A candlestick chart is a style of financial chart used to describe price movements of a security, derivative, or currency. Each Candlestick typically shows one day, so for example a one-month chart may show the 20 trading days as 20 Candlesticks.
Types of Candlestick signals / patterns
The most common and frequently occurring candlestick signals can be divided into three different categories such as Single, double, and triple candles. You can find a more detailed description of the three categories in section 3.2 of the book. Each of these categories has its own importance. A signal can be either Bullish reversal (uptrend going back/stop) or Bearish reversal (down-trend going back/stop). We will use the terms Bullish reversal and Bearish reversal. A Bearish reversal signals that a downtrending, or falling, in conclusion market likely is coming to an end, and that the market is about to reverse and move upwards. A Bullish reversal signals that an upward trending market likely is coming to an end, hence the market is about to reverse and trend, or turn down-wards.
Both types of signals could mean that it is time to trade in the market, buy or sell a pair. When these two signals show up on your graph, it is time to keep an eye on the market. Is a Bullish / Bearish market about to turn or is it just false alarm?
When a signal shows up in your graph, it does not mean that you have to trade now and here. No signals provide a 100% guarantee that the market is going to go one or the other way. Remember that all signals should be read only as an indicator of what is likely about to happen in the market. Some signals are stronger than others are. A few signals are statistically more safe than others.
Inverted Hammer as well as Shooting Star is statistically up to 80% certain. Inverted Hammer, for example, is a Bearish reversal simple signal – a sign that does not necessarily require extra confirmation, and where you, statistically, can be 80% certain that you can trust the signal (that the market is about to turn). It typically follows a downtrend.
Likewise, for the signal called Shooting Star. Inverted Hammer and Shooting Star are similar in shape. Short body and long, top shadow. The difference is that Inverted Hammer is always appearing after a downtrend, and Shooting Star always appears after an uptrend.
Guiding principles of Candlestick
– The “what” (price action) is more important than the “why” (news, earnings, and so on).
– All known information is reflected in the price.
– Buyers and sellers move markets based on expectations and emotions (fear and greed).
– Markets fluctuate.
– The actual price may not reflect the underlying value.