January 24, 2023

Why Candlestick Patterns Matter for Traders?

Why Candlestick Patterns Matter for Traders?

Trading is a dynamic practice that involves a careful examination of market trends to establish the direction of asset price movements.  As a rule of thumb, traders buy low and sell high. Therefore, knowing where the market is headed can help you prepare to open or close a position.

There are various tools that analysts use to determine market sentiments and trends such as candlesticks, moving average convergence divergence (MACD), and relative strength index or RSI.

Depending on the markets you are trading in, you may find some tools to be more adapted and specific to your analysis. For instance, if you are a technical trader in Indian markets, understanding how candlestick patterns in hindi work will help you make inferences that will subsequently inform your trading decisions.

Candlestick Patterns for Trading

When conducting technical analysis, candlestick charts help to convey information that is central to understanding the dynamics of an evolving market. A candlestick shows you a visual representation of an asset’s price action whether bullish or bearish.  Here are the two compelling reasons for using candlestick patterns in trading.

  • Market Entry and Exit: Candlestick patterns can give you a cue on when to enter or exit a market. Whether you are a breakout, momentum, or trend trader, knowing when to open and close your positions will ensure you maximize your gains and minimize your losses.
  • Trade Management: Trading is all about balancing risk and reward. Candlestick patterns help you to understand the current state of the market thereby make is easier to align your risks with the possible rewards. Whether to hold or close a position will be largely dependent on how you balance the pros and cons that candlestick chart patterns can help you achieve.

The deeper you integrate candlestick patterns into your trading plan the more it becomes second nature for you to execute trade strategies based on these patterns.

Candlestick Patterns and Market Behavior

There are several aspects of market behavior that traders ought to try and identify. At any one given time, the market could be in consolidation, breakout, trend reversal or trend continuation.

With the right interpretation of candlestick patterns, you can successfully identify price paths, and craft an optimized strategy to take advantage of an upcoming market move. Here are the five most important candlestick patterns to help you identify the market state.

Doji: This candlestick pattern forms when the open and close for an asset price are almost the same. Depending on where the open and close falls, you can have a gravestone doji, long legged doji, or dragonfly doji patterns. A doji candlestick pattern indicates a consolidation and a possible pending breakout.

Bearish and bullish engulfing:  In an engulfing pattern, you have two candles with the second candle having a body that engulfs or encloses that of the first. Whenever you spot a bullish engulfing or bearish engulfing, it signals exhaustion of the trend in session and a looming reversal.

Morning and evening star: This is another candlestick pattern comprising three candles- a short candle sandwiched between two long candles. Whenever you see a morning or evening star candlestick pattern, it means the asset price is at a point of reversal.

Rising or falling wedge: Wedges are represented by the convergence of two trendlines. They indicate a decrease in the magnitude of price movement and a trend pause. When you encounter either a rising or falling wedge formation, it means that the traders are trying to decide where to take the asset next.

Three Line Strike: This is the last but not the least of the five candlestick patterns. It is a reversal pattern that occurs within a downtrend. It comprises three candles in the direction of the prevailing trend and a fourth candle that pulls right back to where the first candle began. This pattern signals higher prices with an accuracy rate of about 83%.

Bottom Line

Candlestick patterns can signal reversal, continuation, consolidation, or breakout trends. Whatever the trend, the most important aspect is for you to master and use these patterns to inform your market entry and exit decisions. It is also important to note that candlestick patters are not the only technical analysis tools out there. Therefore, you must look out at the whole spectrum of tools to enrich your trading decision.

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