[Candlestick Patterns] - Steemiacademyst Crypto Academy Season 5 - Homework Post For Task 10

in hive-108451 •  5 months ago 

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Hello dear friends of steemit crypto academy. I'm glad to present to you my homework on task 10 which is lectured by processor @reminiscence01.

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Candlestick Patterns By @chiomzy810

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QUESTION

2A.) In your own words, explain the candlestick patterns and their importance in carrying out effective technical analysis.
B.) In your own words, explain the psychology behind the formation of the following candlestick patterns.
– Bullish engulfing Candlestick pattern.
– Doji Candlestick pattern.
– The Hammer Candlestick pattern.
– The morning and evening star Candlestick pattern.
– The Harami Candlestick pattern.

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THE CANDLESTICK PATTERNS AND THEIR IMPORTANCE IN CARRYING OUT EFFECTIVE TECHNICAL ANALYSIS.

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In this first section of the question, i will like to offer helpful definitions and explanations that will aid more comprehension. These includes Candlestick, Candlestick Charts, Candlestick Patterns.

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Candlestick

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Technically, Candlestick are single bars that shows information about the movement of the current price of a goods or asset. If you look at the price chart of any cryptocurrency pair, you will notice a green and a red thick lines, usually with wicks. They are referred to as candlestick due to their similarity appearance to real-life Candlesticks.

They consist of an upper shadow , a real body and a lower shadow. Therefore, there are two types of candlesticks namely; A Bullish Candlestick and A bearish Candlestick.
A bullish Candlestick is generally green with the price closing in the upper shadow and opening in the lower shadow. While, A bearish Candlestick is generally red with the price opening at the upper shadow and closing at thw the lower shadow.
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Candlestick Charts

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As we can see, On a price chart of a cryptocurrency is a collection of bullish and bearish candles and that makes a Candlestick chart. A candlestick chart is a graph-like structure tgat are made up if various candlestick based on the price movements of an asset.

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Example of a a Candlestick Chart

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Candlestick Patterns

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I describe candlestick patterns as those particular price movements on a candlestick chart that makes it easy to point out how the next move of the market is going to be. Because of it, these patterns are used as a tool in the financial analysis of an asset. In every cryptocurrency chart pair, there are so msny existing candlestick patterns and each of them signifies particular movement who might occur or give more insight into the current market situation.

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THE IMPORTANCE OF CANDLESTICK PATTERNS IN TRADING ANALYSIS

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The candlestick patterns are very useful tool used in trading analysis. The importance ae numerous to mention but i will list just a few;

  • Candlestick Patterns are very easy to understand and recognize on a chart.
  • Candlestick Patterns help us to identify the direction/movement of a trend on the market easily and also to identify the important market points.
  • By just looking at the length and colours of the candlestick, you can easily find out whether at that moment the market is bullish or bearish.
  • Candlestick are made by price fluctuation of sn asset in the market and renders a more grouped look, gathering all possible price movements and plotting them on such an easy way comprehendible.
  • The candlestick patterns gives more prediction on who has control of the market at any givdn time, whether it's the buyers or sellers.

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THE PSYCHOLOGY BEHIND THE FORMATION OF THE DIFFERENT CANDLESTICK PATTERNS

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There are various candlestick patterns which are used in trading. But i will be discussing the given five from the question;

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Bullish Engulfing Candlestick Pattern

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I will first explain what an engulfing candlestick pattern is. An Engulfing Candlestick Pattern is a candlestick pattern that is made up of two candles, where the first candle covers the previous candle completely and the second candle has engulfed or swallowed the furst candle.

Now, A Bullish engulfing candlestick pattern is a type of engulfing pattern in which a bullish candke completely shrouds a bearish candle. In this pattern, it happens to be that the first candle is a bearish candle and the second candle a bullish candle. The bullish candle closes higher than the bearish candle's open and opens lower the bearish candle's close.

If this occurs in a downtrend, it literally means that the buyers are now in full control of the market. And bullish engulfing pattern is not enought to trade on a single candlestick and are also common whenever an uptrend gets underway.
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Example of Bullish engulfing candlestick pattern

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Doji Candlestick Pattern

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The Doji Candlestick Pattern I a formation that happens when a market's open price and close price are almost nearly the same. They are made up of a vertical line which shows the high and low price and also a horizontal line which shows the opening and closing price. The Doji candlestick pattern can lead to high profits in trading.

