There is a huge debate among traders about the reliability of candlestick patterns. Whatever your experience with candlestick patterns is, we can say for sure that they reflect pure market psychology in a small and visually appealing format. This article will guide you through a brief overview of the most important candlestick patterns and their meaning.
The Doji Pattern
The doji pattern is arguably the most important candlestick pattern. Its opening and closing prices are the same, which means that a doji has no real body. It can form alone or in combination with other patterns, such as the morning and evening doji stars, and is a major reversal pattern.
A doji pattern signals indecision in the market. Neither buyers nor sellers didn’t manage to push the price far away from its opening price during the trading session, which leads to the absence of a real body. As a reversal pattern, it often forms at tops or bottoms of uptrends or downtrends, respectively.
Hammer Pattern
A hammer pattern is another major reversal pattern, which often forms at the bottom of downtrends. It has a long lower shadow and a small body, with the length of the shadow at least twice the length of the body. Regarding market psychology, a hammer pattern tells us that buyers managed to push the price higher after the initial selling pressure, as reflected by the long lower shadow.
A hammer pattern that forms during an uptrend is called a hanging man pattern. It has the same features as a hammer pattern, only that the long lower shadow now signals that the bullish momentum may be about to end as selling pressure increases.
If you’re wondering how to remember a hammer and hanging man pattern, think about it the following way: the price is “hammering out” at the bottom of a downtrend when forming a hammer pattern, and a “hanging man” hangs at the top of an uptrend.
Engulfing Pattern
Unlike the doji, hammer and hanging man patterns which are single candlestick patterns, an engulfing pattern needs at least two candlesticks to form. It’s an important reversal pattern, in which the second candlestick completely engulfs the range of the first candlestick. In case of a bearish engulfing pattern, a bearish candlestick completely engulfs the previous smaller bullish candlestick. And in case of a bullish engulfing pattern, a bullish candlestick completely engulfs the previous smaller bearish candlestick.
In both cases, an engulfing pattern signals that buying and selling pressure has significantly increased after the low-ranged previous session, and that a reversal of the underlying trend may be under way.
