How to Interpret Candlestick Patterns
When it comes to interpreting the candlesticks, experience, and knowledge of how candlesticks fall in series could be a big asset. Candlesticks come in a wide range of patterns that could be interpreted differently. So joining Investors Hangout can help you memorize some of the patterns to help you to trade on stock markets successfully. This article looks at some of the common interpretations of candle patterns.
#1. The hammer candlesticks
It has a small real body and one shadow. The shadow is long and extends downward with a white body. When it comes after several or a series of downward trending black candles, it implies that reversal is imminent. Also, it suggests that the close will be higher compared to the previous close. A longer shadow suggests that the sellers have achieved a new low and that buyers have emerged. It means that the close will be higher than the opening price.
#2. The hanging man
It comes after a series of up trending white candles. It features a long lower shadow which shows that the bulls are unable to prevent the bears from establishing new lows and ensuring that the close is kept below the open. When seen after an upward trend, it implies that the trend has come to an end.
It is a small real body candle coming after a pregnant (Harami). It means that sentiments are likely to change at any time. A Harami requires two candlesticks to help establish a pattern. Note that a Harami could be black, or white. If it is small in the body, it is a strong indication that a reversal is on the way.
If it is tiny and coming after a huge bar, it expresses extreme emotions. When a big white candle precedes a small black Harami, it shows that an upward trend is about to start.
Typically, Harami should have two candles; the second candle should not be outside the previous candle and should close slightly above half the preceding candle’s body. A bearish Harami indicates the bulls market is coming to an abrupt end. But two candles may not be enough to confirm a change in trend. Thus, a third candle that helps it create a 3 Inside Down pattern confirms that the bears have taken over. A trader can take advantage of Harami by taking profits once the pattern has been seen.
#4. Bullish Harami
It shows that a bearish trend has come to an end and may be reversing. It is a good trend that allows traders to enter a long position. Usually, the bullish Harami is represented by a long candlestick that followed by a smaller bodied candle (maybe a doji) contained entirely in the range of the preceding candle. But it must resemble a pregnant woman. For a Harami to be considered bullish, a smaller body must come after a subsequent doji but should close higher within previous candles. It shows that a reversal is likely to occur. The little white candle is contained within the opening and closing of the black candle and signals that traders should buy.