What moves markets are a mix of different factors— all stirred together like that punch bowl in a college frat party.

Driven by the emotions of fear and greed with a dash of finance thrown in.

So how does a trader make heads or tails of the stock market when there is so much noise.

Believe it or not…

Some of the best traders in the world focus only on price action—specifically, reacting to what they see on a stock price chart.

This study of how emotions interact with markets is part of the technical analysis ecosystem better known as behavioral technical analysis.

At its core, trading is a decision-making process based on the analysis of data and a judgement on risk and uncertainty.

Do you know why so many police officers and detectives have degrees in psychology and not in lifting weights?

Because in order to do their job and solve cases, detectives need to predict the future actions of a criminal.

To a degree, that thought process also applies to trading…

As a trader, your number-one priority is to anticipate the market whether that’s riding the current trend or getting in on a reversal.

Want to put the power of psychology to work for you by utilizing price charts?

 

Candlestick Patterns

Candlestick patterns are used to identify and predict future price movement in a stock.

Technical analysis is a psychological tool used to evaluate stock prices and identify trading opportunities in price trends and patterns seen on charts.

Traders believe that past trading activity and price changes of a stock can be valuable indicators of the security’s future price.

But… before you start trading, it’s important to become familiar with the basics of candlestick and patterns that are available to you.

While candlestick patterns are great to identify future price, it’s best combined with other forms of technical analysis to confirm the overall direction of the market.  

 

What is a candlestick?

A candlestick is a way of displaying information about an asset’s price movement.

Candlestick charts are one of the most popular components of technical analysis allowing for a trader to interpret price information quickly and accurately with just a few price bars.

First, the three basics of a candlestick:

  1. The body – Represents the open and close range for the day
  2. The wicks – Represents the highs and low range for the day
  3. The color – Represents the direction of the market from the open to close.  Green for bullish, red for bearish.

 

 


With practice, a trader can identify these patterns quickly and recognize significant market details at a glance.

In addition to providing quick market information, a trader can stitch together multiple candlesticks to form patterns that represent the psychology or trading activity of the price of the stock.

Candlesticks provide traders with such detailed information they are able to find opportunities to buy or sell a stock based on price action alone.

And some candlestick patterns are so powerful they can provide insight into the balance between buying and selling pressures and identify continuation patterns or indecision between buyers and sellers.

 

Bullish candlestick patterns

Bullish patterns are found in many places in a stocks price formation.

It is important to identify when market conditions favor a bullish trade, or a trader will find himself in what’s known as a bull trap.

The highest rate of success trading a bullish pattern are in trend continuation patterns or in trend reversal patterns.

The Hammer

The hammer candlestick pattern is formed by 

  1. A short body with a long lower wick
  2. Found at the bottom of a downtrend

A hammer shows the trader that selling pressure was overcome during the day and buyers drove the price back towards the high.

Ideally, the body should be green, indicating to the trader that there is even stronger buying pressure compared with a red bar.

An example of the hammer pattern:

 

 

Inverted hammer

A similar pattern to the hammer pattern is the inverse hammer.

The major difference is that the inverse hammer has a long higher wick and a short lower wick.

The inverse hammer suggests that buyers will soon have control of the market and drive prices higher.

An example of an inverted hammer pattern:

 

 

Bullish Engulfing 

The bullish engulfing pattern is a multi-candle pattern that shows the bulls overcoming the bears.

In a bullish engulfing pattern, the first candle is a short red body that is completely engulfed by the second larger green candle.

Even though the second day opens lower than the first, the bulls are showing they are in control and drive price up and over the highs of the previous day.

Here is a detailed diagram that breaks down the bullish engulfing pattern:

 

 

Three White Soldiers

The Three White Soldiers pattern occurs over 3-5 days.

This pattern is most powerful after a reversal is made showing that the bulls are continuing to push the stock higher.

The Three White Soldiers consists of consecutive long green candles with small wicks that open and close  higher (a green bar) than the previous day.

This is an example of the Three White Soldiers pattern:

 

 

Wrapping Up

Traders love to use candlestick patterns and they are commonly used to identify and predict future price movement in a stock.

Technical analysis is a psychological tool used to evaluate stock prices and identify trading opportunities in price trends and patterns seen on charts.

Traders believe that past trading activity and price changes of a stock can be valuable indicators of the security’s future price.

Remember… While candlestick patterns are great to identify future price, it’s best combined with other forms of technical analysis to confirm the overall direction of the market.

Looking for more information on technical analysis and how to combine them with candlestick patterns for explosive gains?

Check this training from Jason Bond as he teaches his two favorite chart patterns to trade.

Author: Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com weekly podcast WealthWise where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share the wisdom needed to live a wealthy life.

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