What is the psychology of candlestick?
The psychology behind candlestick patterns stems from the belief that market participants' emotions and behaviors are reflected in price action. Each candlestick represents a specific time period (e.g., a day, an hour, or a minute) and portrays the battle between buyers (bulls) and sellers (bears) in the market. By observing the different shapes and formations of candlesticks, traders attempt to understand the balance of power between buyers and sellers and make informed trading decisions.
Here are a few common candlestick patterns and the psychology associated with them:
Bullish/Bearish Engulfing: A bullish engulfing pattern occurs when a small bearish candle is followed by a larger bullish candle that engulfs the previous one. It suggests a shift in sentiment from bearish to bullish, indicating that buyers have overwhelmed sellers. Conversely, a bearish engulfing pattern reflects a shift from bullish to bearish sentiment.
Hammer/Inverted Hammer: These patterns have long lower shadows and small real bodies near the top of the candlestick. Hammers indicate that sellers pushed prices lower but were eventually overcome by buyers, suggesting a potential bullish reversal. Inverted hammers are similar but occur after a downtrend and suggest a potential bullish reversal as well.
Doji: A doji has a small real body, indicating that the opening and closing prices were very close or identical. It suggests indecision in the market, with neither buyers nor sellers gaining control. Dojis can be interpreted as a potential reversal signal, especially when they appear after a strong price move.
Shooting Star/Hanging Man: These patterns have small real bodies near the top of the candlestick with long upper shadows. A shooting star occurs in an uptrend and suggests a potential bearish reversal, indicating that sellers have entered the market. A hanging man is similar but occurs in a downtrend and suggests a potential bullish reversal.
It's important to note that candlestick patterns alone should not be the sole basis for trading decisions. They should be used in conjunction with other technical analysis tools and indicators to increase the probability of accurate predictions. Additionally, market conditions, fundamental analysis, and risk management should also be considered for a comprehensive trading strategy.