Now, that we have discussed the essentials of a candlestick chart, let’s take a look at some of the formations candlesticks can create.
All of the formations we are going to analyze in this article consist of only one bar. Being able to deduct information from a single bar is one of the traits of a good trader, and these simple candlestick formations will help you do exactly that.
Simple Candlestick Formations – examples
The Big Candle is very easy to spot. It has a relatively large body compared to its neighboring candlesticks, signaling a large price movement. The closing and opening price are near the absolute high and low of the time period. The big candle works in both directions, and indicates a price movement in the same direction as the candlestick. Big candles can be traded very effectively when they occur in the direction of the currently dominating trend.
In general, a Doji is a candlestick where opening and closing prices are almost exactly the same, as visualized by the almost non-existent body. The wick, however, is significantly longer than the body, which symbolizes that prices have first moved away from the opening price, but then moved back to it.
In a Dragonfly Doji, this phenomenon occurs at the top of the price range for one candlestick. A skilled trader realizes that this means, prices in the time period the candlestick represents first began to fall and then started to rise again. He can therefore conclude, that prices are currently moving up, and are likely to continue this movement for the next candlestick.
When a Dragonfly Doji occurs in an upwards movement, it means that the price went through a short period of correction. Maybe a few traders sold their shares and took the profit they made. The reason itself is not important. More importantly, most people who were willing to sell at this price obviously have sold now, hence this rising prices at the end. This means, demand exceeds supply again, and prices can continue to rise. As a trader you can use this signal to invest in further rising prices.
When the Dragonfly Doji appears in a downwards movement, it can indicate a beginning reversal. A reversal means that the movement is going to change direction. Again, the same logic as in an upward trend applies: Most people willing to sell have sold their shares, and demand starts to exceed supply, which will lead to rising prices. The Dragonfly Doji is especially valid as a reversal signal when it occurs near trendlines or is supported by other indications of the price changing direction.
The Hammer consists of a white body near the top of the candlestick and a longer wick underneath it. In a downwards trend it indicates bullish tendencies and can be an indicator for a reversal.
As the name indicates, this is the mirror image of a hammer: A black or white body near the bottom of a candlestick with a longer wick on top. It indicates beginning bearish tendencies in an uptrend and can be a first sign for a reversal. Is the body especially small, the inverted hammer is considered a shooting start, and becomes an even stronger indication of a reversal.
Inverted Black Hammer
The Inverted Black Hammer, a hammer formation in a downwards direction, is considered a bottom reversal signal. This means, when it occurs after a downtrend, it can indicated the beginning of an uptrend.
Long Lower Shadow
This formation is very similar to the Hammer. The key difference is its long lower wick, which indicated a very strong reversal. Especially around a price support level, this formation is a good indicator for a beginning upwards movement.
Long Upper Shadow
The opposite of the Long Lower shadow, the Long Upper Shadow formation is equivalent to an Inverted Hammer, and indicates a very strong bearish reversal.
The Marubozu is a full candlestick with no wick at the top or at the bottom. It indicates a strong price movement that is likely to continue. The Marubozu works in both directions, and is considered a continuation pattern.
Long Legged Doji
The Long Legged Doji is a Doji with especially long wicks in both directions. This formation occurs when strong market forces fight to pull the price into their direction, but are still kept in balance. As soon as the market breaks out of this balance, this can signal the beginning of a longer movement. You can invest in this movement.
This concludes the first part of our candlestick analysis. Once you learn these candlesticks and how to interpret them within a trend, you can use every single candlestick to understand more about the direction the market is moving in. Your trading will benefit greatly from this knowledge. You will be able to make better decisions, and become a more successful trader.
As with any new trading element, it takes time to master the ability to recognize candlesticks and draw the right conclusions from them. A demo account for Binary Options can help you make it through this learning period without losing real money.
Ready for the complex formations? Read about complex candlestick formations here.