Today we have a special treat for you, a candlestick pattern cheat sheet.
The image is below and you can right click to save it as a PDF.
Technical diagrams are a two-dimensional representation of the price over time.
There are different types of charts, from line charts, bar charts and candlestick charts.
Line charts help us capture the overall movement of the stock.
Bar charts are more detailed than line charts and are suitable for showing or recognizing classic price patterns.
In the next section we will discuss the different types of candles.
Candlestick charts originated in Japan and are known as Japanese candlestick charts. These are the most popular chart patterns and are very versatile.
The candle represents the price movement.
Each candle has a body and two wicks.
The body of a candle represents the distance between opening and closing, and the top and bottom wicks represent the highs and lows of a candle.
If the closing price is below the opening price, the candle will be red (we used blue above to match our branding).
When the closing price is higher than the opening price, the candle is green or white.
Candlestick charts help create visual clarity.
In addition, two or more candlesticks create patterns that allow a trader to make decisions about the direction of the market.
Multiple sequels and Reversal pattern give a strong signal and help with successful trades.
Candlestick chart patterns are the characteristic formations created by the movement of stock prices and are the basis of technical analysis.
Technical analysts and chartists around the world attempt to identify chart patterns in order to predict the future direction of a particular stock.
Patterns can be simple, like trend lines, and can even become complex, like double head and shoulder formations.
They are chart patterns that signal a change in an existing trend to a trader.
They denote periods when the bulls and bears were unable to drive the market in a certain direction.
These are chart patterns that indicate a temporary interruption in an ongoing trend, and after a short time the trend will continue in the original direction.
Right click the image below to download the Candle Pattern Cheat Sheet in PDF format.
Candlestick patterns are divided into bullish and bearish patterns.
Bullish patterns suggest prices are likely to rise, while bearish patterns suggest prices will fall.
From the diagram above, we’re going to examine some candlestick patterns to give you a clearer idea of how studying these patterns can help in identifying trends early.
Bullish reversal patterns
The hammer candlestick pattern occurs in a sustained downtrend.
The resulting candle should have a small body and a distinctive lower shadow.
The color of this candle can be either green or red.
If it’s green, the hammer is bullish. If the stock rises higher after the hammer, the ideal strategy would be to use strategy go long with a stop loss below the low of the candle.
The bullish engulfing pattern is usually found in a downtrend.
We should see a red candle followed by a green candle.
The body of the green candle must envelop the red candle or be slightly larger.
If after the next few candles the price begins to move higher, it is a clear sign that this pattern is being confirmed.
The strategy would be to go long and set a stop loss below the low of the two candles.
The bullish breakaway pattern usually arises at the end of a bearish move.
This pattern is a trend reversal and results in a bullish trend.
However, there is a chance that the trend will not reverse quickly and ideally the trader should wait for a larger green candle to appear to confirm this pattern.
We follow the same strategy as before and go long as soon as the pattern is confirmed with a stop loss from the point the price rises.
Bearish reversal patterns
The hanging man pattern is a bearish reversal pattern and looks like a hammer candle that we looked at earlier.
The only difference between the two is that the hanging man appears at the end of a sustained uptrend.
If the color of the hanging man’s candle is red, it is a strong sign that a bearish trend is likely to begin.
Once a trader confirms this pattern, he should: a Short position and place a stop loss above the high of the candle.
The bearish engulfing pattern is on an uptrend. We should see a green candle followed by a red candle.
The body of the red candle must envelop the green candle or be slightly larger.
If after the next few candles the price begins to move down, it is a clear sign that this pattern is being confirmed.
The strategy in this case would be in short the security once a trader has confirmed the pattern and placed a stop loss above the two candles.
The bearish reversal pattern is like a mirror image of the bullish reversal pattern.
The bearish breakaway pattern typically forms at the end of a strong bull rally.
This pattern is a trend reversal and is transitioning into a bearish trend.
Just as we saw with the bullish breakout, chances are that even with this pattern, the trend will not reverse quickly.
Preferably the trader should use other indicators to confirm the trend reversal.
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Technical analysis is a widely used tool to try to predict stock price movements. It helps to exploit the price differences with the help of various indicators and patterns.
Some of the candlesticks we examined above help a trader gain an advantage by detecting an upward or downward trend early on.
There are many similarities, and at times some patterns can be confusing.
Hence, it is recommended that traders go through all the patterns and try to understand them virtually before using the candlestick patterns directly.
This will dramatically increase confidence and allow any trader to make accurate financial decisions while applying these concepts.
You might even print out the candlestick pattern cheat sheet and have it on your trading desk.
Disclaimer: The information above is for For educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are unfamiliar with exchange-traded options. All readers interested in this strategy should do their own research and seek advice from a licensed financial advisor.