5 Most Powerful Candlestick Patterns in Trading
Author: James Clark
The Top Candlestick Patterns Every Trader Needs to Know
Candlestick patterns, one of the different tools traders use to anticipate and analyze market conditions, have seen their popularity rise. This rise can be attributed to the granular information they provide when compared to conventional line charts. They offer a visual representation of open high and low close in a single bar. Besides this feature, their color-coded bars make differentiating between bullish and bearish markets easier.
So, what are the most powerful candlestick patterns traders use today? Let’s find out!
The Most Powerful Candlestick Patterns in Trading
Simply put, candlestick patterns help traders visualize price movements. They summarize a specific period’s trading action by displaying four price points:
Open – The period’s beginning price
Close - The period’s ending price
High – The peak price during the period
Low – The period’s lowest price
You can set the period according to your requirement. A candlestick pattern can represent a day, a week, or a month, etc. The problem is that there are various charting patterns for traders to follow, making it difficult for them to decide. However, some powerful candlestick patterns that get a higher preference from most traders because of their accuracy and simplicity in identification. They include:
1. The Three Line Strike
This pattern carves out three consequent candles in a downtrend, followed by a final candle that pulls back to the starting point. The three-line strike indicates a Bullish reversal and predicts higher prices with an 83% accuracy rate.
2. Two Black Gapping
A Two Black Gapping pattern is a continuation that shows a gap after an uptrend which yields two black or red bars that post lower lows. This candlestick pattern is 68% accurate and indicates that the prices will continue to fall, triggering a downtrend.
3. Evening Star
This pattern starts with a tall white or green bar that takes an uptrend to a new high. However, a black or red star appears away from the uptrend, indicating a reversal. The Evening Star is 72% accurate and predicts a broader-scale downtrend with lower lows.
4. Abandoned Baby
The Abandoned Baby pattern appears below the downtrend, after a bearish candle. Since it’s away from the trend and appears at the bottom, it indicates a lower low due to the absence of new sellers in the market, creating a moment of indecision. However, it can trigger a broader scale uptrend with a 49.73% accuracy.
5. Three Black Crows
The Three Black Crows candlestick pattern starts when three consecutive black or red candles appear after an uptrend. It predicts a decline in the market, possibly triggering a broader-scale downtrend. The chances of prices dropping are 78%.
The purpose of candlestick patterns is to help traders predict what the price of a stock might do next. It gives traders a break from using complex numbers and graphs by offering a visual representation of the market conditions for them to take action.
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