Stock Market Basics to Advance - Lecture 7
( Candlestick Pattern - Part 2)
D ) Evening
Star Candlestick
The Evening Star Candlestick pattern is a bearish reversal
pattern composed of three candlesticks, signaling a potential shift in market
sentiment from bullish to bearish. Here's a detailed explanation of the pattern
and its underlying psychology:
First Candlestick
(Bullish): This marks the beginning of the pattern with a bullish
candlestick, indicating market control by buyers. It suggests the continuation
of an uptrend, showing optimism and active participation from buyers.
Second Candlestick
(Small-sized): Following the first candle, there's typically a small-sized
candlestick, often with a small body. This candlestick reflects diminishing
buying pressure, indicating indecision or a possible consolidation phase. It
might also hint at the entry of sellers into the market.
Third Candlestick
(Bearish): The third candlestick is a bearish one, preferably with a large
body that engulfs the preceding small candlestick. It signifies a strong
bearish sentiment, with sellers taking charge and driving prices down
significantly. A larger body relative to the second candle enhances the bearish
reversal signal.
Psychology behind the
Pattern:
First Candlestick
(Bullish): At this stage, buyers dominate the market, fostering optimism.
The bullish candle implies an intact uptrend and active buyer participation.
Second Candlestick
(Small-sized): The appearance of the small-sized candlestick suggests
waning buying pressure, potentially due to uncertainty or a lack of conviction
among buyers. It serves as a cautionary signal, hinting at a weakening bullish
momentum.
Third Candlestick
(Bearish): The emergence of the bearish candlestick confirms the shift from
bullish to bearish sentiment. Its large body indicates strong selling pressure,
overpowering buyers. This signals a sell-off or potential shorting opportunity.
Stop Loss Placement:
Traders often use the high of the second candlestick,
representing the recent peak of bullish momentum, as a reference point for
setting a stop loss. A break above this high could invalidate the bearish
reversal signal.
To enhance
trading decisions, traders may combine the Evening Star pattern with other
technical analysis tools and consider the broader market context. Proper risk
management techniques are crucial when trading based on candlestick patterns.
Stock Market Basics to Advance - Lecture 7 ( Candlestick Pattern - Part 2)
E) Hammer
Candlestick Pattern:
The hammer candlestick pattern is a bullish trading signal
indicating a potential reversal from a downtrend to an uptrend. Here's an
overview of this pattern:
Appearance: A
hammer candlestick features a small body near the top of the candle's range and
a long lower wick or shadow. This formation typically occurs during a
downtrend.
Bullish Reversal
Signal: The hammer suggests that sellers initially pushed the price lower
during the trading session, but buyers intervened, causing a rebound. This is
reflected in the long lower shadow, indicating that buying pressure outweighed
selling pressure by the session's close.
Confirmation: To
confirm the validity of the hammer pattern, traders often look for
follow-through buying in the next session. A bullish candlestick or a gap-up
opening in the subsequent session strengthens the signal, increasing the likelihood
of a trend reversal.
Psychological Aspect:
The formation of a hammer candlestick signifies a struggle between buyers and
sellers. Despite an initial decline, buyers step in, pushing the price higher
by the session's close. The small body of the candle indicates buyers' ability
to overcome selling pressure.
Key Considerations:
- The longer the lower wick relative to the body, the stronger the bullish reversal signal.
- Hammer candlesticks are most reliable after a sustained downtrend and near significant support levels.
- Trading Strategy: Traders may consider entering long positions after the formation of a hammer candlestick, with a stop loss placed below the low of the candlestick. This helps manage risk in case the anticipated reversal does not occur.
In summary,
the hammer candlestick pattern is a bullish signal suggesting a potential
reversal in the market's direction. It indicates a shift from selling pressure
to buying interest and is valuable for identifying trading opportunities in
technical analysis.
F) Shooting
Star Candlestick Pattern
The Shooting Star Candlestick pattern is a bearish signal
that indicates a potential reversal from an uptrend to a downtrend. Here's a
concise explanation of this pattern:
Appearance: A
Shooting Star candlestick has a small body near the bottom of the candle's
range and a long upper wick or shadow, with the opening price higher than the
closing price. This formation typically occurs during an uptrend.
Bearish Reversal Signal: The Shooting Star pattern suggests that despite an initial attempt by buyers to push the price higher, sellers stepped in, causing a rejection from the top side of the candlestick. This rejection is reflected in the long upper wick, indicating that selling pressure overwhelmed buying pressure by the session's close.
Opposite of Hammer
Candle: The Shooting Star pattern is indeed the opposite of the Hammer
candlestick. While the Hammer signals a potential reversal from a downtrend to
an uptrend, the Shooting Star indicates a potential reversal from an uptrend to
a downtrend.
Formation:
Shooting Star candles often appear when the price of a stock reaches higher
levels, suggesting that the market may be overextended and due for a reversal.
Key Points:
- The longer the upper wick relative to the body, the stronger the bearish reversal signal.
- Shooting Star patterns are most reliable after a sustained uptrend and near significant resistance levels.
- Trading Strategy: Traders may consider entering short positions after the formation of a Shooting Star candlestick, with a stop loss placed above the high of the candlestick. This helps manage risk in case the anticipated reversal does not occur.
In summary, the Shooting Star Candlestick pattern is a bearish signal
indicating a potential reversal in the market's direction. It suggests a shift
from buying pressure to selling interest and is valuable for identifying
trading opportunities in technical analysis.
F) Tweezer Top
Pattern:
- Tweezer top pattern is a bearish reversal pattern found in technical analysis of financial markets, observed in candlestick chart for stocks, commodities or currencies.
- It consist of two or more candlestick with matching highs, indication a potential end to an upward trend and start of downward movement.
- Top of both candles will be our stop loss.
G) Tweezer
Bottom Pattern:
- Tweezer Bottom pattern is a bullish reversal pattern.
- It consist of two or more candlestick with matching lows, indication a potential end to an down trend and start of upward movement.
- Bottom of both candles will be our stop loss.
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