The secret of becoming a successful day trader is by understanding what matters most in analyzing the price movement. In that case, why don't we start by reading the candlestick chart?
Day trading has to do with investing in a financial instrument in which the trader buys and sells units of the instrument on the same day or even multiple times throughout the day. The trades are executed such that there are no open positions by the end of the day. It is about maximizing little price moves and it can be quite lucrative if the proper strategy is applied.
As such, day trading indicators would need to be highly responsive to rapid market changes. This also applies when you rely on canldestick charts as your indicators.
Best Candlestick Patterns for Day Trading
Based on what day traders need, it is best to trade single candlestick patterns since they don't take too much time to complete. Also. to eliminate the risk of false signals that usually come with single candlestick patterns, you should avoid common charts with no clear direction like the Doji pattern.
Instead, you could take these candlestick charts to wait for reversal opportunities in day trading:
Hammer (Bullish)
The candle of this pattern has a long lower wick and a short body. It tends to be seen at the bottom of a downward trend. It shows that in the face of selling pressures, there is a strong buying surge that brought about a rise in price. A green body in this pattern signifies a stronger bull market than a red body.
It is one of the most widely used candlestick patterns as it allows traders to identify capitulation bottoms which are then succeeded by a price bounce that can be utilized to enter long positions. The hammer pattern is solidified by an increase in trading volume. For confirmation of this pattern, the subsequent candle needs to close above the low of the hammer candle and possibly above the body.
Here's how the candlestick pattern appears on an hourly chart (suitable for day trading):
Inverted Hammer (Bullish)
This has a short body and a long upper wick and it is also found at the bottom of a downward trend. It signifies a buying pressure that succeeds a selling pressure. It is also an indication of the impending control that buyers are about to have.
Here's how an inverted hammer appears on an hourly chart; a perfect signal for day traders to buy.
Hanging Man (Bearish)
This candle has a short body with a long lower wick and it is usually seen at the top of an upward trend. It is an indication that the strength of the selling pressures was more than that of the buying thrust while also letting the trader know that a bearish trend is about to take over the market.
This candlestick pattern is not so common as it shows that there is a large buyer that got trapped in a bid to support the market momentum. It is essentially the indication of a possible climax in an uptrend just before a downtrend hits the market.
Here's how a hanging man candlestick appears on an hourly chart. Day traders usually watch this signal to identify sell opportunities.
Shooting Star (Bearish)
This is a candle that features a long upper wick and a short body; it is also usually seen at the top of an upward trend. In this case, the market opens higher than the previous day and builds a bit of momentum before eventually crashing like a shooting star, hence the name. It is an indication that the market will soon be taken over by selling pressure.
In this case, there is an initial rise in price and demand but due to the impatience of buyers, the price is bumped up to new highs before they realize their mistake. By the time they do, it sets off a panic-selling spree in which the buyers are now eager to sell to minimize their losses.
Here's how a shooting star candlestick appears on an hourly chart.
As mentioned earlier, day trading can be quite lucrative as long as you equip yourself with the necessary knowledge on how to make the most of it. One way to figure it out is by understanding the candlestick chart. It has become ubiquitous on just about every trading platform due to the depth of information provided and the simplicity of the components that make up these charts.
The types of candlestick chart patterns above can be your weapons to identify any day trading opportunities. Nonetheless, you may need to time your entry carefully because that is when you can effectively utilize the information gleaned from the candlestick charts profitably.