Candlestick Analysis is essentially a psychological analysis of traders' mentality at the time. For this analysis, candlestick chart pattern is used as a tool.
Just as a skilled artist portray beautiful imagery on a canvas, a skilled trader can portray traders' psychology at the time on a chart with the aid from candlestick chart pattern.
As the father of the psychoanalysis Sigmund Freud suggested, we human beings are essentially driven by greed and fear.
And in the case of trading this is so true. The mere fact that traders react to this natural instincts, i.e. greed to accumulate and fear of losing makes candlestick analysis work beautifully on a day-to-day basis.
In candlestick analysis, we study combinations of chandlestick chart pattern that consists more than one candles and are categorized as followings:
A candlestick reversal pattern indicate a reversal of the trend. In order for this candlestick chart pattern to work beautifully, the prior market trend must be identified as either bullish or bearish.
A bullish candlestick reversal pattern occurs ONLY in a downtrend. The formation of this pattern indicates that the bearish or downtrend is reversing. That being said, the bullish candlestick reversal pattern CAN NOT occur in an uptrend.
A bearish candlestick reversal pattern is the opposite of the bullish candlestick reversal pattern. It occurs ONLY in an uptrend. The formation of this bearish reversal pattern indicates that the bullish or an uptrend is reversing. That being said, the bearish candlestick reversal pattern CAN NOT occur in a downtrend.
While the Japanese literature of candlestick analysis refers to a large variety of candlestick reversal pattern, we will only focus our attention to few of the most popular and proven candlestick chart pattern in this article.
|Bullish Reversals||Bearish Reversals|
|Bullish Engulfing Candlesticks||Bearish Engulfing Candlesticks|
|Morning Star||Evening Star|
|Tweezer Bottom||Tweezer Top|
|Major Bullish Reversals||Major Bearish Reversals|
|Inverse Head and Shoulders||Head and Shoulders|
|Triple Bottom||Triple Top|
|Double Bottom||Double Top|
Identifying a trend (bullish or bearish) and continuation of that trend plays a very significant role in candlestick analysis.
Trendlines help identify the trend direction while continuation candle pattern helps traders identify whether the existing trend is going to continue until the candlestick reversal pattern formation occurs.
|Bullish Continuation||Bearish Continuation|
|Rising Three||Falling Three|
In our context of candlestick analysis, the text book perfect candlestick chart pattern that are discussed here are formed infrequently in a real world. Some flexibility should be applied in real world candlestick formation.
Sine the candlestick analysis is a subjective notion, the details on the formation of candlestick chart pattern as explained above might change from one trader to another from their viewpoint of experience and knowledge base.
|Major Continuation Pattern|