3 Candlestick Patterns That Pinpoint Reversals By Richard Krugel | October 12th, 2020 | If you run an internet search on candlestick patterns, you'll get a wide and dizzying array of results:
So what's a trader to do with all this information?
Nothing.
The truth is, you don't need to memorize—or recognize—even a fraction of that junk.
When I'm analyzing a market, there are only 3 candlestick patterns that I'm worried about.
Over the last decade, they have proven to be the most accurate at confirming entries at the areas I want to trade. | 1. Reversal Candlesticks | | Bullish Reversal Candlestick
The image above shows a bullish reversal candlestick, and you'll notice that it's a singular candle formation.
Here's what a bullish candlestick is telling us:
Price made a new low, but selling pressure very quickly dried up as an increase of buyers entered the market, resulting in the candle closing high off its lows, signaling buying strength. | | Bearish Reversal Candlestick
The inverse is true with this type of formation in a bearish scenario, and the image above shows that price made the highest high before reversing and closing strongly lower off its highs.
Here's what a bearish candlestick is telling us:
Price made a new high, but buying pressure very quickly dried up as an increase of sellers entered the market resulting in the candle closing lower off its highs, signaling selling strength. | | | | | 2. Hammer Candlesticks | | Bullish Hammer Candlestick
These candles are easy to spot and they generally have taller wicks than their bodies, resembling a hammer's handle and head.
They tend to close without (or with very little) upper wicks.
Here's what a bullish hammer candlestick is telling us:
Price opened near the highs of the candle and although sellers initially succeeded at pushing price lower, they lost the final battle when buyers tipped the scales in their favor again by closing price higher than the opening price. | | Bearish Hammer Candlestick (AKA Inverted Hammer)
These bearish formations are simply upside down hammers, and are also known as inverted hammers.
Here's what a bearish hammer candlestick is telling us:
Price opened near the lows of the candle, and although buyers initially succeeded at pushing price higher, they lost the final battle when sellers tipped the scales in their favor again by closing price lower than the opening price. | | | These reversal patterns are formed with 3 candlesticks, the middle candle being the doji candle which is then flanked on either side by two larger candles.
Doji candlesticks generally show up at areas of indecision and are defined by their very small bodies, which tend to form around the middle of the candle's length.
Here's what a bullish flanked doji is telling us:
Price came down strongly into an area when sellers were dominating, but there was a period of indecision at the next candle because price went up and down, not finding any real direction.
This indicated a balance between buyers and sellers, and at the very next candle, buyers tipped the balance in their favor and immediately moved price back up again. | | Bearish Flanked Doji
The opposite is true in the case of a bearish flanked doji, and in this example, the doji had a very small body where the bullish example had none.
Here's what a bearish flanked doji is telling us:
Price moved up strongly into an area when buyers were dominating, but there was a period of indecision at the next candle because price went up and down, not finding any real direction.
This indicated a balance between buyers and sellers, and at the very next candle, sellers tipped the balance in their favor and immediately moved price lower again. | | Conlcusion | These three patterns can provide us with powerful clues as to what a given market may do next, especially at important areas or levels we watch for reversals.
It does't matter what market or time frame you're trading, just pay attention to all the major swing highs/lows on your chart and you'll see these patterns popping up over and over again.
If you really want to get into the nuts and bolts of this whole approach, and you're ready to be on the right side of price action no matter which way its headed...
Click here to grab my Triple Threat Trading Patterns eBook.
There's no cost to download, and you'll get an actionable strategy you can apply right away. | | | |
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