Candlestick patterns are an excellent tool to discover trade signals. Nonetheless, recognizing a candlestick pattern and then interpreting it is critical. That is precisely what this chapter will concentrate on. So, without further ado, let’s get this party started.
What is Candlestick?
A candlestick is a type of price chart used in technical analysis that displays the high, low, open, and closing prices of a security for a specific period. It originated from Japanese rice merchants and traders to track market prices and daily momentum hundreds of years before becoming popularized in the United States. The wide part of the candlestick is called the Body and tells investors whether the closing price was higher or lower than the opening price. Trong một số trường hợp đặc biệt close price = Open price, we will talk later.
Before reading candlestick patterns, you need to understand the structure that makes a candle. A basic would include:
- Candle Body: Distance from open price -> close price
- Close price: The ending price of the candle, at which point it will change to make another candle
- Open price: The starting price of a candle
- Lowest price
- Highest price
- Upper shadow/Lower shadow: The remaining part in the candlestick is called a shadow. Various candle lines along with changing shadow and body length make up candle patterns that traders watch out.
Explance for make the shadow and why is it important ?
The top or upper shadow, of a candlestick shows the highest value of a data set for the time period charted, and the bottom/lower shadow, shows the lowest value. The upper and lower shadows are commonly unequal. Its illustrate the highest and lowest prices at which a security has traded over a specific time period.
- When the upper shadow of a candlestick is longer, it signifies strong action on the part of buyers during the trading session. However, the fact that the closing price of the period is substantially lower than the period high reveals that sellers successfully forced the price back down. A strong high and weak close creates a long upper shadow.
- When the lower shadow is longer, it reveals the opposite: sellers controlled the trading session at some point, driving the price significantly down. Buyers then stepped in before the close to push prices back up. It means the session closed strong; thus, the lower shadow is longer.
- Long candlestick shadows on one side or the other – top or bottom – often occur at the end of a trend, just before price action reverses, forming a new trend in the opposite direction.
The popular candlestick patterns
The Marubozu candlestick pattern is a candlestick pattern that looks like a block, meaning that it does not have any wicks (Marubozu, in Japanese, means “bald head” or “shaved head”). When this candlestick pattern appears, the next candle will probably still be an uptrend or downtrend candle like a Marubozu because momentum is still there.
There are three types of marubozu candles:
- Marubozu open: As for the Marubozu open, the opening price should be flat: i.e. the price action should move only in one direction, but unlike the Marubozu full candle, the closing price on the other side can slightly differ from the high/low. In other words, the open should be flat, while there is room for a short wick on the other side.
- Marubozu close: The Marubozu close candle is opposite to the Marubozu open: the close should be flat while the price action can slightly move in the other direction before it starts aggressively trading in one direction.
- Marubozu full: The Marubozu full example, both the open and close are flat, the asset opens the session, starts rallying in a certain direction and closes at the exact end. Thus, open and close are at the same price as are the high and low.
How to Trade with Bullish Marubozu
In the Bitcoin chart above, a bullish Marubozu occurs right after a sideways zone. Combined with volume, we will see a very strong buying force at here, so the new trend is just getting started. You will rarely see an isolated Marubozu running against the main trend. So when a bullish Marubozu emerges, the trader can expect more upside potential. Thus, opening a trade on the next candle with R:R 1:3
- Entry long: Open price of next candle
- Stoploss: Nearest support
- Take profit: Nearest Resistance
How to trade with Bearish Marubozu
Looking at the 4H BTC/USDT candle, we will see 2 consecutive Marubozu candles with strong selling volume, opening a new trend. At the first Marubozu candle, the real body is quite short after an uptrend, so to be safe we wait to close the second candle with strong volume and then take a short order with R:R 1:3
- Entry short: Openprice next candle
- Stoploss: Nearest Resistance
- Take profit: Nearest support, but in this case we cant see nearest support zone so combine observing next candles and set volume R:R 1:3 take profit buy market price
Considered to be one of the most important single candlestick patterns, the doji can give you an insight into the market sentiment. Dojis are said to be formed when the opening price and the closing price of a stock are the same. Since the opening price equals the closing price, these candlesticks virtually have no body. Here’s an example of a doji.
As you can see, the upper and lower shadows are quite long here, which signifies an increase in volatility. But, in spite of the volatile behavior, the price token has opened and closed at the same price. This essentially indicates that there’s indecisiveness in the market.
For instance, the opening price and closed price have a small difference. In this scenario, traders consider a doji to have been formed even though the candlestick has a thin body to it.
There are some types special of Doji candles:
- Dragonfly doji: The dragonfly doji is formed when the opening and closing prices of a stock are at the highest point of the day. The dragonfly doji has no upper shadow and a long lower shadow.
- Gravestone doji: It is the direct opposite of the dragonfly doji. The gravestone doji is formed when the opening and closing prices of a token are at the lowest point of the day. The pattern has no lower shadow and a long upper shadow.
How to trade with Doji
On its own, a doji may not mean much. Its significance comes into play only when it occurs during a prevailing trend. When a doji appears during either a bullish or a bearish trend, it indicates a pause in the trend and that the market players (buyers and sellers) are uncertain about the price movement. This signal can be construed as a possible impending reversal of the trend.
3) Spinning Top
The spinning top is a single candlestick pattern that like the Doji, signifies market uncertainty and indecision. When the closing price is somewhat close to the opening price, a spinning top forms. A spinning top has a body that is tiny but distinct and has a structure that is comparable to a doji.
How to trade with Spinning Top
The long shadows mean that both the buyers and the sellers are fighting for control, but neither of them have been able to get the upper hand. Hence, the uncertainty in the price movement. When a spinning top appears during a trend, it signifies a loss in momentum and can be interpreted as an indicator of a trend reversal.
However, you still need to exercise caution when dealing with this pattern. This is primarily because there’s only a 50% chance of a trend reversing with a spinning top. Sometimes, the spinning top would merely turn out to be a pause, with the prevailing trend continuing without a reversal.
Therefore, while reading candlestick charts, it is advisable to combine this pattern along with the others to confirm the market direction. For instance, a reversal is said to be confirmed if dojis appears alongside spinning tops.
A pattern that is generated by just a single candle is termed as a single candlestick pattern. Typically, traders use the 1-day candlestick chart to identify a single candlestick pattern. In the following sections, I will introduce a few more typical single candles and candlestick patterns that can be used to identify trend reversals.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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