Doji Candlestick Pattern normally looks like a cross as both the opening and the closing prices are equal or can be almost the same.
The word Doji is originated from japanese meaning blunder or mistake and that refers to the rarity of having the open/close price be almost the same.
There are four types of Doji Candlestick Pattern inclusively;


  • Long-legged Doji:

This pattern can only occur when the supply and demand factors are basically at equilibrium. As the name implies , it's truly a Long-legged candlestick pattern. And this Doji can signal a reversal I price sometimes.


  • Neutral Doji:

This type of doji candlestick pattern is the most common. This pattern therefore occurs when buying and selling are almost the same. And the future direction of the trend is uncertain as shown by the Doji pattern.


  • Dragonfly Doji:

This specific doji is a bullish reversal pattern which is characterized by having it's horizontal line at the top of the vertical line. This pattern displays at the end of the downtrend when the supply and demand factors are at equilibrium.


  • Gravestone Doji:

This Doji pattern is found at the end of the uptrend, usually when a supply and demand factors are equal. The future prediction/direction of the trend is regulated by the prior trend and Doji pattern. It opens and closes at day's low and it's a bearish reversal candlestick pattern.

These patterns are formed in a period of indecision in the market that's why we should always take note. Now, to minimize fake outcomes, trading should be made or done only/strictly after the next proper candle has been formed.

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The Hammer Candlestick Pattern

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This Candlestick Pattern has a shorter body and a very long wick below, thereby giving it the I'm of a hammer. The closing and opening price are almost the same. Through the view of this candle, it signifies that the price us highly imposed by the buyers. It is very important as that. If it occurs at a support level in the market , they can suggest a strong reversal in price. See below a bullish hammer.

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We also have a type of hammer which is the inverted hammer. This hammer rather has it's wick going up rather. And this can occur because the price is being opposed by the sellers, thereby pushing it down. It is equally essential in that when it occurs in an uptrend, it suggests a string price reversal. This is the bearish hammer.
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The Morning and Evening Star Candlestick Pattern

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The star candlestick pattern is the bullish type. Therefore, the first candlestick is a strong bearish candle, that's to say that "sellers are in control". And the second candlestick is a small doji candle, which implies that sellers can not push price down again. The third candle is a bullish candle that covers the Doji which means that the buyers are now in control again.

The sellers were in control and then the buyers took control over the price, If this pattern should happen in a downtrend, it shows a very strong reversal in price. The signal given by the pattern is the strongest when it occurs at a sopport level from this candlestick pattern price generally rise..
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Evening Star Candlestick Pattern:

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This is a bearish star candlestick pattern. The first candle is a strong bullish candle which means that buyers are in total control. Secondly we have a small doji which indicates that the buyers are losing their strength and power in the market. While the third candle is a long bearish candle, which covers the small doji, which means that the sellers are in control.

It basically means that the buyers are in control of the market there until the sellers took over in charge. When this pattern happens or occur in an uptrend, it shows a strong reversal in price. Showing from the image, the signal is stronger at a resistance level. So you could tell from the name "evening star" that the price is about to fall.
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The Harami Candlestick Pattern

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The Harami Candlestick Pattern is made up of two candles. The bullish and the bearish Harami, the second candle is smaller than the first candle. From the looks, this pattern is simply like the engulfing candlestick pattern.

This specific pattern occurs when the buyers and sellers are fighting for control in the market. That's why this candlestick pattern shows indecision in the market.

We have the types of Harami Candlestick namely the bullish and bearish Harami Candlestick Pattern,;


  • Bullish Harami:

In this pattern, the first and longer candle is bearish while the send smaller candle is a bullish.
A bullish candle is completely enclosed by a bearish candle, so when it is formed in a downtrend, it shows or signifies a strong reversal which is bullish.
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  • Bearish Harami:

Here, the first candle is a bullish and the second a bearish. The bearish candle is engulfed by the bullish candle, if this should occur in uptrends mostly in strong resistant areas, ut requests acstrong reversal in price which in nature is bearish.
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An admirable thing about the harami candlestick pattern is because, if it occurs in the middle of a trend, it will rather opinate continuation of that particular trend.
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Conclusion:

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A trader should know too well that a Candlestick Pattern is really important and needful because, they contain alot of information on how the price asset movement of the market is at one point in time. These patterns are rather not hard to learn, for a calm understanding of these patterns will aid to knowing the charts very well. Its also essential to use the price action strategy.
Most of the patterbs are relatively the same, so they are easy to learn and adaptable.
All thanks to professor @reminiscence01 for the lecture.

N/B: All images were screenshoted from https://www.tradingview.com/ and edited with screen master.

Thank You For Reading!

Cc-
@reminiscence01
@dilchamo

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