Candlestick Charting For Dummies, 2nd Edition

This cheat sheet shows you how to read the data that makes up a candlestick chart, figure out how to analyze a candlestick chart, and identify some common candlestick patterns. Candlestick formations and price patterns are used by traders as entry and exit points in the market. Forex candlesticks individually form candle formations, like the hanging man, hammer, shooting star, and more. Forex candlestick charts also form various price patterns like triangles, wedges, and head and shoulders patterns. All currency traders should be knowledgeable of forex candlesticks and what they indicate.

• The term for a stock with price action moving sideways is consolidating.
• However, it’s not a foolproof indicator of an uptrend, and traders need to consider the broader market context before making any investment decisions.
• The small real body can be either black or white (red or green).
• For example, candlesticks can be any combination of opposing colors that the trader chooses on some platforms, such as blue and red.

Just above and below the real body are often seen the vertical lines called shadows (sometimes referred to as wicks). These two patterns are common examples of bullish three-day trend continuation patterns. These patterns are common and reliable examples of bullish two-day trend continuation patterns in an uptrend. The gravestone doji, on the other hand, appears like an “inverse T”. The upper wick should be long, and this represents a rejection of higher prices. Despite buying activities, price eventually closed near or at the open, at the low of the candle.

Bullish vs. Bearish Candles

An example of a trend line break on Consolidated Edison (ED) is shown here. The candle might look the same, but the previous trend and its direction give different signals. Notice that each candle pattern in the hammer family is a reversal pattern that could be bearish or bullish depending on what directional move preceded it. The smaller the timeframe you use, the closer you look into the price action of the asset. Let’s say you are looking at an H4 chart like the one shown above. When you switch to the H1 chart, you will have 4 times more candles.

Candlestick charts are more visual due to the color coding of the price bars and thicker real bodies. Highlighting prices this way makes it easier for some traders to view the difference between the open and close. If the harami pattern occurs after a downtrend, it may signal a possible bullish reversal. Conversely, if it occurs after an uptrend, it may signal a bearish reversal.

Constructing a candlestick chart

​An engulfing pattern on the bullish side of the market takes place when buyers outpace sellers. This is reflected in the chart by a long white real body engulfing a small black real body. With bulls having established some control, the price could head higher. The above chart shows the same exchange-traded fund (ETF) over the same time period. The lower chart uses colored bars, while the upper uses colored candlesticks.

Some traders prefer to see the thickness of the real bodies, while others prefer the clean look of bar charts. These charts are a few of the most common and reliable bullish two-day trend reversal patterns in an uptrend. While there is a myriad of patterns (and their corresponding names), I hope you can see that it’s about understanding what the candles mean. How market psychology is reflected in these open, high, low and close prices, and what this means in consideration of the price trend.

Candlestick Charting For Dummies

The term for a stock with price action moving sideways is consolidating. Consolidating happens when the price of a stock stays between two price levels and moves sideways. The stock shown above consolidated for three months between $67 and $73. When a stock is in an uptrend, more hollow candles are present. When a break in a trend line occurs, you may experience heavy selling. On most charts, if you can draw a multi-month trend line, the candle that closes below the trend line is usually a big filled candle.

This type of candlestick represents a price increase over the period in question. The default color of a bullish Japanese candlestick is green, although white is also often used. It is believed that three candles progressively opening and closing higher or lower than the previous one indicates an upcoming trend reversal. Popular three-candle reversal patterns are Three White Soldiers and Three Black Crows. The fifth and last day of the pattern is another long white day.

Engulfing Candlestick Patterns

Here are two common examples of bearish three-day trend reversal patterns. These are a couple of the most common bearish three-day trend reversal patterns. Here are a couple common bullish three-day trend reversal patterns. These figures shows some of the most common and reliable types of bearish two-day trend reversal patterns in an uptrend. If you’d like to learn more about reading a candlestick chart, check out our in-depth interview with Andrew Lokenauth.

If it is followed by another up day, more upside could be forthcoming. ​A bearish engulfing pattern develops in an uptrend when sellers outnumber buyers. This action is reflected by a long red (black) real body engulfing https://g-markets.net/ a small green (white) real body. The pattern indicates that sellers are back in control and that the price could continue to decline. Do note that candlestick patterns should NOT be used in isolation.

It is a bearish signal that the market is going to continue in a downward trend. The Piercing Line pattern is a bullish reversal pattern that occurs after a downtrend and suggests a possible trend reversal. This pattern is characterized by two candlesticks, where the first one candlesticks for dummies is bearish, and the second one is bullish. The second candlestick opens below the previous one’s low but then closes above the midpoint of the previous one, indicating a potential shift in market sentiment. In this case, the inverse hammer is actually a bullish pattern.

Candlestick charts show that emotion by visually representing the size of price moves with different colors. Traders use the candlesticks to make trading decisions based on regularly occurring patterns that help forecast the short-term direction of the price. The Dark Cloud Cover is a bearish reversal pattern that indicates a possible trend reversal in the market.

Stock Charts For Dummies

This is followed by three small real bodies that make upward progress but stay within the range of the first big down day. The pattern completes when the fifth day makes another large downward move. It shows that sellers are back in control and that the price could head lower. For example, candlesticks can be any combination of opposing colors that the trader chooses on some platforms, such as blue and red.