Chart Patterns: Understanding Candlestick Formations

Chart patterns are very vital tools in technical analysis to study historical data and then predict the future price movements. Of the various patterns, the prominent ones in candlestick formations are easily visible and effective in measuring the market sentiment. Some of the patterns such as doji, hammer, and engulfing formations are used to point to possible swings or continuations.

A doji is characterized by the appearance of a very small or non-existent body; signifies that the market opened and closed at nearly the same price. It shows indecision on the part of buyers and sellers and frequently indicates a prospective change in trend, especially in the top or bottom of the trend.

The hammer is a solitary candlestick with a small body located near the exterior and a long lower shadow. Appears similar to a hammer. This pattern will usually occur after a downtrend and is a reversal upward pattern since buyers are again in charge after suddenly selling pressure.

Engulfing patterns are those in which a single candlestick completely 'engulfs' the previous candlestick; bullish and bearish versions are available. While a bullish engulfing pattern suggests the possible reversal into an uptrend, that of a bearish engulfing pattern indicates its contracting tendency.

Knowing well candlestick formations enables traders to make informed decisions and helps better predict market movement while reducing exposure to risk.

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~ Nesaty