Technical analysis is an analysis of past price movements to predict future price movements. With technical analysis, we can know when is the right time to buy and sell (eg stocks).
To better understand this analysis, my Finansialku friends can read articles about technical analysis.
In analyzing price movements, there are 3 types of charts that you can use, namely line charts, bar charts, candlestick charts .
Compared to other types of charts, candlesticks are more commonly used and have the advantage of being able to show the movement of the highest, lowest, open and close of a stock in a certain period.
Price movements are formed from the existence of a power struggle mechanism between sales and purchases. If the number of sales is greater than the number of purchases, the price will fall.
Conversely, if the number of sales is less than the number of purchases, the price will increase. The power struggle mechanism between selling and buying is what will be reflected in the candlestick .
In units of time, candlesticks can be formed in minutes, hours, daily, monthly, and yearly. And from each of these time scales, the shape of a candlestick can be different.
Just like using binoculars, you can analyze candlesticks from a large time scale to a small time scale to get a more detailed picture of a situation.
The history of candlesticks can be read here:
History of Candlestick Charts and Munehisa Honma
Before you understand about candlestick patterns , it’s a good idea to know how to read a candlestick first .
How to Read Candlesticks ?
Let’s dissect the components of a candlestick through the following image:
Candlestick Components
The candlestick components consist of:
Body (Body)
The candlestick body shows the range of the opening price and closing price of a trade that is formed over a unit of time (minutes, hours, daily, monthly, or yearly).
If the closing price is higher than the opening price, the candlestick will be green (the stock price went up because the buy > bid).
On the other hand, if the closing price is lower than the opening price, then the candlestick will be red (the stock price fell because selling > buying).
The longer the body of the candlestick , the more intense the pressure to buy and sell shares.
The shorter the body of the candlestick , the less movement (opening and closing prices are close together) and represents a consolidation of stock prices .
Tail (Wick/Shadow)
The tail of the candlestick shows the lowest point and the highest point of price movement during a unit of time (minutes, hours, daily, monthly, or yearly).
If the tail extends downwards, it means that during that period of time sales dominated and the price moved down, but the buying back went up so that it reversed direction.
If the tail extends upwards, it means that during that period of time buying dominated and the price moved up, but the buying went back down so that it reversed direction.
The longer the tail of the candlestick , the more intense the buying or selling force dominates over a period of time, so that the price during robot trade far exceeds the opening price and closing price.
The shorter the tail of the candlestick , the selling or buying traded does not fluctuate too much from the opening price or closing price.
Types of Candlestick Patterns
Thomas Bulkowski in his book entitled Encyclopedia of Candlestick Charts , there are 105 types of candlestick patterns .
Of the 105 candlestick patterns , it was found that there were only 7 candlestick patterns that had success between 50% to 67%, the rest had success rates below 50%.
Although candlestick patterns can provide price trend signals quickly, you need to be careful in choosing candlesticks as a trading reference .
There are so many candlestick patterns , it often makes it difficult for traders to memorize and analyze the candlestick patterns that appear.
In addition, candlestick pattern analysis cannot run alone. You also need to learn about other technical analysis techniques besides candlestick patterns .
Ideally, this candlestick is combined with trend analysis, support & resistance , and other indicators to confirm the signal.
[Also Read: Definition of Uptrend Is & Definition of Downtrend Is]
Candlestick patterns can be formed from one, two, or three candlesticks . In general, a candlestick pattern will show:
- Trend reversal or trend change ( reversal pattern ).
- Continuation trend ( continuation pattern ).
For example: the price trend was up ( bullish ), then turned down ( bearish ).
For example: The trend continues to increase/decrease from the previous candlestick .
Basic Candlestick Patterns (1 candlestick )
You don’t need to memorize 150 candlestick patterns . If you want to be proficient in candlestick pattern analysis , then here is the basic 1 candlestick pattern that you should know.
‘ Marubozu’
‘ Marubozu’ in Japanese means “dominant”. The ‘Marubozu’ candlestick type does not have a tail and a full body .
‘Marubozu’ pattern with green color indicates an uptrend ( bullish ). This means that the opening price is the same as the lowest price, and the closing price is the same as the highest price.
