Improve trading probability with candlestick action.
4 important candlestick patterns that every trader should know
Candlesticks can be quite useful in offering guidance to the direction of the next price move. Though it’s only indicative and can’t be used in isolation, candlestick patterns are a powerful tool to 'prepare' the trader for the next move.
Trading candlesticks is a skill that gets developed over time. You can learn to identify signals from the candlesticks, and start trading small sizes to test the signals in real time. When you have traded enough of those signals, you will have a good idea of which signals to trust and which to let go of.
Thomas Bulkowski is a highly regarded expert on candlesticks and the video below summarises his best ideas coupled with probability.
Candlestick chart Basics
A candlestick chart represents the price action of an asset plotted using a series of candle-like price bars. The bar has a body and wicks on both ends of the body. The two ends of the body depict the open and close price, while the upper wick extends to the high price of the selected time frame, and the lower wick to the low price. As shown in the picture below, a red candle is formed when the close price is lower than the open price, and a green candle is formed when the opposite happens.
Here we discuss four such candlestick patterns and how they can be included in a trader’s tool book to further improve probability.
Bullish Candlestick Patterns
Bullish candlestick patterns indicate a reversal of a downtrend or continuation of an uptrend and help in taking trades on the long side.
Bullish Engulfing Candlestick Pattern
A bullish engulfing pattern is formed towards the end of a downtrend signalling the reversal of the trend. As shown in the picture below, the pattern can be formed with two or more candles, with the body of the candle at the right completely engulfing the body of immediately preceding candle.
As stated earlier, a candlestick may not be the best solo indicator of change in trend and can be used if the signal is confirmed by other technical signals. For example, in the chart below, the price was in a declining trend forming lower lows and lower highs. It makes a higher low at the bottom and forms an engulfing candle right after that, confirming the bullish signal. The price moved upwards for a decent swing trade afterward.