What are the important points to analyze candlestick patterns correctly? What is the psychology behind the formation of the candlestick patterns?
Nowadays, Trading in the stock market with the help of a candlestick chart is very common. But more often people fail to confirm the reliability of the pattern formed. The dilemma to enter the trade and how to set the best risk-reward are the prime concerns traders experience.
First of all some basics and then we will talk about the PSYCHOLOGY behind every pattern formed.
- There are 2 types of candlestick patterns 1. Reversal Candlestick pattern 2. Continuation Candlestick pattern.
- These patterns are sub-divided into more 1–2–3–4–5 day candlestick patterns. This number of days represents how many days the pattern takes to complete and then analyze it and take action. More the days rarely the candlesticks patterns are formed and are more reliable.
I have my way of looking at the candlesticks and analyzing their characteristics, like who dominated (buyers/seller), What is the size of the candle as compared to previous candles, Where the body is placed (upper part or lower part of the trading range), comparing preceding candles with the current candle’s range and the volume during the whole period.
Most Importantly I analyze the subsequent – follow-up candle formed after the candlestick pattern to enter the trade.
Below is an example that most people under-rate to take into consideration.
The closings are always important in the technical analysis prospect.
The higher VOLUME during the pattern formation, the more reliable the patterns tend to blow off, as there is an increase in the participants.
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TRADING PSYCHOLOGY – SHOOTING STAR CANDLESTICK PATTERN
During an impending uptrend, the sellers are less and buyers continue to buy on every downtick, at some level of resistance (any significant level) or at a price where the smart guys (market makers) think the security is overvalued – More selling side trades are placed than buy orders. *The volume should increase during reliable candlestick pattern FORMATION is because of this more interest by the market participants.
- Finally, the pattern is confirmed when more retail buyers come to buy as they feel they are getting the security at a lower price which was trending upwards for a significant time, their BUY orders are filled by the “Market Makers” who have already bought at a very lower price and are exiting at euphoria.
This is how the reversal occurs, remember that candlestick patterns formation and their subsequent moves are the minor trends that form an intermediate or secondary trend.
- A candlestick pattern formed in the direction of the secondary trend is more reliable than the one in the opposite direction. For Example, If there is a bullish reversal candlestick formation then the secondary trend must be UP, and vice-versa for bearish candlestick formation.
Most people think that Retail Traders are trapped every time, this is because they don’t absorb the moves of the market seriously or analyze the securities in an analytical way and just trade the prices.