 Hi in this video, I'm going to be talking about candlestick formations otherwise known as price action and why traders use certain candlestick formations as Indications of a potential reversal in price There are two main reversal candlestick formations or price action And one is called the hammer candle and the other one is called an engulfing candle now Candlesticks will are pretty much unique in a sense that they're like snowflakes. There's no two Candlestick formations that are exactly the same but you will get candlestick formations that look similar to each other and You need to understand the story behind The candlestick formation, which is what I'm gonna break down for you So candlesticks pretty much are telling you what price is doing within a certain time period Whether you're on a daily chart or a 15 minute chart it doesn't matter the candlestick formations are the candlestick formations at the end of the day and They tell you Basically what supply and demand of what buyers and sellers have done in that time period now They're obviously clues as to when strong buying or strong demand is coming into the market and strong supply is coming into the market or sellers are coming into the market and That like I said, there are two candlestick formations that really indicate a change in supply and demand and the possible Reversal and sometimes you just continuation, but in this video. I'm gonna be talking about just the reversal in in price so First is what the traders call a hammer candle or Popular name for it is called the pin bar candlestick, right? So Just like everything else. You've got the high low and open and close prices Now this is what the obviously hammer candle Looks like and it's because it's got a long wick to the downside Which looks like the handle and this would be the the bit on the top and then you also have an inverse hammer candlestick or an inverted hammer candlestick or an inverse pin bar and it's pretty much the opposite of the Hammer candle. So you've got a long wick to the upside and then you've got the body on the lowest side now, why is this a Reversal signal you shouldn't just take it, you know for granted if you see something online and someone's trading hammer candles or pin bars As that's just what it is. You need to understand Why and the story behind? What's happening with buyers and sellers? So We'll go into that now, right? So this is the life of a hammer candlestick, right? So we have our open price, right? So this is basically where we start so that we don't know what the previous candle was Before but let's just you know ignore that and just say that price started from here So we have an open price and then what happens is is Oh Sorry about that. So what happens is is price Will Generally, you know end up going down sellers are pretty much in control, right? So it's going down going down going down to a certain point and Then what happens is As price starts making its way back up So sellers are in control and pushing price down then all of a sudden buyers will come into the market and Start to push price creating a wick All right, so buyers something will happen within that time period that Prices are being pushed up by buyers. So there's more demand than supply right, so Something's happening within the market buyers are just You know, there's a lot of demand coming into the market And then you end up with what would be considered maybe some sort of doji dragonfly doji candle, right? So Then prices basically push up even higher to the point where it creates a Bullish candle, right? So at the start and the open of the candle Sellers were in control pushing price all the way down by the end of the candle Demand and the buyers are in control so much that that you know, basically supply Is is very weak and demand is exceptionally strong now this will give Traders a strong indication that price is or potentially about to reverse Depending on where price is on a price chart So don't just take the fact that you know You see a hammer candle and that's just you know a reversal candle you have to understand the story behind it and We'll go into the inverted the inverted is pretty much the same but I'll attempt to animate the the inverted hammer candle now So again with the inverted hammer candle you have prices starting here or the open price and then you will have buyers drive the market higher and higher and higher and So on so there's a lot of demand coming in There's really no supply the sellers aren't entering the market yet and then at some point there is Extremely, you know supply really does come into the market So when some strong supply does come into the market What happens is is it creates the wick which gives us the information Regarding what's happened in the past and there is strong supply Driving price down demand is getting weaker and weaker supply is getting stronger and stronger So much so to the point where it pushes price past Where the open price was? so You can see that basically Supply was so strong that it pushed price past where buyers had Previously been in control. So this now tells the story that Prices may want to reverse and continue actually lower On on a price chart and again depending on where You see this candlestick is a strong indication of a reversal so the second candlestick reversal pattern that is very popular with Traders and that indicates a reversal or potential reversal in price is engulfing candlestick pattern. So we have a bullish and a bearish engulfing candlestick pattern and It involves two candlesticks. So you have the first candlestick which would be a bearish candlestick because what we're looking for is bullish price action So we're looking for price to Reverse so go to the upside. So what you need to see is sellers in control so demand should be The sorry supply should be the candle that you want to see first which indicates that the sellers are in control and then the second candlestick Sorry candlestick you want to see is a bullish candlestick. So again, we're looking for a reversal So just like the pin bar or hammer candlestick this is a Reversal candlestick because it basically plays out over two bars instead of one. So We have the first candlestick, which is a bearish candlestick and then we have a second candlestick and to for the engulfing candlestick to qualify as a engulfing candlestick the close price of the Second candlestick must close above the high price of the bearish candlestick the first candlestick and the reason why that is is because That then gives a strong indication that price is reversing so if prices for example were down here and Maybe we had the wig that was potentially Here that doesn't really give strong enough indication as to You know if if buyers are really taking control of the market what you want to see is price go above The high price the higher the better So the more demand you see and the bigger the engulfing candle on the right-hand side The better right? So again, if you think about the story between and and what this is showing you is that the sellers and Supply was coming into the market But then something happened within this time period where buyers and demand Increased so much that prices closed above above the high price of the previous candle so Traders pretty much take that as a very very bullish signal to get long and the same thing would apply with a bearish candlestick so With a bearish engulfing candlestick the same principles apply So you would have a bullish candle So you'd have demand coming into the market creating a high price close price open and and low price And then you would have and the second candle which is our bearish which is our engulfing candlestick you would have price basically start from here and then May it may go up a little bit. So this would be potentially green Well, I forget this The candlestick which hasn't you know appeared yet So you might have prices go something like this in the next candle and then again Something has happened within the market to push prices down All right, so supply has entered the market the sellers have come in and they're pushing price lower and lower So low in fact that it goes past the previous Candlesticks low and keeps going and closes anywhere below the candlestick low the further away the close price and the finished price of the bearish engulfing candlestick is From the low price or High price obviously in a in a bullish engulfing candlestick pattern The further away is the stronger the supply and this Again indicates a potential reversal in price So I'm going to show you on a price chart where these candles should be traded and To have the best probability of price Reversing away should be really trading these are the hammer candlestick and the engulfing candlestick pattern So in this example, we have Some bullish and bearish hammer candles as well as bullish and bearish engulfing candles at levels of support and resistance now what you want to do if you're looking for a reversal is look for bullish pin bars at a level of support and Bullish engulfing at levels of support and any bearish Price action. So any bearish Engulfing candles or bearish or inverted hammer candles at levels of resistance So you can see here. We have the bullish or Hammer candle right here pin bar here. We have a bullish engulfing pattern where the Close price is above the previous candlesticks high price and When we have a reversal signal here to the downside We can see that price is closed below the low price Again, we had two three and then we eventually had the reversal. So Yes prices can be and candlestick Patterns can be traded You know anywhere on the price chart But what you want to do is look for strong areas of support and resistance and then look for These when I say strong areas of support and resistance I mean, you know obvious areas of support and resistance and then look for these candlestick price actions for as a way to get into the short or to the long side And then what traders will do is put their stop loss Somewhere above the price action Here, so if you're getting into the short side you put your stop loss above the the engulfing pattern If you're trying to get into the to the short side so to the downside and then You would enter on the close of that candlestick stop loss above the high and then Trade to the downside. So if you were looking to buy on this candle Then you would put your stop loss below here As soon as the candle forms and it was a level of support Then you would buy as soon as the candlestick closes Then hopefully prices make their way higher. So I hope you enjoyed this video And if you do have any questions, please email me at info at trading 180.com