Candle sticks can give us some insights into how the market may be expected to move in the future.
Please be aware, they are not full proof and should always be used with extra data to back them up (this will be explained later in the training).
They can tell us investor sentiment sometimes though since they are a visual representation of what the participants in the market are doing.
There are two main types of candle patterns.
Reversal patterns and continuation patterns.
As their name suggests, one may reverse the overall direction the market is going in and the other may make it continue further in the same direction.
Let's look at some of the reversal ones first.
Bullish Hammer ;
A bullish hammer much be at the bottom of a down trend to be valid.
You can see leading into this hammer the price has been falling pretty strongly before the hammer was formed.
For a hammer to be formed, the price will have pushed down into new lows but before the candle closes there will have been a buying spree pushing the candle back up to close above where it opened.
The big wick it leaves under it is one of the tell tale characteristics of it.
The wick will usually be 2-3 time longer than the candle body and usually there will be little to wick sticking out the top of the candle.
As with all candle patterns, the important thing is it hints at the psychology of investors.
Here price was pushed lower but failed to stay there.
This tells us that in that area investors seem more interested in buying the pair than selling it and it can lead to price turning around and heading in the opposite direction.
Inverted (Bearish) Hammer
As with all candle patterns, the pattern flipped around is the same.
This is a bearish hammer pattern.
The psychology behind this is the exact same, the market has been pushed into a area where people seem to not want to buy any more and price begins to fall.
As with the bullish hammer, it must occur at the end of a up trend and the wick should be 2.3 times longer than the body.
Bullish Engulfing Pattern
One of the favorite patterns for many traders since it is so easy spot and can be pretty powerful.
A engulfing candle does exactly what is says on the tin, it "engulfs" the previous candles.
When we see an engulfing patterns at the top or bottom of a trend it can be a strong indication that the trend is going to change.
It can be a sign that the sellers are exiting the market and buyers are coming in.
The psychology of the engulfing candle is it appears the other side of the market has taken over suddenly.
Bearish Engulfing Pattern.
Doji Candle.
A doji candle is a candle that opens and closes at the exact same price and there is no body to the candle.
It just shows as a line.
This candle shows indecision, in this example below, the market has been pushing up and then the doji appeared.
This tells us during that candle there was a lack of interest in new buyers to push the price to close higher.
It could indicate they are not willing to pay higher prices and price will fall.
A doji candle at the top is usually stronger than one at the bottom of the move. I would advice you actually avoid trading doji candles at the bottom of move since they have a high failure rate for turning the market.
It is very important to understand a doji only has any relevance if it in the end of a trend up or down.
A doji when the market is going sideways means nothing and you can expect to see a lot of them in sideways moving markets.
Evening Star Formation
This is a 3 pattern candle and made up from a few of the candles we have spoken about so far.
Since it involves more candles it is usually a stronger signal to buy/sell.
The pattern goes like this;
1 - Big candle pushes up (or down)
2 - There is a hammer type of candle or sometimes a doji
3 - There is an engulfing candle in the other direction
These patterns often work out more since they are kind of like two signals in one.
It is important to remember these candle patterns do not work all of the time though, they just give an indication of what price might do and they should always be used with other analysis to back them up.
I have marked in examples of where these reversal patterns have shown up on this chart and indicated if they would have been successful to trade or not.
This is a weekly time frame chart so these patterns would have all been considered to be strong (bigger time frame = stronger candles)
Different traders will call these candles different names and there are loads and loads more we could show you but we believe it is more important to teach you how to understand what these candles are indicating and not fill your head with all the names which are pretty unnecessary.
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