At the start of the 18th century, a Japanese man named Homma discovered that the markets were strongly influenced by the emotions of traders.
Candlesticks communicate that emotion by visually showing the size of price moves with different colors. Traders can use candlesticks to their advantage by interpreting each candlestick and the patterns they form so they could predict what price will do next.
They may seem random but many times they will form a pattern which will signal either a bullish or a bearish reversal. Bullish patterns indicate that the price is likely to rise, while the bearish patterns indicate that the price is likely to fall.
A bullish engulfing candle is a candle that engulfs the previous candle, showing a strong bullish reversal. Whenever price forms a bullish engulfing on the bottom of a trend, it’s very likely that price will reverse to the upside.
A bullish pin bar is a candle with a small body and a long wick on the bottom, signifying seller’s exhaustion and that buyers are gaining momentum here. Bullish pin bars found at the bottom a trend is a sign that price is likely to reverse to the upside.
A morning star is found at the bottom of a trend and consists of at least three candlesticks. The middle candle at the very bottom can either be bullish or bearish but it tends to have a small body compared to the rest. The last candle is a bullish candle that engulfs the previous candle. This pattern indicates a strong turning point of the market and shows that there is a likely reversal to the upside.
A tweezer bottom consists of two candles, with both wicks on the bottom lining up with each other on a level of support. The wicks on the bottom must tap at an equal level of support, meaning one wick isn’t extending further than the other. Tweezer bottoms are essentially double bottoms on a lower timeframe.
A bearish engulfing candle is found at the top of a trend, which signifies a strong bearish reversal. It’s likely that price will reverse to the downside when this pattern shows up at a strong level of resistance.
A bearish pin bar showing at the top of a trend is strong signal that price will reverse to the downside. A bearish pin bar is a candle with a long wick at the top, showing buyer’s exhaustion, and sellers are willing to push the price down.
An evening star is found at the top of a trend and consists of at least three candlesticks. The middle candle is small compared to the rest and the last candle is a bearish candle that engulfs the previous candle. This indicates a potential reversal to the downside.
A tweezer top is the opposite of a tweezer bottom, in which two candles’ wick are tapping at an equal level of resistance, not one is extending over the other. This is a double top pattern on the lower time frame and this signifies a potential downside reversal.