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5 Candlestick Charts Every Trader Should Know How to Read | gt.io
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Date:
01st Oct 2020
Author:
gt.io

5 Candlestick Charts Every Trader Should Know How to Read

Candlestick chart patterns were first developed in the 18th century, by a wealthy Japanese businessman, Munehisa Homma, to analyse rice contract prices. But these patterns were so efficient, they soon became the basis of trading in Japan. Today, they are one of the most versatile technical indicators for predicting market movements. 

In total, there are 42 recognized candlestick chart patterns. But not all of them are equally reliable. Here are 5 candlestick patterns that perform well for traders of all levels. 
 
The evening star is a pattern that signals the reversal of a trend. It consists of a bearish pattern and is generally used for trading forex. For an evening star pattern, there should be 3 candles. The first, a large white (or green) candle that signifies high buying pressure and continued uptrend. The second is a smaller candle which is also bullish but has a smaller body. This shows that there is fatigue in the uptrend. The last one is a large black (or red) candle. Here, the asset opens at a price lower than the previous day. It generally closes near the middle of the first candle.
 
The evening star is a reliable indicator for identifying the start of a downward trend. However, finding it can be difficult at times between all the price data. Therefore, trendline and price oscillators can be used to confirm the pattern.
 
The abandoned baby is a bullish pattern that indicates the reversal of a downtrend. It is also composed of 3 candles. In this pattern, the first is a large black (or red) candle, along the downtrend. The second is a narrow Doji candle, which gaps below the closing of the first candle. This indicates fresh sellers failing to appear. The last is a bullish white (or green) candle that opens higher than the second candle. 
 
“Doji” in Japanese means mistake. This points to the rarity of such patterns. Doji candlestick patterns occur when the opening and closing price of an asset are almost equal. These look like a cross or plus sign, with almost no body. The Doji pattern is formed when bullish traders are trying to push the price upwards but bearish traders reject this price rise, pushing it back. Similarly, it can also occur if bearish traders are trying to lower the price but face almost equal resistance from bullish traders. This causes the formation of a wick like pattern.
 
Doji patterns point towards a period of indecisiveness from both the bullish and bearish sides. This causes the price to just hover in between. Many traders interpret it as a sign of a reversal. But that is not always the case. There can be times when the buyers or sellers may be gaining momentum, continuing the trend. 
 
In a bearish pattern, there are 3 candle sticks, each closing on a progressively lower level. The opening level of the fourth bar is even lower. But it reverses and closes above the high point of the first candle. There can also be a bullish three-line strike, in which the candles close on a progressively higher level, followed by a strike candle that is bearish.
 
This is a bearish pattern that indicates an uptrend reversal. It starts near the top of an uptrend. In this pattern, the first candlestick opens at a point slightly higher than the closing point of the previous bar. But the price is pushed lower throughout the session. If such behaviour continues over 3 sessions, a black crow pattern is formed. Traders interpret it as the start of a sustained bearish trend.
 
For making the most of the Japanese candlestick patterns, it is best to have a definitive strategy with stop-loss levels and pre-determined entry and exit levels.