Candlestick Basic Patterns

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Candlestick Basic Patterns

Postby Trade12 » 01 Apr 2016, 13:54

For those not familiar with the details of candlestick charting, it’s important to go over the fundamentals. The difference between the open and the close is called the “real body” of the candlestick. The higher of these values creates the upper extreme of the real body, and the lower of these values creates the lower extreme. The amount the stock rose in price above the real body is called the upper shadow. The amount that the stock fell below the real body is called the lower shadow.
If the candle is green or white, it means the lower extreme is defined by the opening price and that the stock’s price rose during the period being charted. If the candle is red or black, then the lower extreme identifies the closing price, and the stock fell during the period.
Candles may be created for any time period: Monthly, weekly, hourly or even a minute. Regardless of the time frame, candlesticks should not be judged in isolation; traders should always look for follow-up action to confirm any signals during the following applicable period.
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Re: Candlestick Basic Patterns

Postby Trade12 » 01 Apr 2016, 13:57

DOJI

The doji is one of the most important candlestick patterns. A doji formation is a single-candle pattern. It occurs when prices opened and closed at the same level. A doji represents equilibrium between supply and demand, a tug of war that neither the bulls nor bears are winning. Traders should not take action on the doji alone. Always wait for the next candlestick to make an appropriate trade.
After a long uptrend, the appearance of a doji can be an ominous warning sign that the trend has peaked or is close to peaking. The converse holds true for a downtrend. When assessing a doji, always take careful notice of where the doji occurs. If the security you’re examining is still in the early stages of an uptrend or downtrend, then it is unlikely that the doji will mark a top, but it could precede a pause in the current trend move. It can be viewed as a pivot.
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Re: Candlestick Basic Patterns

Postby Trade12 » 01 Apr 2016, 13:58

Engulfing pattern

The bullish engulfing pattern is most significant when it occurs after a prolonged downtrend. The stock or index has been selling off sharply. On the day of the bullish engulfing pattern, prices will often start the day by falling. However, strong buying interest comes in and turns the market around.
The bullish engulfing pattern is so named because the open-close range of this candle surrounds or engulfs the open-close range of the previous one. The bullish engulfing represents a reversal of supply and demand. Whereas supply has previously far outstripped demand, now the buyers are more eager than the sellers. Perhaps at a market bottom, this is just short covering at first, but it is the catalyst that ultimately creates a buying stampede.
When analyzing the bullish engulfing pattern, always be aware of its size. The larger the candle, the more significant the possible reversal. A bullish engulfing candle that consumes several of the previous candles speaks of a powerful shift in the market.
Apple Inc. provided a good example of this pattern last summer. Apple had been on a downtrend from June 1 until June 20. Then, on June 23, Apple formed a bullish engulfing pattern where that day’s candle engulfed the previous day’s candle completely and suggested that the market would embark on a new bullish rally.
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Re: Candlestick Basic Patterns

Postby Trade12 » 01 Apr 2016, 13:58

Hammer
The hammer candlestick pattern forms after a prolonged downtrend. It is considered a strong reversal signal. On the day of the hammer candle, there is strong selling as the market opens up. As the day goes on, however, the market recovers and closes near the unchanged mark, or in some cases even higher.
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Re: Candlestick Basic Patterns

Postby Trade12 » 01 Apr 2016, 14:00

Hanging man

Hanging man candlestick formations are another reversal pattern. This formation typically happens after a prolonged uptrend when a security moves significantly lower after the open, but rallies to close well above the intraday low. It is important to emphasize that the hanging man pattern is a warning of potential price change, not a signal, in and of itself, to go short.
Although they are relatively reliable, candle patterns are just one tool in a trader’s toolbox. Traders should integrate candlestick analysis, moving averages, Bollinger bands, price patterns (such as triangles) and indicators (such as stochastic or CCI) to reach trading decisions. Of course, the break of a simple trendline is a powerful message that should not be ignored, particularly when done in the neighborhood of reversal formations.

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