Previously in Candlestick Charts in detail - Part 1, we saw the basic candlestick chart, the significance of long and short body,Spinning tops and Marubozu.
Now we will learn about the Doji, Hammer and Hangman patterns and how we can identify a trend with the help of these patterns.
Doji
Doji candlesticks have the same open and close price. The doji has a very small body that appears as a thin line.The price may go above and below the open price but it will close at or very near the open price. This indicates that neither the buyers nor the sellers have the control.
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When Doji appears, we must closely monitor the preceding candlesticks.
If doji forms after a series of long filled body(green Marubozu), it means that the buyers are exhausted and there is a possibility of sellers bringing down the price. Before deciding, look for a red candle to close below the long green candle open position.
If doji forms after a series of long filled body(red Marubozu), it means that the sellers are exhausted and there is a possibility of buyers bringing up the price. Before deciding, look for a green candle to close below the long red candle open position.
Hammer and Hangman
Hammer and Hangman looks exactly the same but has different meanings depending on the past action. Both have short bodies,long lower shadows, short or no upper shadow.
Hammer is bullish reversal pattern formed during downtrend. To be more sure of the trend reversal, look for a green candle to close above the open price of the hammer to its left.
Hangman is bearish reversal pattern formed during uptrend. To be more sure of the trend reversal, look for a red candle to open below the close price of the hangman to its left.
Inverted Hammer and Shooting star
Inverted Hammer and Shooting star looks exactly the same but has different meanings depending on which trend they occur.
Both have short bodies,long upper shadows, short or no lower shadow.
Inverted Hammer is bullish reversal pattern formed during downtrend.
Shooting star is bearish reversal pattern formed during uptrend.
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Now that we know all the important patter in the Japanese Candlestick chart, we will be able to analyze the market slowly with charts and identify the trends.
