Maximize Your Profits Using These 3 Crucial Candle Patterns
Your trades are most profitable when you can pinpoint when a stock will most likely experience a reversal of fortune.
So it pays to know the early signs of a change in trend. And candlestick charts are some of the best market visuals you can use to get advance notice that a trend change is on the way.
We’ve used candlestick analysis to help spot some of our most profitable comeback plays this year. And if you take a few minutes to learn how to read candle charts, I can all but promise you’ll see bigger gains and instantly improve your trading profits.
I know many investors who aren’t familiar with candlestick charts are intimated by the bedlam of lines on the page. But once you understand the basics of candlesticks, you’ll be able to instantly absorb all the relevant information on any candlestick chart. More importantly, you’ll be able to use that information to perfect your buys and sells. And that means siphoning more money out of the markets.
Why use candles instead of a simple line chart? It all comes down to information. On a daily line chart, the closing price is plotted. That’s it. It’s not a problem if you’re only interested in the overall trend. But if you’re planning a trade, you want as much information as possible. That’s where candlesticks come in…
Candlestick charts not only show you the closing price of a given stock—but also its opening price, its high of the day, and its low of the day.
Take a look at this example:
Depending on your charting program, bullish and bearish candles might be different colors—so keep that in mind before venturing off on your own. Typically, candles with green or white real bodies are for bullish days, while red candles signify bearish days.
Now, as you can see, these candles convey a lot of information—even with just a quick glance. So let’s start putting all your newfound basic candle knowledge together. It’s time you learned some unique candlesticks that can help pave the way to fast, double-digit gains.
A hammer is an important (and popular) reversal candlestick formation. A hammer is formed when a stock takes a huge dive at the open, then recovers and plows higher towards the close. What results is a hammer-like shape with a long lower shadow on the candle. And guess what? That’s bullish…
A hammer means one thing: all the sellers have been flushed out and buyers push the stock higher into the close. And when a hammer occurs at an important support area after a big swoon, you should pay close attention. Looking for hammers is a great way to bottom-fish for a trade on the long side. This is what it looks like when a hammer helps trigger a big run:
Beautiful, ain’t it? But what if a hammer shows itself during a strong uptrend? In this case, you’re looking at an entirely different outcome—and another name for this important reversal candle, as you’re about to find out…
2. Hanging man
Hanging man candles might look like hammers – but these actually have bearish implications.
When you see a hanging man in an uptrend, it’s an indication that the stock in question might be running out of steam.
Yes, a hanging man candle closes well off its lows. But the intraday selloff is a hint that buyers are becoming exhausted.
As you’ve probably already guessed after learning about hanging man and hammer candles, you can’t view these signals in a vacuum. A stock’s overall trend is vital to deciphering a candle’s meaning…
3. Engulfing candles
Sounds awful, right? But it’s another key reversal clue. An engulfing candle can give you strong indication as to when bulls or bears are gaining control to change a trend’s direction
As the name suggests, an engulfing candle’s real body completely engulfs the real body of the previous day’s candle.
Think about what this means. If a stock in a downtrend opens below the previous day’s close, then powers higher all day to close above the previous day’s open, it’s clear that buyers are quickly gaining an upper hand over the sellers. This action can lead to a rapid change in trend—and a chance for you to book fast double-digit gains.
Of course, the same is true for a bearish engulfing candle. If a stock in a strong uptrend experiences a day where it opens higher, then closes below the previous day’s open price, it’s probably a good idea to take profits…
So there you have it—three crucial candle patterns. Hopefully, this quick look into candles has given you a glimpse into the struggle between buyers and sellers and how you can take advantage of sharp reversals in your trading.
We’re just scratching the surface of countless candle formations used by traders around the world. If you’re interested in diving deeper into the candlestick game, I highly recommend Japanese Candlestick Charting Techniques by Steve Nison.
Nison is the man responsible for bringing candlestick charts to the West—and his book is considered by most pros to be the bible of candlestick charting. If you want to improve your trading, it’s well worth your time.