Candlestick charts may look complicated or confusing to the uninitiated, but they are a simple-to-use power tool for traders.
Candlesticks plot the open, high, low and closing price for a specified period, and can create patterns that traders often look to as an indication for when a stock could potentially continue or reverse its trend.
The hammer pattern is a widely used indicator of bullish trading, and a bullish reversal. It looks like what it is named for; the long lower wick looks like the handle and the short body at the top of the candlestick looks like a hammerhead.
With that basic picture in your head, let’s see the hammer in place in this chart on Astoria Financial Corp. (AF).
In the annotated chart, notice that once Astoria Financial closed with a hammer pattern, the stock continued to trade in a bullish fashion.
A dragonfly doji is a candlestick pattern that could potentially indicate a bullish reversal at the end of a downtrend. With a dragonfly doji, the open, high and close are relatively close to each other in some specified period, while the low price is below those prices.
Here’s a look at a dragonfly doji:
In this chart on Emerson Electric Co. (EMR), notice that the stock formed a dragonfly doji in a down channel, which could be an indication that there may be a bullish reversal in the cards.
Three Black Crows
The three black crows pattern is considered bearish, with three black or red candlesticks consecutively potentially indicating an increase in bearish momentum.
Here’s an example from the daily chart on Yamana Gold Inc. (AUY):
Here’s a look at how the trade turned out:
Like all indicators, candlestick patterns aren’t always reliable and the resulting trades may not always turn out as you might expect. The indicators outlined here are just simple patterns with a high probability of either reversing or continuing. Keep these in your trader toolkit, but guard against the times when these patterns don’t work out by properly managing the risk in your positions.