The Japanese-style candlestick chart, mastered by Munehisa Homma, has been used for centuries to help traders better understand price movements. This type of chart representation melds together various facets of market information, including the open, high, low, and close prices of a given time-frame. Guided by candlestick charts, traders can make informed decisions using visually appealing and easy-to-understand snapshots of the markets. One primary use of these charts is the identification of entries using candlestick patterns. This article will discuss five top candlestick patterns for entries in detail.
1. The Hammer: Denoting potential reversals, the Hammer is indeed a hammer in the works for trend followers. Appearing after a downtrend, the Hammer has a small body near the upper trend line with a long lower wick and minimal or no upper wick. If the body of the Hammer is green or white, it indicates a stronger bullish reversal. On encountering the Hammer at the bottom of a downward trend, a trader can consider it a signal to enter a long position or exit a short position.
2. The Bullish Engulfing: As the name suggests, the Bullish Engulfing appears during a downtrend and signifies a possible trend reversal towards bullish territory. This two-candle pattern features a smaller bearish (red) candle followed by a larger bullish (green) candle, which ‘engulfs’ the previous candle’s body. A trader can interpret this as a strong buying pressure signal, potentially marking an optimal entry point for a long position.
3. The Bearish Engulfing: Essentially the mirror image of the Bullish Engulfing, the Bearish Engulfing pattern denotes a possible bearish reversal. It involves a smaller bullish (green) candle, followed by a larger bearish (red) candle that eclipses the body of the first candle. This pattern suggests an increase in selling pressure and might signify an ideal entry point for a short position.
4. The Morning Star: This three-candle pattern is another strong indicator of a potential bullish reversal. It begins with a long bearish (red) candle, followed by a small-bodied candle that gaps away from the previous body (indicating indecision), and concludes with a third green candle that closes within the first candle’s opening range. When seen following a downtrend, this pattern signals a potential shift from bears to bulls, offering a probable entry point for long positions.
5. The Evening Star: The Evening Star is a bearish reversal counterpart to the Morning Star. This pattern starts with a long bullish (green) candle, followed by a gap upward into a small-bodied second candle, and finishes with a bearish (red) candle that closes within the range of the first candle. This indicates a potential shift from bulls to bears and may provide an optimal entry point for a short position.
Each of these candlestick patterns has the power to indicate potentially lucrative entry points to the discerning trader. However, like all trading strategies, these should not be used in isolation. Traders are advised to complement these patterns with other forms of technical analysis to increase the chances of successful trades. Whether it’s the intimidating Hammer at the end of a relentless downtrend or a hopeful Morning Star glistening at the brink of a bullish turnaround, these candlestick patterns, when interpreted correctly, could be reliable beacons in the stormy seas of market trades.