This condition shows that buyers fully dominate the price movement from opening to closing. Usually, this indicates an uptrend ( bullish ) or a change in trend ( reversal ).
Meanwhile , the red ‘Marubozu’ pattern indicates a downtrend ( bearish ). This means that the opening price is the same as the highest price, and the closing price is the same as the lowest price.
This condition shows that the sellers fully dominate the price movement from the opening to the close. Usually, this indicates a downtrend ( bearish ) or a change in trend ( reversal ).
‘Spinning Tops’
The ‘ ‘ Spinning Tops ‘ ‘ pattern is an s candlestick with a long tail on both sides. The color of the body candle can be green or red, and the tail can be long or short.
The ‘Spinning Tops’ pattern indicates an almost balanced strength between bullish and bearish (in a floating state).
If the candlestick pattern shows ‘Spinning Tops’ in an uptrend ( bullish ), then you need to be careful.
This condition can mean the trend is starting to weaken so that there may be a trend change or a pause, and vice versa.
‘Doji’
The ‘Doji’ pattern is a pattern where the opening price is the same as the closing price, so there is no body candle (only a line). That is, there is a balanced fight between sellers and buyers.
If the ‘Doji’ pattern appears after the rally of the candlestick pattern with a long body, then you need to be careful because it means the trend is starting to weaken.
But when a ‘Doji’ pattern appears , don’t be in a hurry to buy/sell either.
You can confirm a reversal by waiting for the next candlestick to form , namely a green candlestick ( bullish reversal ) or a red candlestick ( bearish reversal ).
Here are the various ‘Doji’ patterns that can appear:
‘Hammer’ & Hangin’ Man
The ‘Hammer’ and ‘Hanging Man’ patterns are similar, but can give different signals, depending on the trend of price movements that occurred before this candlestick pattern appeared.
The ‘ Hammer ‘ pattern that appears when the trend is down, gives a signal of a bullish reversal pattern . The ‘Hammer’ pattern is a sign that the price has touched its bottom and will soon move up.
The long tail indicates that the sellers are still trying to push the price further down, but the buyers have managed to show strength and close above the opening price.
On the other hand, the ‘ Hanging Man’ pattern that appears when the trend is up, signals a bearish reversal pattern .
The ‘Hanging Man’ pattern is a sign that the price has touched the top and will soon go down.
The long tail indicates that the sellers are trying to take over to push the price down, but the buyers can still show strength even if the closing price cannot exceed the opening price.
Even though the ‘Hammer’ and ‘Hanging Man’ patterns appear , don’t be in a hurry to make a buy/sell decision. You can confirm from the formation of the next candlestick (eg ‘Marubozu’ ) or use other indicators.
‘Inverted Hammer’ & ‘Shooting Star’
Similar to the patterns ‘ ‘ Hammer ‘ ‘ and ‘ ‘ Hanging Man ‘ ‘, but the ‘Inverted Hammer’ ‘ and ‘ ‘Shooting Star’ ‘ candlestick patterns show different signals, depending on the trend of price movement that occurred before this candlestick pattern appeared.
The ‘Shooting Star’ pattern appears when an uptrend occurs . While the ‘ Inverted ‘Hammer’ ‘ pattern appears when the trend is down.
The ‘ ‘Shooting Star’ ‘ pattern means that sellers are starting to try to take over the market, but buyers can still show strength even if the price ends up closing below the opening price. The upward trend has shown signs of weakening.
[Also read: Why Stock Traders Should Know Candlesticks]
The ‘ Inverted Hammer’ ‘ pattern means that buyers are starting to show strength to take over the market, but sellers can still show strength even though in the end the price closed higher above the opening price.
The downward trend has shown signs of weakening.
Conclusion
How about after learning the basics for candlestick patterns ? Hopefully this article can be useful for you beginner traders in stocks, cryptocurrencies , forex , etc…
From understanding the 1 candlestick pattern , you will find it easier to understand if you meet 2 or 3 candlestick patterns .
Of course, this candlestick pattern analysis cannot be the only determinant in buying/selling decisions. You should also learn other technical analysis.
And most importantly you have to keep practicing and practicing to hone your flying hours in trading .