Candle formations are the fundamental language of charts. If you want to understand market movements, it is essential to learn to read the most important ones. The following candles often signal trend reversals or confirm the continuation of movement. When you understand them and use them in the right context, you can significantly increase the probability of your successful trades.
1. Bullish Engulfing
It appears at the bottom of a declining trend. A small red candle is 'engulfed' by a larger green one. It signals the strength of buyers and a potential reversal upwards.
2. Hammer
Characteristic long lower wick and small body above. It forms after a decline and signals rejection of lower prices. Often precedes a rise.
3. Morning Star
Three-candle formation. The first candle is a large red one, the second is small (often a doji), and the third is a strong green one. It signals a reversal upwards.
4. Bearish Engulfing
The opposite case of bullish engulfing. It appears at the top of a rise, where a small green candle is 'engulfed' by a larger red one. It indicates the dominance of sellers.
5. Hanging Man
At the top of the trend, a candle with a small body and a long lower wick appears. Although it may look like a hammer, in the right context it warns of a potential decline.
6. Evening Star
The opposite version of the morning star. It begins with a strong green candle, followed by a small indecisive candle and then a strong red one. A strong signal for a reversal downwards.
