Sunday, July 6, 2008

What are candlestick patterns?

Candlesticks patterns give you buy and sell signals for a given security. They can help you determine the right time to buy a stock and the right time to short too.

These patterns like any other indicator out there are not 100% accurate but they have been known to be useful in the past. If you are going to find great stocks knowing which patterns to use can be very helpful.

Here is an example of a couple different candlestick patterns and what they mean.

1. A morning star is a stock reversal pattern. It is said to mark the bottom of a pullback. It consists of three different candlesticks. The first candlestick is a bearish day. During this day the bears take control of the stock and push it down lower.

The second candlestick is a day when the bulls and bears are evenly matched. Neither one is able to take control of the stock. So, it doesn’t go anywhere.
During the third day the stock rises. The bulls eventually take control of the stock and push it up. This candlestick should be larger than the other two. It signals that buying pressure is coming and that the sock is likely to go up.

2. The hammer is another bottoming signal. This one only consists of one candlestick. This pattern happens after the stock has been falling. The stock opens and starts to fall because there is selling pressure.

Sometime during the day however the bulls take control and push the stock up. After the day is finished the stock finishes up. This will show that buying pressure is starting to happen. But be cautious if this pattern does not occur when the stock is pulling back it could be forming a hanging man pattern which is actually a bearish signal.

If you trade candlestick patterns you should always have a plan on how you are going to exit the trade if you are right and if you are wrong.

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