Arguably daily candlesticks are the most widely used technical tool to analyze price action. The reason for this is because they are designed to track opens and closes, which are the most volatile and liquid times of the trading day. When a market closes above the opening price, it is thought to have positive momentum. And when a market close below the opening price, there is negative momentum and sellers have the advantage.
There are seemingly endless candle patterns that have been recognized over the years. I was reviewing an article I saved from back in the 1990s, and it included and named 32 bullish candlestick patterns and 35 bearish patterns. The patterns take two to five days to form and the names are interesting to say the least. A few of my favorites: abandoned baby, homing pigeon, gravestone doji, stick sandwich, 3 white soldiers, dragonfly doji and identical 3 crows.
Rather than trying to remember the names and patterns, I choose to study what the patterns have in common. Names are not important; interpreting whether bulls or bears have the edge is.
When you view candles keep it simple:
- When you see few consecutive candles with small shadows or bodies (difference between open and close) it indicates neutrality. Thus, odds increase for a vertical move or breakout.
- When a bullish candle completely engulfs the previous one, a rally often ensues.
- Conversely, if a bearish candle engulfs the prior candle, a decline in price is common.
- Long candle bodies with tiny wicks (prices outside the candle body) typically lead to continuation in the direction of the close.
- Long wicks on the bottom with a small body on top (hammer shape) are a sign that bulls are taking control.
- Long wicks on top with a small bearish body often lead to negative price action.
Markets trend and consolidate. Astute technicians need to identify only a few phases: neutral, uptrend, downtrend and reversal. Rather than focus on names, learn to read subtle changes in price action. Charts reveal history as well as psychology and sociology of the participants.
Senior Technical Analyst
Market Taker Mentoring, Inc.