Most of the time, you might have heard about using price action strategies to trade in stocks. But for that, it is important to understand candlestick patterns, its anatomy, and most importantly how to read candlestick pattern in different market conditions.
If you are a beginner and want to make a profit in the maximum number of trades, then here is detailed information on how to understand and use these patterns for short-term and intraday trading.
What is a Candlestick Pattern?
In general candlestick pattern is the graphical representation of the price movement and change in the particular time frame.
The candlestick has three basic features:
- The body represents the open-to-close range or the difference between the opening and closing prices of a security.
- The wick, or shadow, indicates the high and low, or the highest and lowest prices reached during the trading day.
- The color represents the market direction. When there is a green (or white) body, it indicates a price increase in the underlying security, and a red (or black) body shows a price decrease.
How to Read Candlestick Pattern for Day Trading?
Now to use the candlestick pattern for day trading, first of all open a candlestick chart and set the time frame of 15 minutes.
Some expert traders also trade using a 5-minute chart.
Now follow the steps below:
- Mark or identify Intraday support and resistance levels.
- Check whether the share price is trading near the support or resistance.
- Now, if the share price is near the support look for the pattern that gives a signal of bullish reversal. For example, hammer candlestick patterns that have a short body and long tail in the downward direction.
- Wait for the formation of another candle. If the breakout occurs, i.e. if the next candle breaks the high of the candlestick pattern then it gives you the signal of a bullish market.
- On the other hand, if any pattern, let’s say hanging man, is formed near the resistance level, then on breakout of the low of the candle signals the strong bearish trend.
It is important to note that one must wait for the confirmation of the signal and most importantly identify the pattern correctly.
For example, a short body with a long tail is not always a hammer and hanging man. One must check the length of the wick which should be double the body size of the candle.
Secondly, check for divergence or momentum using different oscillator indicators to confirm the reversal and upcoming trend in the market.
Third, it is always good to place stop loss values to avoid any kind of risk in the highly volatile market. For the right trade position learn candlestick patterns from the right source and start making a profit in the share market.
How to Use Candlestick Patterns for Trading?
In all, the correct usage of candlestick patterns helps a trader take the right position and maximize profit.
Here are some of the ways by which a trader can use a candlestick pattern:
1. For Confirmation of Signals
When you are using candlestick patterns, you should never rely solely on a single candlestick pattern. It is always suggested to look for confirmation through different types of technical indicators or chart patterns.
2. Different Patterns Can be Used in Different Time Frames
Single candlestick patterns are useful for intraday while for swing or positional trade where the daily chart is used, one can look for uncommon pattern like bullish engulfing, bearish harami, three white soldiers candlestick pattern, etc.
3. Combination of Patterns
Now hammer candlestick formed after doji gives a better confirmation of reversal and hence you can combine multiple candlestick patterns to increase the reliability of your analysis.
For example, if a bullish engulfing pattern is followed by a hammer, it can strengthen your bullish signal.
To get in-depth understanding of these strategies, you can also refer candlestick pattern book available online.
Candlestick chart patterns provide traders with a powerful tool for analyzing market trends and making well-informed decisions. By effectively learning how to read candlestick pattern in combination with other technical tools, traders can enhance their ability to gain profits and mitigate risk.
Don’t forget that thorough research, continuous learning, and disciplined risk management are the keys to success in trading with candlestick patterns.
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