How to Read Candlestick Chart for Day Trading

A candlestick chart also called a Japanese candlestick represents the price movements of a stock for a particular period of time, such as a day or an hour, and displays the opening, closing, high, and low prices for that period.

You can use the candlestick chart for day trading to identify patterns and trends in the market. You can make informed decisions based on the price movements and volume of a stock. 

Candlestick Chart Components 

Candlestick charts are comprised of red and green candles that indicate the range of prices over a specific time period. For instance, in a 5-minute candlestick chart, each candlestick represents 5 minutes, and in a 15-minute candlestick chart, each candlestick represents 10 minutes.

Each candlestick has two main components: the opening price and the closing price. 

A green candlestick indicates that the closing price at the end of the time period is higher than the opening price, 

A red candlestick indicates that the closing price is lower than the opening price.

To illustrate this, let’s consider an example. Suppose you open a 15-minute candlestick chart of stock at 9:30 am when the price is Rs. 230. If the price rises to Rs. 233 by 9:45 am, the candlestick formed during that period will be green.

anatomy of a candlestick

Candlestick patterns are composed of four main components: open, high, low, and close, each of which represents a specific period of time, such as one day.

  • Body: The body of the candlestick represents the opening and closing price of the stock over a specified time period. 
  • Wick or Tail: The wick or tail of a candlestick represents the range of prices that the stock traded within during the specified time period. The upper wick or tail represents the highest price the asset reached during the period, while the lower wick represents the lowest price.
  • Candlestick Colors: Different colors of candlesticks have different meanings. A green candlestick usually represents a bullish or positive price movement, while a red candlestick usually represents a bearish or negative price movement.
  • Patterns: Candlestick charts are often used to identify patterns that can indicate potential price movements. For example, a series of long green candlesticks may indicate a strong bullish trend, while a series of long red candlesticks may indicate a strong bearish trend.

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15 Candlestick Patterns to Learn for Day Trading

Candlestick patterns are divided into 3 categories

  • Bullish reversal candlestick pattern
  • Bearish candlestick pattern 
  • Continuation Candlestick Patterns

In this article, I have covered the most commonly used candlestick patterns. You can read my article on 37 types of candlestick patterns to check the details of all the candlestick patterns. 

Bullish Reversal Candlestick Patterns

A bullish reversal candlestick pattern indicates a potential reversal in a downtrend. These patterns show that bears (sellers) are losing control, and bulls (buyers) are taking over. These patterns are generally found at the end of a downtrend and signal a change in trend direction.

You can use these patterns to identify potential entry points for long positions or to confirm a bullish bias.

1. Hammer

Hammer pattern

A Hammer is a bullish reversal pattern that forms when the price is in a downtrend. It is characterized by a small real body (the difference between the open and close) at the top of the candlestick and a long lower shadow (the difference between the low and the real body). This indicates that the bulls were able to push the price up from the low and that they are likely to continue doing so.

You can read my article on how to trade hammer candlesticks to know the strategies that you can use along the hammer.

2. Bullish Engulfing

Bullish engulfing pattern

A Bullish Engulfing pattern is formed when a small bearish candlestick is followed by a larger bullish candlestick that completely engulfs the previous candlestick. This pattern indicates that the bulls have taken control of the market and that a bullish trend is likely to follow.

3. Piercing Line

piercing-pattern

A Piercing Line is a bullish reversal pattern that is formed when a bearish candlestick is followed by a bullish candlestick that opens below the previous day’s low, but closes above the previous day’s midpoint. This pattern indicates that the bulls are gaining strength and that the bears may be losing their grip on the market.

4. Morning Star

morningstar

A Morning Star is a bullish reversal pattern that is formed by three candlesticks. The first candlestick is a bearish candlestick, the second is a small candlestick with a small real body that can be bullish or bearish, and the third is a bullish candlestick. This pattern indicates that the bears have lost control of the market and that the bulls are likely to take over.

You can read my article on how to trade morning star candlesticks to know the strategies that you can use along the morning star.

5. Bullish Harami

Bullish harami

A Bullish Harami is a bullish reversal pattern that is formed when a small bearish candlestick is followed by a larger bullish candlestick that has a real body that is completely within the range of the previous candlestick. This pattern indicates that the bears are losing their grip on the market and that a bullish trend may follow.

