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Identify Patterns
How to Identify Candlestick Patterns for a perfect trade setup?
As candlesticks are more appealing, the trader looks for candlestick patterns which can give specific trading signals. They can be broadly classified into continuation or reversal patterns. The candlestick patterns can be a single candlestick pattern or may be formed by grouping two-three candlesticks.
The first step for identifying a successful candlestick pattern is to develop a trade setup that answers four basic questions.
1. What is the Pattern?
The first step is to understand what the particular pattern is? If it is a one, two or three candlestick pattern, What is the structure of the pattern? Is it bullish or bearish in nature?
2. Where is the Pattern?
The next important step for a successful trade setup to know where the pattern is placed. If the pattern is a Bullish Reversal Pattern, it should be occurring after a down trend or a series of falls. If the pattern is a bearish reversal pattern, it should occur after an uptrend or a series of rises. A continuation pattern should be in between or middle of a trend.
3. How Big is the Pattern?
The third important thing to consider is the size of the pattern and also on what time frame you are looking at the pattern at. Higher the timeframe, stronger is the pattern and the chance of a high probable setup. A candlestick pattern formed on a 15 min time frame chart vis a vis a weekly chart – obviously the weekly pattern holds more importance.
4. Volume on the Pattern?
Last but not the least, Volume is a very important market variable to be studied in technical analysis. If the volume supports the particular pattern formation, your trade set up is ripe in comparison to low volumes.
Types of Candlestick Patterns
We can classify some important candlestick patterns by one, two or three candlestick patterns.
1. One Candlestick Patterns-
- Hammer
- Inverted Hammer
- Spinning Top
- Shooting Star
- Marubozu
- Doji
- Hanging Man
2. Two Candlestick Patterns-
- Bullish Engulfing Pattern
- Bearish Engulfing Pattern
- Bullish Harami Pattern
- Bearish Harami Pattern
- Tweezer Bottom
- Tweezer Top
- Piercing Line
- Dark Cloud Cover
3. Three Candlestick Patterns-
- Morning Star
- Evening Star
We will discuss each candlestick pattern one by one in our upcoming units.
