Candlestick Patterns That Reveal Trend Changes

There are many candlestick patterns that are used by traders to identify trend changes in a security price. The most popular candlestick trend reversal pattern is the Hammer. First if you don't know anything about candlesticks, a candle is formed with the high, low, opening and closing price of a security. Candlesticks have much in common with the bar charts but they have many things different too as well.

A Hammer represents the bottom of the trend. It occurs at the end of the downtrend. Hammers have small bodies and long shadows. Hammers have infact long lower shadow and a small upper shadow. What a hammer reveals is that after the price of the security opened on the market, sellers drove it down further.

By the end of the day, buyers have recouped much of their losses to end the day near or at the high. No Hammer is complete without confirmation. If the price action directly after the Hammer is down, no hammer has taken place. A true Hammer cannot have its low violated by subsequent price action. Volume should also be taken into account. If the volume is heavy, the Hammer formed is genuine.

The other candlestick pattern as important as the hammer is the Hanging Man. Hammer is formed in the downtrend and the hanging man is formed in an uptrend. You will find the hanging man at the very top of the price action. This means that the uptrend is about to end and an downtrend is underway. Traders should take action accordingly. If a hanging man is formed and the price actions till continues upwards, it means there was no hanging man. Hanging man can only be formed at the very top of the price action. It should be confirmed with the volume information.

Bullish and Bearish Engulfing Patterns are another candlestick trend reversal patterns. A Bullish Engulfing Pattern is formed when a candlestick bar opens lower than the previous candlestick's close and closes higher than the previous candlestick's open.

You can say, the latest candle body engulfs the last candle body on the chart. Now why we call this a Bullish Engulfing Pattern? It is called the Bullish Engulfing Pattern as it signals the major defeat of the bears. However, if the subsequent price trades below them, it is an indication that the engulfing pattern is not true and should be ignored.

On the other had, the Bearish Engulfing Candlestick Pattern is formed at the very end of an uptrend and it marks the impending reveral and the start of a downtrend. This engulfing pattern also depends on two consecutive candles formed with the first candle body being engulfed by the subsequent candle body. The first candle body will be small and the second candle body will be large. The firt candle opens higher than the second candle's close and its close is lower than the second candle's open thus the second candle engulfs the first candle body.

Now, candlestick charting is being used extensively by the traders in their dail trading decisions. What you need to do is to master these candlestick patterns and combine them with technical indicators to generate highly accurate trading signals!