In the past few weeks we have treated the bullish and bearish chart formations in two articles. There were three types, namely the continuation formations, the consolidation formations and the reversal formations. Apart from the basic patterns, formations can also be recognized by candlesticks. It's not so much about recognizing large patterns, but about determining what a candle says about the current market. In the past, several forms of candles have earned their name, which will be examined in more detail below.
Bullish candle formations
What does a bullish candle represent? Clearly, there are more buyers on the market - and more than sellers. Therefore, the closing price of a bullish candle is always above the opening price and the high above the low.
Now, not every candle looks the same and that's a good thing, because otherwise there were hardly any differences. Candle formations can also be subdivided into continuation candles, consolidation candles and reversal candles.
How can bullish continuation and reversal candles be recognized?
Candle formations are the first signs of bullish movements because they - each by time unit - represent the shortest period. A bullish candle formation can point both in the direction of the upward trend (continuation candle) and in the opposite direction (reversal candle) within a downward trend.
The continuation candle therefore points in the direction of the trend and usually has a large body and one short lower and upper wick.
In many cases, the reversal candle has a short body, a long lower wick and a short upper wick.
What does this have to do with? Candles with the body represent the price rise or fall within the selected period. The lower wick is the difference between the low and the opening price, the upper wick is the difference between the high and the closing price. The closing and opening prices each represent the end of the body.
If the demand in an upward trend is very high, the price always reaches new highs and the body is accordingly very large because the high is very high is close to the closing price. In a downward trend, the reverse candle represents an abrupt change in demand. As a result, the body soars up while the low remains at a low level. Since the opening price of the candle is in a downward trend at the top of the body, the difference between low and opening becomes very large. This candle formation is also called a "hammer".
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How can you recognize bearish candle formations?
Bearish candle formations differ from the Bullish ones only in the direction of the candles. Basically, the continuation candles in a downward trend represent long candle bodies with short wicks because the differences between high and opening as well as closing price and low are very small.
However, this does not apply to reversal formations: the bearish hammer shows with Body down. This is because the candle was previously bullish. The abrupt change of direction within the candlestick period leads to a large difference between the high and the closing price.
There are several names for candle formations such as the harami, bullish and bearish engulfing, hammer, Inverted Hammer or Shooting Star. All of these formations are composed of two or more candles. This shows that technicians like to interpret more in the formations than is actually necessary, because they basically only represent the three forms of continuation, reversal or consolidation and it does not matter which candle has formed in front of the hammer. When new buyers enter the market, they can either do it after a consolidation or after a steep trend. But that doesn't change anything about the hammer itself.
Experience has shown that the hammer as a reversal candle and the conventional continuation candle deliver the most reliable signals. All other candle formations usually only allow interpretation by definition. The broker BDSwiss offers the opportunity to try out strategies based on candle formations with small sums.