Imagine that you're sitting there looking at a chart of your favorite stock. The price has just hit an important area of support. So you buy.
But then, the price immediately plunges...hitting your stop and causing a loss. As if this isn't frustrating enough, the price then proceeds to rally until it goes all the way up to what would have been your take-profit point. But because you've been stopped out, you make nothing.
If you've been trading stocks for a while, you may not even have to imagine this. Maybe it's already happened to you.
If so, the problem you are facing is one of timing. You're failing to find the right time to enter a trade. And the best way to solve this problem is to learn candlestick patterns.
Unfortunately, there are hundreds of these patterns that have been identified. And it can seem overwhelming to try to learn them. So in this article, I'm going to give you a few of the most important patterns and what they mean.
Hammer & inverted hammer
A hammer candlestick has a small body, little to no upper wick, and a long lower wick. An inverted hammer is the opposite: it has a small body, little to no lower wick, and a long upper wick.
Here's an example of what a “hammer” looks like:
This particular candlestick is not a “true” hammer because it doesn't appear at the end of a downtrend. But it should at least give you an idea as to what a hammer normally looks like.
When this pattern usually appears, it is after several red candles and is green itself. In such a case, it means the downtrend is likely to reverse on the very next candle. If you see this, it's best to wait for the next candle to print to make sure that it's green. If so, this is a confirmation and signal to enter the trade.
An inverted hammer looks like this candle upside-down. It also comes at the end of a downtrend and is a bullish sign.
Shooting star and bearish hanging man
A shooting star looks exactly like an inverted hammer. But it appears at the end of an uptrend. It implies that the trend is about to reverse and the price is going to fall. Similar to the previous mentioned patterns, it's best to wait for a confirming red candle before selling when you see this.
A bearish hanging man looks exactly like a hammer but shows up during an uptrend. In the image above, the candle shown could be considered a bearish hanging man instead of a hammer. However, the following candle failed to confirm a trend-reversal. But if you were to see this at the end of an uptrend and the next candle printed red, it would be a signal to sell.
Bullish and bearish engulfing
A bearish engulfing pattern occurs when a small green candle is “engulfed” by a large red one. This is a sign that the uptrend is reversing.
Here's an example:
A bullish engulfing pattern is the opposite of this: when a small red candle is engulfed by a large green one.
It can be difficult sometimes to have the right timing to enter trades. Use these candlestick patterns to avoid entering too early.