example Support and
These patterns consist of a series of Resistance Levels. Traders use these
candles that provide strong signals when levels as crucial reference points to
interpreted in the context of the market validate candlestick patterns.
trend.

FUNDAMENTAL ANALYSIS
Involves staying informed about economic
events, news releases, and geopolitical
developments to time market entries with
key fundamental factors.

Unlike solely relying on price movements

and technical indicators, fundamental
analysis provides a more holistic
Morning/Evening Stars perspective. It focuses on evaluating the
underlying factors that shape and impact
market trends, aiming to uncover the
underlying strengths and weaknesses of an
asset.

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ENTRY EXECUTION
Plan and execute precise entries based on By incorporating candlestick analysis and
a combination of technical and pattern interpretations into risk
fundamental analysis, aligning with risk management strategies, traders can make
management strategies. more informed decisions and protect their
capital while participating in the dynamic
world of trading.
TRADING STRATEGIES
By carefully analyzing price movements,
indicators, and other relevant factors,
traders aim to determine optimal entry
and exit points for their trades.

To establish potential entry points, traders

closely examine various patterns and
signals within the market.

trading strategies combine technical and

fundamental analysis to identify potential Stop loss order and evening star
entry and exit points. By carefully candlestick pattern
assessing patterns, market conditions, and
risk management principles, traders aim to
make informed decisions that optimize DEVELOPING TRADING
their trading outcomes. PSYCHOLOGY
Establishing a disciplined and resilient
Identify potential entry and exit points trading psychology is vital for navigating
based on the identified market conditions. the dynamic forex market and maintaining
and candlestick patterns learned a consistent edge in trading.

Traders can cultivate a positive trading

RISK MANAGEMENT mindset by focusing on continuous
learning, emotional control, and adapting
Risk management is a critical aspect of
to changing market conditions, ultimately
trading, and it involves implementing
enhancing their trading performance.
strategies to effectively manage and
mitigate potential losses. Traders employ
various techniques to manage risk,
including the use of stop-loss orders
based on candlestick analysis and pattern
interpretations.

Risk management in trading goes beyond

setting stop-loss orders. It also involves
diversifying one's portfolio, managing
position sizes, and adhering to disciplined
risk-reward ratios. Traders should carefully
assess their risk tolerance, establish clear
risk management rules, and consistently
evaluate and adjust their strategies as
market conditions change.

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CONCLUSION

the utilization of candlestick charts has revolutionized the way traders approach financial
markets. These charts, with their rich historical significance and adaptability, have
become an essential tool for traders of all levels of expertise. Whether you're a novice or
an experienced professional, embracing the power of candlestick analysis can enhance
your trading journey by providing valuable insights into market sentiment and potential
price trends. By understanding the various candlestick patterns and their interpretations,
traders can make more informed trading decisions and effectively manage risk. So,
embrace your journey in trading, explore the world of candlestick analysis, and unlock the
potential for greater success in the dynamic realm of financial markets.

Embrace Your
Journey
NDA
- CLEMENCY SIBA

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