Secrets To Read Candlestick Patterns

Price Action : Take entries with deadly accuracy.

What is a candlestick pattern and how does it work?

A candlestick pattern has 4 data points:

Open — The opening price

High — The highest price over a fixed time period

Low — The lowest price over a fixed time period

Close — The closing price

For a Bullish candle, the open is always below the close.

And for a Bearish candle, the open is always above the close.

There are few powerful candlestick patterns :

• Hammer
• Shooting Star
• Bullish Engulfing Pattern
• Bearish Engulfing Pattern

Hammer

A Hammer is a bullish reversal pattern that forms after a fall in price.

How to recognize it:

• Less to no upper shadow
• The price closes at the top ¼ of the range
• The lower shadow is about 2 or 3 times the length of the body

And this is what a Hammer means…

1. When the market opens, the sellers took control and took price lower
2. After too much selling, huge buying pressure comes in and pushed price higher
3. The buying pressure is so strong that it closed above the opening price

In short, a hammer is a bullish reversal candlestick pattern that shows rejection of lower prices.

PRO TIP : If there’s Hammer doesn’t mean the trend will reverse immediately.

We’ll need more “confirmation” to increase the odds of the trade in our favor.

Bullish Engulfing Pattern

A Bullish Engulfing Pattern is a bullish reversal candlestick pattern that forms after a fall in price.

How to recognize it:

• The first candle has a bearish close
• The body of the second candle completely “covers/engulf” the body first candle (without taking into consideration the shadow)
• The second candle closes bullish

And what a Bullish Engulfing Pattern means…

1. On the first candle, the sellers are in control as they closed lower for the period
2. On the second candle, strong buying pressure comes in and closed above the previous candle’s high — which tells you the buyers have won the battle for now

In short, a Bullish Engulfing Pattern tells you the buyers have overwhelmed the sellers and are now in control.

Shooting Star (The opposite of a Shooting Star is Hammer.)

A Shooting Star is a bearish reversal pattern that forms after an increase in price.

How to recognize it:

• Little to no lower shadow
• The price closes at the bottom ¼ of the range
• The upper shadow is about 2 or 3 times the length of the body

And what a Shooting Star means…

1. When the market opens, the buyers took control and pushed price higher
2. At the buying pressure, huge selling pressure comes in and pushed price lower
3. The selling pressure is so strong that it closed below the opening price

In short, a Shooting Star is a bearish reversal candlestick pattern that shows rejection of higher prices.

Bearish Engulfing Pattern

A Bearish Engulfing Pattern is a bearish reversal candlestick pattern that forms after an increase in price.

How to recognize it:

• The first candle has a bullish close
• The body of the second candle completely “covers/engulf” the body first candle (without taking into consideration the shadow)
• The second candle closes bearish

And what a Bearish Engulfing Pattern means…

1. On the first candle, the buyers are in control as they closed higher for the period
2. On the second candle, strong selling pressure comes in and closed below the previous candle’s low — which tells sellers have won the battle for now.

In short, a Bearish Engulfing Pattern tells you the sellers have overpowered the buyers and are now in control.

Understand Any Candlestick Pattern Without Memorizing

#1: Trending Move

What is a Trending Move?

A Trending Move is the “longer” leg of the trend.

If the candles are large/wide in range (in an uptrend), it signals strength as the buyers are in control.

If the candles are small/narrow, it signals weakness as the buyers are exhausted.

Example of a Trending Move:

#2: Retracement Move

A Retracement Move is the “shorter” leg of the trend.

If the candles are large, it signals the counter-trend pressure is increasing.

If the candles are small, it’s a healthy pullback and the trend is likely to resume itself.

Example of a Retracement Move:

#3: Swing Moves

Swing Points/Moves refer to swing highs and lows — the “points” on the chart where the price reverses from.

An example:

Points to Remember:

If the swing highs/lows move higher, then market is in an uptrend

If the swing highs/lows move lower, then market is in a downtrend

If the swing highs/lows are not moving higher or lower, then market is in a range

What’s Next

In my next blog, I will explain a simple Price Action setup in order to take trades in live markets. And the best part is there will be no indicators, so its purely Price Action based.