Hello friends, I am very well pleased to participate in this class presented by professor @reminiscence01 on Candlestick Patterns.
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Task 10 Question 2:
a) In your own words, explain the candlestick patterns and their importance in carrying out effective technical analysis.
b) In your own words, explain the psychology behind the formation of the following candlestick patterns:
- Bullish engulfing Candlestick pattern
- Doji Candlestick pattern
- The Hammer candlestick pattern
- The morning and evening Star candlestick pattern.
- The Harami Candlestick pattern.
Candlestick is a means by which information about the movement of the price of an asset is communicated. The candlestick chart happens to be among the prominent elements of technical analysis that facilitates traders to carry out a fast deciphering of price information with just a handy number of price bars.
Technical analysis has a base on candlestick pattern and this candlestick pattern is a greatly profitable tool to traders and investors as it illustrates the movement of price. The candlestick pattern is a graphically displayed price movement on a candle candlestick chart that helps in the prediction or forecasting of market price movement.
It is a financial tool for technical analysis, a kind of financial chart on which the price movement of currencies, derivatives, and securities are displayed as a pattern. It is very useful to traders and investors as it can be used based on chronological price patterns to forecast the prospective movement of price in the market.
Basically, candlestick charts display a day price movement hence, for a 20-day trading period in a month, there would be 20 candlestick patterns, nonetheless, an interval longer or shorter than one day can still be depicted.
Candlestick patterns helps in pointing out recent trading opportunities if one can be able to get at major candlestick formations like hanging man, hammer, inverted hammer, and morning star, which are patterns that demonstrate either a long upper or lower shadow and having small body. Also, candlestick pattern serve as a provider of secondary confirmation.
Acquiring knowledge of how to effectively and efficiently use candlestick isn't a waste but a good and advisable choice reason being that it does not only help in sighting recent trading chances but also assist in the verification of the possibility of virtual recent positions as well as mitigate the likelihoods of choosing losing stakes.
As a financial tool for technical analysis, it provides translucency about anticipated probable or conceivable moves or change in price. This implies that they can serve as a signal that facilitates investors to determine at what point to open either long or short position or perhaps make an exit. The knowledge of momentum, determination of movements, and understanding of existing market emotion in real-time are all obtainable with the help of candlestick patterns.
Dissimilar to other charts, candlestick patterns can explicitly inform more about when a financial asset opens or closes, assist in recognizing extensions and reversals and further are quite spot on in the forecast of an asset's future price hence, used be numerous traders and investors.
- Bullish Engulfing Candlestick Pattern:
Two candlesticks form the bullish engulfing pattern. Here the first candle being red with a short body is entirely engulfed by the second green bigger candle. The first candlestick is bearish while the second is bullish and this shows that an asset has greater buying attention than the selling one.
*The bullish engulfing pattern is visible in the downtrend market movement pointing out that the bulls are in charge and are driving asset's price upward. In this case, when an asset's price rises higher than the high of the second candle, a long position can be opened or when there is a guarantee of reversal of a downtrend. In a bullish engulfing candlestick pattern, the second candle opens lower than the earlier low, but as a result of the bullish pressure, it gives rise to a higher high.
- Doji Candlestick Pattern:
This pattern implies a contest between buyers and sellers which results in loss net gain for both parties. It is also, independently, a neutral sign but can be observed in other reversal patterns. The candlestick appears like a plus sign when the open and close of a market are nearly at the same point in price.
- The Hammer Candlestick Pattern:
This is a bullish reversal pattern that suggests a probable reverse to an upward movement of an instrument resulting from the bull's dominant presence in the market. Primarily, this is a single-candle pattern visible or located at the edge of a downtrend movement and its hammer-like nature makes it obvious and notable among other patterns and shows that the market is under the influence of the bears. At the existence of hammer pattern, a notable buying pressure follows low prices and the result is higher closing prices.
There is also an inverted kind of hammer pattern and it is formed in a downtrend and depicts price support or probable reversal of movement. This inverted hammer varies from the other hammer as it possesses a long upper shadow (wick) which shows a high buying pressure following the opening price, shortly succeeded by selling.
- The Morning and Evening Star Candlestick Pattern:
Morning Star
This is another prominent or famous bullish reversal candlestick pattern formed by three distinct candles. Among these three candles, the first has a red/black long body, come next is one with a short body (presumed to be Doji) which does not coincide with any of the candles before or after it and a long green/white candle closes the pattern. This Morning Star points out decompression of selling pressure, and the last candle among the three indicates the reinvigorated buying interest and often marks the commencement of a reversal of a bullish trend.
Evening Star
This is a reversal candlestick pattern that points out a probable bearish trend and is often formed by three various candlesticks. The first is one huge bullish candlestick, the second, a tiny-bodied bullish candlestick, and the third, a larger bearish candlestick. The second candlestick with a small body shows the period in which buyers begin to have a decline of interest and the bears are about to assume control. On the other hand, the third candlestick often opens at lower prices than the prior day but closes at levels close to the midpoint of the first day.
The retardation of buyer's interest and the prime of an uptrend is marked by the Evening Star candlestick. At the completion of the pattern, short positions can be opened by investors or traders. The Evening Star pattern is uncommon but when it is spotted, traders and investors go into action owing to the reliability of the pattern as a strong and vital indicator of future decline of the price.
- The Harami Candlestick Pattern:
Harami candlestick pattern is a bullish trend reversal pattern that occurs anytime the market is in a downtrend movement. Anytime there is an appearance of green/white candlestick following a sequence of a bearish candlestick, the Harami is seen. Harami ought to be enclosed within the past day's candlestick body and this could be pointing out a loss of pace by the trend but if this is followed by another up day, the implication is an approaching more bearish days.
Candlestick charts are among the vital financial tools for technical analysis used by traders and investors to acquire direct knowledge about price trends. Japanese candlestick patterns are applicable to virtually all markets as such appears to be a valuable tool for all categories of traders and investors.
Thank you Prof @reminiscence01 for the lessons and to all of you who made out time to read through my post.
#club5050 😀
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