Before continuing you might want to check out this blog post:
This is not a technical article (it will not show you how to trade) but a simplified explanation of reversal patterns for anyone who is just getting started in learning about technical analysis reversals.
It will introduce you to 7 types of candlestick patterns (reversals): Hammer, Hanging Man, Dragonfly Doji, Gravestone Doji, Morning Star Evening Star and a Double Bottom Chart Pattern.
Reversal; a change to an opposite direction, position or course of action (google dictionary) these can be used to analyze and trade stocks or cryptocurrencies. This is a change in the price direction of a stock or cryptocurrency trend, which can be positive (bullish, represented by green candles) or negative (bearish, represented by red candles); it may be going downwards and suddenly a change upwards as prices go up, and or vice versa.
Trend; a general direction in which something is developing or changing. (Google Dictionary)
Each pattern and reversal reveals to investors and traders a chance to enter the market and profit. And these strategies are very important and not as simple as it seems to spot or act upon, it is crucial to understand exactly when to enter and when to pull out of a trade. And keep in mind, this process may not be as fast as you expect.
“So how long does it really take to become a proficient investor and trader? The simple answer is, it depends. I would rather be direct and tell you like it is than say you can just attend a weekend seminar and begin trading on Monday like a pro. It doesn’t happen like any other profession, and trading and investing is no different. It does take time.” — Terry Tran — Hedge Fund Manager, Trading Mentor in Sydney, Australia.
Trading and investing are for anyone who is ready to learn, study and happens to be psychologically prepared to enter the industry.
“Great thing about trading and investing (unlike sports or many other professions like dentistry, doctor, lawyer etc.), investing and trading has no age to entry barrier. I’ve met 15 year olds who with the help of their parents have already built a small portfolio from their pocket money, as well at 80 plus year olds who are determined to finally look after their own financial destiny.” — Terry Tran
Hammer Candlestick; is considered a bullish reversal created when open and close prices are around the same price, so you will see a short stick, and along bottom shadow which has to be at least twice the size of the body or the stick. The market would be moving in a downtrend and reverse.
As you can see in the image below the candlestick looks like an actual hammer and it can be bullish or bearish as long as it follows a downtrend, small body, and long bottom shadow. A very small upper shadow is accepted but usually, it doesn’t have any.
Shadow; is the line you see attached to the candlesticks to show how far up or down the price fluctuated, and the candlestick body shows the price the stock opened and the price when it closed, in a certain timing (for ex: 10 minutes, 1 hour, 1 day, etc.).
Hanging Man Candlestick; is the opposite direction of the hammer considered bearish, uptrend market, then there is a gap, a lower shadow that is at least twice the size of the body a small body where open and closing price are pretty much the same, and it could be bullish or bearish, but it requires confirmation candle.
Gap; are also known as windows, and it happens when no trading takes place, the stock will close at one price and the following day will be at a different price due to orders placed before the opening of the following day.
Dragon Fly Doji; considered a bullish reversal pattern, where price closes the same as opening price, on a downtrend and long lower shadow. This is a sign the market is testing to find out where support and demand is.
Support; is when the market follows a pattern in how low the market is willing to go and a line is drawn to mark that support trend. Usually, prices are expected to rise after touching the support line.
Demand; is seen when the market follows a pattern in how high they are willing to go, how much they desire to buy, and after a while it creates a pattern and a line is drawn to mark that trending demand, and the prices are expected to fall after touching the demand line.
Doji; signifies indecision in the market, where investors and traders, bulls and bears, are testing the market yet they do not seem to commit in either direction.
Gravestone Doji Candlestick; this is the bearish model of the Dragonfly Doji. Upper trend market, opening and closing prices are almost or exactly the same with a long upper shadow. Investors and traders see this as a time to sell, or exit the market.
Double Bottom Chart Pattern; this pattern shows the drop of a stock, market or crypto, then a rebound, then another drop followed by another rebound. Two dips in a sequence. Experts say the first drop´s advance should be between 10 to 20% and second drop about 3 to 4%.
Rebound; is a turnaround after a downfall.
Morning Star Candlesticks Pattern; is considered a bullish reversal, consists of 3 candles representing 3-day-observation:
· Day 1 — Larger bearish or red Candle followed by a gap;
· Day 2 — Smaller bullish or bearish candle followed by a gap;
· Day 3 — large bullish or green candle.
Evening Star Candlesticks Pattern; this is the bearish formation of the Morning Star pattern that occurs when the market is on an uptrend, represented by 3 candles on a 3-day-observation:
· Day 1- Larger Bullish Candle followed by a gap;
· Day 2 — Small Bullish or Bearish candle followed by a gap;
· Day 3 — Large Bearish Candle.