Candle stick patterns cheat sheet:A Guide to Understanding and Trading Candle Stick Patterns
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Candlestick patterns are a popular trading technique used by both seasoned professionals and amateur traders to make investment decisions. They are visual representations of the price action on a stock or forex market, and can provide valuable insights into market sentiment and potential trends. In this article, we will provide a brief overview of the main candle stick patterns and their meaning, along with some guidelines for trading based on these patterns.
Candlestick patterns can be divided into two categories: reversal patterns and continuation patterns. Reversal patterns indicate a potential change in the direction of the market, while continuation patterns indicate that the current trend is expected to continue.
1. Reversal Patterns
a. Inverse Head and Shoulders Pattern
This pattern consists of three peaks and three troughs, with the second peak being higher than the first and the second trough being lower than the first. When the stock closes below the inverse head and shoulders pattern, it indicates a reversal in the direction of the market.
b. Double Top Pattern
This pattern consists of two peaks of approximately the same height, with the second peak being lower than the first. When the stock closes below the double top pattern, it indicates a reversal in the direction of the market.
c. Double Bottom Pattern
This pattern consists of two troughs of approximately the same depth, with the second trough being deeper than the first. When the stock closes above the double bottom pattern, it indicates a reversal in the direction of the market.
2. Continuation Patterns
a. Turning Patch Pattern
This pattern consists of two peaks and two troughs, with the second peak being higher than the first and the second trough being lower than the first. Turning patch patterns can indicate a continuation of the current market trend.
b. Hammer Pattern
This pattern consists of a long tail on the downward side or a small upper tail on the upward side, with the head of the candle being close to the open price. Hammers patterns can indicate a possible reversal in the direction of the market.
c. Grapple Pattern
This pattern consists of two peaks and two troughs, with the second peak being higher than the first and the second trough being lower than the first. Grapple patterns can indicate a continuation of the current market trend.
Trading Guidelines
When considering candle stick patterns in your trading strategy, it is important to remember that they are not always reliable indicators of future price movement. However, when combined with other technical and fundamental analysis, they can provide valuable insights into market sentiment and potential trends.
When analyzing a candle stick pattern, consider the following factors:
a. The length of the candle, particularly in relation to the price movement of the previous bar or day.
b. The depth of the candle's body, particularly in relation to the price movement of the previous bar or day.
c. The position of the candle relative to the moving average or other technical indicators.
d. The time frame of the candle stick pattern in relation to the broader market or market trend.
e. The confirmation of the pattern by other market indicators or trends.
Candlestick patterns are an invaluable tool in both fundamental and technical analysis, providing traders with valuable insights into market sentiment and potential trends. By understanding and applying the principles of these patterns, traders can make more informed decisions and improve their overall trading performance. However, it is important to remember that candle stick patterns are not always reliable indicators of future price movement, and should always be considered in conjunction with other market factors and indicators.