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Published On: Sat, Dec 29th, 2012

Performing Technical Analysis using Candlesticks

You can utilize candlestick patterns to detect and confirm key price formations, e.g. retracements, reversals, breakouts and fakeouts etc. For instance, you can make great use of candlesticks to help you determine and distinguish between reversals and retracements. There are a great number of valuable candlestick patterns that traders have identified over the years as being very useful. Here are the descriptions of some of the most popular configurations:

 1.   Morning Star

This formation presents a three-day candlestick pattern that is indicative of a strong bullish reversal.  Day one is usually represented by a long bearish candle; the second proceeds slightly lower followed by a third bullish candlestick that closes above the central point of day one, as illustrated in the next diagram.

 Morning Star Candlestick Chart

2. Dark Cloud Cover

This is a bearish reversal configuration that consists of a large bearish candlestick that projects a vivid shadow over the previous bullish one. To form such a pattern, the second candlestick of this formation must open close to its highest point before closing beneath the center of the first candlestick, as shown in the next diagram.

Dark Cloud Cover Candlestick Chart

3. Hanging Man

This candlestick comprises one candlestick possessing a small body which is frequently produced when a bullish trend peters out. Investors tend not to be very interested in the body’s color but, instead, focus on the size of the candlestick’s tail. This is because the hanging man tends to display a tail which is normally double the size of the body. There is also little or no upper wick present, as displayed in the following diagram. This candlestick is a strong bearish sign as it is usually generated by intense selling pressure that was only rejected towards the close of the candlestick.

candlestick chart 3

4. Shooting Star

This configuration is created when the opening, low and closing prices of a candlestick have almost the same value. The shooting star’s other prime characteristic is that it displays a long wick that is practically twice the length of the body, as demonstrated by the middle candlestick in next diagram. This is a major bearish indication which advises when sellers begin to reject the current bullish trend.

 Shooting Star Candlestick Chart

5. Doji

This candlestick is created when price both opens and closes towards the center of its formation. The Doji displays an equally long tail and wick, as demonstrated in the next diagram.  By itself, the Doji presents neither a bearish nor bullish indication. As such, investors prefer to analyze it as part of a three-candlestick configuration. On its own, the Doji indicates that traders are in a state of indecision and not confident about whether to sell or buy the asset in question.

Doji candlestick chart 5

6. Hammer

This arrangement is normally generated when a strong bearish trend begins to stall and often signifies that an upwards reversal is imminent. The hammer possesses a minimum body and is created towards the closing time of the present day’s trading. This pattern exhibits hardly any upper wick but displays a sizeable lower tail which is usually double the length of its body, as displayed in the next diagram. Essentially, the hammer is the last one of a three bearish candlestick pattern and strongly indicates that price has rebounded against a key support level.

Hammer Candlestick Chart

 

Summary

Candlesticks possessing either a long tail or wick with minimum body length are considered by many experts to display the most useful patterns e.g. morning star, hammer, hanging man inverted hammer. As such, you are well-advised to focus your efforts on identifying such configurations especially using the longer timeframe trading charts from the daily upwards.

You can then exploit these candlestick formations as follows. For example, envisage that you have been unsuccessful in identifying any quality trading opportunities by using your trading strategies. Under such circumstance, you could commence a new search by attempting to identify one of the candlestick formations listed above.

For example, consider that you have detected a morning star on a daily chart. You should then attempt to determine by using fundamental and technical analysis the exact reasons why this structure was created. By doing so, you could then confirm if a full-scale bullish reversal is imminent and whether you should activate a new CALL binary option using the applicable asset as its underlying security.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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