You can read our article on the best technical indicators used in trading that might help you in picking the right trend.

Bearish Candlestick Patterns

A bearish candlestick pattern indicates a potential reversal in an uptrend. These patterns show that bullish (buyers) are losing control, and bearish (sellers) are taking over. These patterns are generally found at the end of an uptrend and signal a change in trend direction.

You can use these patterns to identify potential entry points for short positions or to confirm a bearish bias.

6. Bearish Engulfing Pattern

bearish engulfing pattern

This pattern occurs when a small bullish candlestick is followed by a larger bearish candlestick that completely engulfs the previous candlestick. It is a strong indication of a trend reversal from bullish to bearish.

7. Evening Star Pattern

Evening star

This pattern is formed by three candlesticks: a large bullish candlestick, followed by a small bullish or bearish candlestick, and then a large bearish candlestick that opens below the previous candlestick’s close. This pattern is also a sign of a trend reversal.

You can use trend reversal trading strategy to invest in Sensex, banknifty or nifty 50.

8. Dark Cloud Cover Pattern

Dark cloud cover

This pattern forms when a bullish candlestick is followed by a bearish candlestick that opens above the previous candlestick’s close but then closes below its midpoint. This indicates a potential trend reversal from bullish to bearish.

9. Hanging Man Pattern

Hanging man

This pattern forms when a small bullish candlestick is followed by a larger bearish candlestick that has a long lower shadow. The long lower shadow indicates a bearish sentiment, and this pattern is a sign of a potential trend reversal.

10. Shooting Star Pattern

Shooting star

This pattern is the opposite of the Hanging Man pattern. It forms when a small bullish candlestick is followed by a larger bearish candlestick that has a long upper shadow. This pattern is also a sign of a potential trend reversal.

You can use advanced technical analysis tools to observe these candlestick patterns carefully, however, I have shortlisted the best free technical analysis software in India for in-depth analysis of market trends.

Continuation Candlestick Patterns

Continuation candlestick patterns indicate a temporary pause in a trend before it resumes in the same direction. These patterns are often referred to as continuation patterns because they suggest that the market is taking a brief break before continuing its previous trend. 

Continuation patterns can be observed during both an uptrend and a downtrend.

11. Doji Pattern

Doji

A doji pattern occurs when the opening and closing prices of the candle are nearly the same. The doji pattern is represented by a small body with a long upper and lower tail. It suggests that the market is experiencing indecision and that the buyers and sellers are in equilibrium. You can interpret this pattern as a sign that the trend is likely to continue in the same direction.

12. Spinning Top Pattern

Spinning top

The spinning top pattern is similar to the doji pattern, but the body is slightly larger. This pattern suggests that there is indecision in the market, but it is not as pronounced as in the doji pattern. The spinning top pattern indicates that the trend is likely to continue in the same direction, but you should be cautious.

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13. Falling Three Methods

Falling three

The falling three methods pattern occurs during a downtrend and is represented by a series of candlesticks. The first candlestick is a long red candlestick, followed by a series of small green candlesticks. The green candlesticks are all contained within the range of the first red candlestick. This pattern suggests that the market is taking a brief pause before continuing its previous downtrend.

14. Rising Three Methods

Rising three

The rising three methods pattern occurs during an uptrend and is the opposite of the falling three methods pattern. The first candlestick is a long green candlestick, followed by a series of small red candlesticks. The red candlesticks are all contained within the range of the first green candlestick. This pattern suggests that the market is taking a brief pause before continuing its previous uptrend.

15. Upside Tasuki Gap

Upside Tasuki

The upside tasuki gap pattern occurs during an uptrend and is represented by two consecutive green candlesticks. The second green candlestick opens above the close of the first green candlestick, creating a gap between the two candlesticks. The third candlestick is a red candlestick that opens within the gap and closes above the close of the first green candlestick. This pattern suggests that the market is taking a brief pause before continuing its previous uptrend.

