As we have already mentioned, the technical analysis relies on the fact that history is likely to repeat itself. This is probably the most important assumption in Technical Analysis.
This assumption is important because candlestick patterns heavily depend on it.
Consider today the 7th July 2014, few events are taking place in the stock. Following the factor:
Let's assume these factors are in play and that the stock falls on the 8th of July 2014. The stock then rallies to a positive close. The stock rose on the 6th day as a result of these 3 factors.
The time passes, and we can safely say that the same set of factors are observed for five consecutive trading sessions. What are your expectations for the 6 th day of trading?
History repeats itself, nothing but an assumption. This assumption needs to be reaffirmed. If a set of factors has worked in the past, it tends to be repeated in the future. We expect the same outcome, provided that the factors are the exact same.
This assumption means that we can expect stock prices to rise on the 6th trading session.
Candlesticks can be used to identify trading patterns. The patterns help technical analysts to plan trades. Patterns are created by grouping multiple candles in a specific sequence. Sometimes, however, a single candlestick pattern can identify powerful trading signals.
Candlesticks can therefore be broken down into multiple patterns or one candlestick.
We will learn the following under the single candlestick pattern:
Multiple candlestick patterns can be a combination of multiple candles. We will be learning the following information under the multiple candlestick patterns:
You must be curious about the meanings of these names. Some patterns, as I mentioned in the previous chapter retain their original Japanese names.
Candlestick patterns allow traders to develop a holistic view. Each pattern has an inherent risk mechanism. The entry and stop-loss prices can be viewed using candlesticks.
There are a few things we should remember before we dive in and begin to learn about the patterns. These assumptions apply to candlesticks only. These assumptions are specific to candlesticks. We will continue to refer to them later on.
These assumptions might not be obvious at this stage. These assumptions may not be obvious to you at this stage. I will go into more detail as we move forward. These assumptions should be noted.
We will be learning more about single candlestick patterns in the next chapter.