What is a Candlestick?
Candlesticks Patterns are one of the most popular components of technical analysis. A Candlestick is a type of price chart. Japanese rice merchants and traders used to track market prices using candlesticks for hundreds of years. Sir Steve Nison Introduced them to the western world in his famous book “Japanese Candlestick Charting Techniques”.
A Candlestick consists of 3 components
- The body, which represents the open-to-close range
- The wick, or shadow, that indicates the high and low
- The colour, which reveals the direction of market movement. A green candle indicates increase in the price of the asset. whereas a red candle indicates that the price of an asset is decreased.
Candlesticks are formed by upward and downward movements of the price. While this price movement generally looks random. But sometimes it forms several recognizable patterns. these patterns when formed by multiple or in some cases single candlesticks are referred to as Chart patterns
Are Candlestick Patterns reliable ?
Nowadays Many traders can identify candlestick patterns at a glance. And these popular patterns have all kinds of fancy names like, “Bearish dark crow” and “bearish dark cloud cover”. In addition, single bar patterns including the Doji and hammer have gained a lot of popularity amongst technical traders. But in my opinion, Not all candlestick patterns work equally well.
The efficiency of Candlestick patterns has suffered a lot in the last few years because of the hedge funds. These well-funded organizations work against retail traders and traditional investors. However, few reliable and trustworthy candlestick patterns continue to appear on charts.
Here are 5 of the most trustworthy and reliable Candlestick patterns:
1.Three White Soldiers Pattern
Three white soldiers is a reliable reversal candlestick pattern when confirmed by other technical indicators like the relative strength index (RSI). The pattern is formed by three consecutive candlesticks that open within the previous candle’s body and a close that is above the previous candle’s high. These candlesticks preferably should not have long shadows. In conclusion, The three white soldiers candlestick pattern suggests a strong change in the market. which means that it usually appears at the end of an existing trend.
2.Bullish Engulfing Pattern
This candlestick pattern indicates a potential reversal in the trend. the pattern consists of two candles, As the name suggests the second candle ( green) should completely engulf the body of the previous red candle. A bullish engulfing pattern generally appears at the end of a downtrend. In my opinion, the Bullish engulfing pattern is one of the most reliable candlesticks patterns.
3.Morning Star Pattern
This candlestick pattern indicates a potential bullish move in the market. A morning star forms following a downward trend. It consists of 3 candlesticks- a long bearish candle, followed by bearish doji or a small body candlestick and a long bullish candle. The opposite pattern to a morning star candlestick pattern is the evening star, which signals a reversal of an uptrend.
A Marubozu candlestick is a long bodied candle with no wicks. which indicates that the price of an asset did not trade beyond the opening and closing price. when a marubozu is found in a up trending market it indicates that the current uptrend will continue. similarly a marubozu in a downtrend indicates that the exsisiting down trend is likely to continue.
5. Hanging man candlestick pattern
A Hanging man is a single candle- candlestick pattern, A hanging man when apears at the end of an uptrend indicates at a potential downmove of the market. the formation of this Candlestick pattern reveals that the bulls were unable to take the price up. In conclusion it signifies that the sellers are stronger in the market and the exsisting uptrend may end.
The Bottom line
These candlestick pattern despite being know by many hedgers provide very reliable and consistent results. but it should be noted that it best to use them in a borader trading system. which means A trader should use Candlestick as a tool like anyother techincal indicator or tool in a trading system. taking a trade soley on a candlestick patttern formation can be rsiky and misleading. In my opinion Fibonaci retracement tool and RSI indicator provide best results when used with candlestick patterns.