Candlestick patterns are used to describe the day-to-day price movements of an underlying asset. There are various candlesticks, and their colors get more intricate as you go up the investment ladder.
Candlestick patterns can be highly volatile, so investors should exercise caution when using them in their trading strategies. Being aware of what candle patterns tell you about a market is vital if you want to make intelligent decisions about what to do next with your money.
What are Candlestick Patterns?
A candle pattern is a graph that records the closing price of a security over some time. A candlestick graph shows the open, high, low, and close prices for any given period. The candlestick is represented by either a colored or white bar.
There are various types of candlestick patterns that vary in shape and color. All these variations can be used to give you clues about what the market will do next.
Candlesticks give you a snapshot of the supply and demand in a market over some time. They can also reveal how volatile stock or commodity is relative to its average trading range. The patterns that form can be thought of as candles with wicks and shadows, which have various meanings depending on the shape and color of each component.
Types Of Candlestick Patterns
Two main types of patterns are used to identify market tendencies:
Bullish
An upward-pointing pattern is called a bullish candle. This means that the stock or commodity is on an upward trend and should continue to rise as long as supply and demand increase. The combination of high volume and high open prices is the most indicative of a bullish candle.
A bearish candle
This candle represents a downward-pointing candlestick indicating that the market is on a downtrend. Like the bullish candles, they are mainly composed of high volume and available prices. The main difference between bullish and bearish candles is the color of their actual body (the space within the wick). Bearish candles have a red or dark-gray accurate body color that points downwards. Conversely, bullish candles have a white or light-gray actual body color that points upwards.
How to Use Candlestick Patterns
Technical analysts usually use candlestick patterns to predict the market's next direction or individual stock. There are various methods that technical analysts use to analyze candlestick patterns, and they all depend on when they form.
One of the most common methods is to look at candlesticks that form near the end of an existing trend. The idea is that once a reversal has begun, it exhibits a substantial change in price from the highs or lows before it. A reversal candlestick pattern is often a signal that the trend is reversing.
Another method is by looking at the volatility of a given candle pattern. Attentive traders should pay attention to when a candlestick forms without any shadow, which shows its extreme high or low concerning its average trading range. A candlestick with no shadows indicates that it's trading in an area that is highly overbought or oversold, which means it could be susceptible to further price declines.
Next is looking at the previous candlestick, which allows you to determine the underlying trend. If a security is trading in a downtrend and suddenly forms a bullish candle, it may continue going up.
The last method is looking at the candles that surround each pattern. It involves observing how a particular candlestick formed is relative to the surrounding candles.
Benefits of Using Candlestick Patterns
-Candles record price movements over some time. These price movements can be either upward or downward. When the candle closes, any wayward price movement usually turns around in a few days and reverses itself.
The pattern that forms inside the candle can is tied to the supply-demand dynamics of a market.
-Candles record the supply and demand of security. A high supply (a large volume of buyers) will show up in a long candle, whereas the opposite is true for the low supply (sellers). This can be used to gauge the general health of a market.
-Candles can be used to measure the volatility of an asset. When the candle closes on an upward or downward move, it gives you a clue about whether the market was pretty volatile or not.
-Candy patterns give you clues about possible price movements up and down. To predict whether the market will be more volatile in the coming days, you need a pattern that tells you whether there is a high supply of buyers or sellers and if they are more active than usual.
-Candlestick patterns can reveal how volatile and unpredictable a security is by comparing it to its average trading range. A high percentage of price movement outside this range usually indicates that the trader will encounter more volatility in price movements.
-Candles can be used to measure supply and demand in the market. It is essential to look at more than just when the candle closes. There are various types of candlestick patterns that vary in shape and color. All these variations can be used to give you clues about what the market will do next.
-Candlestick patterns can be used as a contrarian indicator. A candlestick pattern looks like a candle, which is no coincidence. Candles are most valuable when they are used concerning each other.
-Candle patterns can show the law of supply and demand at work. If you know how to read them, candlesticks can predict how stock your trading might act in the future.
-Candlestick patterns can be used to spot dead-cat bounces. Candlestick patterns are mainly used to predict future price movements. Dead cat bounces are just one way of using candlestick patterns. If you notice that a security has pushed through a series of high and low prices in one day without making any downward movement, you should watch it closely for the possibility of a dead cat bouncing.