Tuesday, 15 October 2013

Technical Analysis: - Candlestick Patterns

          Let us take a look at the basics of candlestick  and how they are read.
          The hollow (White) or the the filled (black) portion of the candlestick is called the body, which represents the opening and closing price. The long thin line above and below the body is known as shadows or tails, which represents the high & the low price.
          White  Candle represents the bullish because the stock price increases during the period and the black candle represents the bearish because the price decreases during the period.
          Some of the important candlestick pattern are discussed below:
  1. Doji: - Doji is formed when the opening and closing prices are virtually equal. The length of the upper and lower shadows can vary. 
    Doji represents indecision or tug-of-war between buyers and sellers. When Doji appears after an uptrend, it signals that the uptrend could be nearing to an end.  Even after doji forms, further downside is required for bearish confirmation. When a doji appears after a downtrend, it signals the downtrend could be nearing to an end. Even after the doji forms, further upside is required for bullish confirmation. Following are the types of Doji: 
  2. Bullish Engulfing Pattern: - Bullish Engulfing is a bullish reversal pattern. It could be formed at the end of a downtrend or within an uptrend. It is two-candle pattern. The first candle has small bearish body and the second candle has a large bullish body. The small body of the first candle represents hesitancy to continue a downtrend, while the large body of the second candle represents that the buying pressure has overwhelmed the selling pressure, suggesting a potential reversal of trend.  
     
  3. Bearish Engulfing Pattern: - Bearish Engulfing is a bearish reversal pattern.  It could be formed at the end of an uptrend or at the resistance. It is also a two-candle pattern. The first candle has a small bullish body and the second candle has a large bearish body. The small body of the first candle represents hesitancy to continue an uptrend, while the large body of the second candle represents sellers have overwhelmed the buyers, suggesting a potential reversal of trend. 
     
  4. Hammer: - Hammer is a bullish reversal pattern. It can be formed at the end of a downtrend or at the support. Its appearance is top-heavy with the real body being either color (whit or black). A hammer has a long lower shadow and this is the most important aspect of this candle. It indicates that the bears attempted to push price lower, but failed and the bulls are stepping in.  The following day needs to confirm the Hammer's bullish reversal signal with a strong bullish candle which is a gap up or a long white candle on a high volume. 
  5. Hanging Man: - Hanging man is a bearish reversal pattern. It is formed at the end of an uptrend or at the resistance. A hanging man is top-heavy with the real body and has a long lower shadow. The color of the real body is irrelevant. The long lower shadow formed indicates the selling pressures might just begin. The next trading day needs to confirm the Hanging Man's bearish signal with a strong bearish candle which is a gap down or a black candle on a high volume. 
  6. Shooting Star: - Shooting star is a bearish reversal pattern. It could be formed at the end of  an uptrend, or at the resistance. It is opposite pattern of Hammer. A shooting star is a bottom-heavy with a long upper shadow. The long upper shadow of a shooting star is the major important aspect of the pattern. It indicates that bulls attempted to push price higher but failed. The following day needs to confirm this with a strong bearish candle which is a gap down or a long black on a strong volume.
  7. Inverted Hammer: - Inverted Hammer is a bullish reversal pattern. It looks similar the shooting star pattern but it is formed at the end of a downtrend or at the support.  Inverted hammer is a bottom heavy with real body and has a long upper shadow. The long upper shadow of a inverted hammer is the important aspect of the pattern. It indicates that the buying pressure might bust begin. The next trading day needs to confirm its bullish reversal signal with a strong bullish candle. 

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