Firstly, let us start with a popular candlestick pattern which is a Hammer.
What is a Hammer Candlestick Pattern?
Hammer is a single bullish reversal candlestick pattern that occurs at the bottom of a downtrend. This candlestick has a long lower shadow which is at least twice the length of the real body and has no upper shadow or a very small upper shadow. The colour of the real body can be either Red or green however a green hammer is much stronger than a red one.
What is the psychology behind the pattern?
A hammer pattern is formed when prices rally from an intra – period sell off, to close near the open. The long lower shadow initially shows that the bears had moved the prices too low, continuing the ongoing bearish trend. The bulls then came and eventually move the prices up and closed it more than the opening price. Hammers signal that the bears may have lost control over the prices, thus indicating a potential reversal to an uptrend.
Confirmation of this candlestick pattern occurs when the next candle after the Hammer closes above the closing price of the hammer. This confirmation shows that the bullish reversal has taken place.
Traders can go long, once the high of the hammer candle is crossed, keeping the low of the hammer candle as the stoploss.