Candlestick

The big assumption is that history tends to repeat itself.

Firstly, As previously stated, one of the key assumptions of technical analysis is that history tends to repeat itself. This is most likely one of the most crucial assumptions in Technical Analysis.

Secondly, It would make important to analyze this assumption more at this point because candlestick patterns rely significantly on it.

Assume that on July 7, 2014, a few things are happening in a specific stock. Let us refer to this factor as:

1. Factor 1:-The stock has fallen for four consecutive trading sessions.
2. Factor 2:-Today is the fifth session, and the stock is sliding on somewhat lesser volumes.
3. Factor3:-The stock’s trading range today is quite narrow in comparison to the previous four days.

Thirdly, With these factors in play, let us imagine that on the next day (8th July 2014), the stock’s decline is arrested and the price rises to a positive close. As a result of the three variables, the stock increased on the sixth day.

Moreover, After a few months, say, the same collection of circumstances is seen for 5 consecutive trading sessions.

What would you anticipate for the sixth day?

Importantly, The assumption is that history tends to repeat itself. However, there is one limitation to this assumption. When a group of circumstances that has worked in the past tends to repeat itself in the future, we expect the same outcome to occur, providing the factors are the same.

Besides, Based on this assumption, we can expect the stock price to rise in the sixth trading session even this time.

Candlestick Patterns what to expect?

Furthermore, Trading patterns are identified using candlesticks. Patterns, in turn, assist the technical analyst in establishing a trade. The patterns are created by arranging two or more candles in a specific order. However, powerful trading signals can sometimes be spotted by a single candlestick pattern.

As a result, candlesticks can be divided into two types: single candlestick patterns and multiple candlestick patterns.

We shall learn the following under the single candlestick pattern.

1. Marubozu
2. Bullish Marubozu
3. Bearish Marubozu
4. Doji
5. Spinning Tops
6. Paper umbrella
7. Hammer
8. Hanging man
9. Shooting star

Not only but also, Multiple candlestick patterns are made up of several candles. We shall study the following from the various candlestick patterns:

1. Engulfing pattern
2. Bullish Engulfing
3. Bearish Engulfing
4. Harami
5. Bullish Harami
6. Bearish Harami
7. Piercing Pattern
8. Dark cloud cover
9. Morning Star
10. Evening Star

Indeed, You’re probably wondering what these names mean. Some of the patterns keep their original Japanese names, as I explained in the last chapter.

Especially, Candlestick patterns assist traders in developing a comprehensive point of view. Each pattern includes a built-in risk mechanism. Candlesticks provide information on both the entry and stop-loss prices.

Few assumptions specific to candlesticks

Surely, Before we go in and start learning about the patterns, there are a few more assumptions to consider. These assumptions apply just to candlesticks. Pay close attention to these assumptions because we will be returning to them frequently later.

At last, These assumptions may not be evident to you at this point. I’ll go through them in greater depth as we go along. However, keep the following assumptions in the back of your mind:

• First, Buy strength and sell weakness:-A bullish (blue) candle represents strength, while a bearish (red) candle represents weakness. As a result, whenever you buy, make sure it’s a blue candle day, and whenever you sell, make sure it’s a red candle day.
• Second, Be flexible with patterns (quantity and verify):- While the textbook description of a pattern may mention specific parameters, there may be slight deviations in the pattern due to market conditions. As a result, one must be somewhat adaptable. However, one must be flexible within boundaries; therefore flexibility must always be quantified.
• Third, Look for a prior trend:-If you are searching for a bullish pattern, the preceding trend should be bearish, and vice versa if you are looking for a bearish pattern, the prior trend should be bullish. We’ll start with single candlestick patterns in the future chapter.

Conclusion

1. History tends to repeat itself; we changed this premise by including the factor angle.
2. Candlestick patterns are classified as single or multiple candlestick patterns.
3. Three key assumptions apply to candlestick patterns.
4. Invest in strength and sell weakness.
5. Be adaptable; quantify and verify.
6. Look for a previous pattern.