Use Candlestick Patterns To Identify Trend Reversals In Price Action!

Published: 20th January 2010
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Steve Nison is considered to be an authority on candlestick charting. In the last decade, candlestick charting has become highly popular with the traders. Now many use candlestick charts in their daily trading. On the candlestick charts there are some very important candlestick patterns that can give leading indication of the trend reversal that is about to take place in the market. If you can spot these candlestick patterns accurately, you can become a highly successful trader. A candlestick body is formed with the opening and closing price of the stock,security or the currency pair and the wick is formed by the opening and the closing price. By taking a look at the candlestick charts, you can quickly judge the mood of the market whether the bulls are prevailing or the bears are prevailing!

A Hammer represents the bottom of the trend. It occurs at the end of the downtrend. Hammers have small bodies and long shadows. Hammers have infact long lower shadow and a small upper shadow. What a hammer reveals is that after the price of the security opened on the market, sellers drove it down further.

However, by the end of the day, the buyers were able to recoup most of the price lost during the day and were able to close off at or almost equal to the high of the day. Now, if the price action just after a hammer is formed is more down, it is an indication that the hammer formed was not a true hammer becuase in case of a true hammer, the price action is not going to go down further. When confirming a hammer, volume should also be taken into consideration. Hammers formed on heavy volume are considered to be geniune.

The other candlestick pattern as important as the hammer is the Hanging Man. Hammer is formed in the downtrend and the hanging man is formed in an uptrend. You will find the hanging man at the very top of the price action. This means that the uptrend is about to end and an downtrend is underway. Traders should take action accordingly. If a hanging man is formed and the price actions till continues upwards, it means there was no hanging man. Hanging man can only be formed at the very top of the price action. It should be confirmed with the volume information.

Bullish and Bearish Engulfing Patterns are another candlestick trend reversal patterns. A Bullish Engulfing Pattern is formed when a candlestick bar opens lower than the previous candlestick's close and closes higher than the previous candlestick's open.

You can say, the latest candle body engulfs the last candle body on the chart. Now why we call this a Bullish Engulfing Pattern? It is called the Bullish Engulfing Pattern as it signals the major defeat of the bears. However, if the subsequent price trades below them, it is an indication that the engulfing pattern is not true and should be ignored.

On the other had, the Bearish Engulfing Candlestick Pattern is formed at the very end of an uptrend and it marks the impending reveral and the start of a downtrend. This engulfing pattern also depends on two consecutive candles formed with the first candle body being engulfed by the subsequent candle body. The first candle body will be small and the second candle body will be large. The firt candle opens higher than the second candle's close and its close is lower than the second candle's open thus the second candle engulfs the first candle body.

Now, candlestick charting is being used extensively by the traders in their dail trading decisions. What you need to do is to master these candlestick patterns and combine them with technical indicators to generate highly accurate trading signals!


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Mr. Ahmad Hassam has done Masters from Harvard. Know these Candlestick Patterns. Download the Ultimate Swing Trading Software FREE!

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