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The Three Candlestick Patterns Every Trader Should Know

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When it comes to technical analysis, there are many ways one can analyze the markets. Among these different types, price action based technical analysis is commonly used by professional traders. The main difference between price action based technical analysis and an indicator based technical analysis is the fact that instead of relying on indicators, the trader focuses their analysis based on the candlestick patterns that form.
A candlestick pattern, as you might know comes when you make use of the candlestick charts. The candlestick charts are one of the oldest methods of visually depicting the price. The name candlestick derives from the fact that the price action is visually displayed like a candle with a week on the top or on the bottom.
Originally developed in Japan, the candlestick patterns are now essential to trading. They are widely used because of the fact that one can simply gauge the market sentiment by looking at how these candlestick patterns emerge. Therefore, as a trader it is important that you understand what these sentiments mean and also learn about the three most important candlestick patterns.
If you look around, especially at trading forums and on other websites, you will see that there are more than 100 different candle stick patterns. Each of these candlestick patterns convey different meanings. However, not all of them are required to be learned by the trader.
You can simply focus on the three most important candlestick patterns and this will help you to improve the confidence in your trading. The biggest benefit of using these three simple candlestick patterns is the fact that you would be easily able to mix this new knowledge that you learn about candlestick patterns into your existing trading strategies which may or may not use technical indicators.
Let's now take a look at these three candlestick patterns that we have been talking about.

1.The bullish/bearish engulfing candlestick pattern

The bullish or the bearish engulfing candlestick pattern is formed when the current candlestick completely engulfs the previous candlestick. Depending on the way this engulfing candlestick closes, bullish or bearish, it gets its name. The bullish and bearish engulfing candlestick patterns are primarily reversal patterns. Therefore, when these patterns appear at the top or at the bottom of a trend, it can signal that a correction or a change of trend is soon to occur.
Bullish and Bearish Candlestick patterns example
As you can see in the above chart, we have an example of a bullish and bearish candlestick pattern. This candle sticks up here when the market is overwhelmed by strong selling or buying pressure. As a result, the buyers are the sellers prevail leading to a bullish or a bearish candle stick pattern that forms.
As you can see from the above chart, after the appearance of these candlestick patterns you can see how price has moved in accordance with the reversal.

2.The inside bar candlestick pattern

The inside bar candle stick pattern is a very interesting formation. It appears when prices remained trading within the highs and lows of the previous session. The inside bar can be found both on a candlestick chart as well as on a bar chart.
An inside bar candle stick pattern usually signals a continuation of the previous trend. However this is not the case all the time. There for traders need to first wait and see how the following candlestick emerges from this inside bar pattern. In almost 90% of the times, price action tends to continue in the direction of the breakout.
However, traders need to bear in mind that sometimes market can also lead to a fake breakout. This happens usually by price action breaking out in One Direction after the inside bar is formed. After this, prices tend to reverse and move into the opposite direction.
Inside bar candlestick pattern
Above example, you can see two instances of an inside bar pattern. In the first instance, after the inside bar is formed, prices break out to the upside initially. However, as you can see prices retrace back again. But notice that the low of the previous inside bar was not yet breached. After this dip, prices then continue to move to the upside.
The next inside bar pattern is a bit clearer to understand. Here you can see how after the formation of the inside bar, prices break out from this range and continue to move higher.

3.The doji candle stick pattern

Lastly, we have the doji candlestick pattern. The doji candle stick pattern is quite significant when it appears. A doji candlestick pattern is identified when the price open and closing remained the same. This means that traders were unable to either push the prices higher or lower. A doji candlestick pattern is often set to be an indecision in the markets.
What is important about the doji candlestick pattern is that after it forms, you should focus on how the next candle stick closes. Usually, if there is a bullish candlestick pattern after the doji, it could signal that the uptrend will prevail. Similarly, when there is a bearish Candlestick pattern after a doji, you would notice that the price would move lower.
Example of a doji candlestick pattern
In the above chart you can see how the doji candlestick pattern is formed. It is important to note that the appearance of the doji pattern near the top or near the bottom of a trend is very significant. As you can see in the above charts, after the doji candlestick pattern emerges near the top, and the bearish candlestick closes after the doji, you can see prices moving lower.
Likewise, when the doji candlestick pattern emerges near the bottom of the trend, you can see a bullish close which leads to a small retracement in the market.
In conclusion, traders can begin understanding only these three Candlestick patterns which can greatly benefit your trading.
(by AllFXBrokers)


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