Use Candlestick Patterns To Identify Trend Reversals In Price Action!

There are many candlestick patterns that are used by traders to identify trend changes in a security price

. The most popular candlestick trend reversal pattern is the Hammer. First if you don't know anything about candlesticks, a candle is formed with the high, low, opening and closing price of a security. Candlesticks have much in common with the bar charts but they have many things different too as well.A Hammer represents the bottom of the trend. It occurs at the end of the downtrend. Hammers have small bodies and long shadows. Hammers have infact long lower shadow and a small upper shadow. What a hammer reveals is that after the price of the security opened on the market, sellers drove it down further.By the end of the day, buyers have recouped much of their losses to end the day near or at the high. No Hammer is complete without confirmation. If the price action directly after the Hammer is down, no hammer has taken place. A true Hammer cannot have its low violated by subsequent price action. Volume should also be taken into account. If the volume is heavy, the Hammer formed is genuine.Now a Hanging Man is identical to a hammer with the exception that it occurs at the uptrend. It crops up at the top of the price action on heavy volume and is confirmed by subsequent price action confirming the top. If the high of the Hanging Man is surpassed, then this signal is invalid.Two more important candlestick patterns that you need to know how to identify are the Bullish and Bearish Engulfing Candlestick Patterns. Both are also very good trend reversal patterns. A Bullish Engulfing Pattern is formed when the candlestick body has an open lower than the previous low of the last candlestick and the close is higher than the previous close of the last candle.In simple terms, the candlestick body engulfs the previous candlestick's body. Why is this pattern bullish? It represents a major defeat for the bears. Bullish Engulfing patterns are highly accurate but if the subsequent price trades below them than the pattern failed.On the other had, the Bearish Engulfing Candlestick Pattern is formed at the very end of an uptrend and it marks the impending reveral and the start of a downtrend. This engulfing pattern also depends on two consecutive candles formed with the first candle body being engulfed by the subsequent candle body. The first candle body will be small and the second candle body will be large. The firt candle opens higher than the second candle's close and its close is lower than the second candle's open thus the second candle engulfs the first candle body.Now, candlestick charting is being used extensively by the traders in their dail trading decisions. What you need to do is to master these candlestick patterns and combine them with technical indicators to generate highly accurate trading signals!


Use Candlestick Patterns To Identify Trend Reversals In Price Action!

By: Ahmad Hassam

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