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How to Analyze Candlestick Chart Patterns for Day Trading

You can use candlestick chart patterns to determine the entry and exit points of a trade, as well as to understand the trend, corrections, and consolidation. Here are the steps to analyze candlestick chart patterns for day trading:

1. Understand the Time Frames

The first step in analyzing candlestick chart patterns is to understand the time frames you are trading in. Different time frames can have different patterns and trends.

For example, a bullish reversal pattern on a 1-minute chart may not be as significant as a bullish reversal pattern on a daily chart.

2. Know What is Price – Action Analysis

A price action analysis is the study of price movement without any indicators. It is the most basic and essential aspect of analyzing candlestick charts. By observing price movements, traders can predict the future movements of the stock.

For example, if the price is consistently moving higher, it indicates an uptrend. Conversely, if the price is moving lower, it indicates a downtrend.

3. Learn about Bullish and Bearish Candles

Bullish candles indicate buying pressure and a potential bullish trend. They have a long body with a small wick or no wick at the bottom. Bearish candles, on the other hand, indicate selling pressure and a potential bearish trend. They have a long body with a small or no wick at the top.

4. Determine Entry and Exit Points Based on Candlestick Chart Patterns

Entry points are determined by identifying the pattern in the chart and buying the stock when the pattern is confirmed. The exit point is determined by setting a target price or a stop loss.

For example, if you are trading a bullish reversal pattern, you can buy the stock when the pattern is confirmed and set a target price at the previous high or resistance level. You can also invest in bank nifty based on candlestick chart pattern.

5. Understand Trends, Corrections, and Consolidations

Understanding the trend, corrections, and consolidation is essential to analyze candlestick chart patterns for day trading

You can identify an uptrend by higher highs and higher lows, while a downtrend is identified by lower highs and lower lows. 

In a correction, prices move against the trend but fail to make a new high or low. Corrections are common in markets, and they help traders identify the strength of the trend.

Consolidation happens when prices move sideways, forming a range or a channel. Consolidation can be observed as a pause in the trend, and it helps traders identify the support and resistance levels.

For example, if the price of a stock is in a clear uptrend, you can look for buying opportunities when the price pulls back to a support level. Conversely, if the price is in a clear downtrend, you can look for selling opportunities when the price rallies to a resistance level.

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How to Combine Candlestick Patterns with Other Strategies

You can combine candlestick patterns with other popular trading strategies to make profitable trades. Let’s take a look at some examples of how to combine candlestick patterns with other strategies.

1. Moving Averages and Candlestick Patterns

Moving averages are commonly used to identify trends and potential trend reversals. When combined with candlestick patterns, they can provide a powerful trading signal.

For example, if you see a bullish engulfing pattern on a chart, indicating a potential reversal in an uptrend, you can wait for confirmation from a moving average crossover. A moving average crossover occurs when a short-term moving average crosses above a longer-term moving average, indicating that the trend has reversed.

2. Fibonacci Retracement and Candlestick Patterns

Fibonacci retracement is a technical analysis tool used to identify potential levels of support and resistance. You can combine with candlestick patterns to get valuable information about where to enter or exit a trade.

For example, if you see a bearish engulfing pattern at a Fibonacci retracement level, indicating a potential reversal in a downtrend, you can use the retracement level as a potential exit point for your short position. 

Alternatively, if you see a bullish engulfing pattern at a retracement level, indicating a potential reversal in an uptrend, they can use the retracement level as a potential entry point for a long position.

3. Trend Lines and Candlestick Patterns

Trend lines are used to identify trends and potential trend reversals. You can get a clear picture of the market trend by combining it with candlestick patterns. 

For example, if you see a bullish engulfing pattern at the support line of an uptrend, it can be a reliable signal to enter a long position. 

Alternatively, if you see a bearish engulfing pattern at the resistance line of a downtrend, it can be a reliable signal to enter a short position. You can also learn how to predict the next candlestick for trend direction whether the trend is going to be bullish, or bearish.

4. MACD and Candlestick Patterns

The Moving Average Convergence Divergence (MACD) is used to identify potential trend reversals. You can analyze the trade entry or exit points combined with candlestick patterns. 

For example, if you see a bullish engulfing pattern and the MACD histogram crosses above the signal line, it can be a reliable signal to enter a long position. 

Alternatively, if you see a bearish engulfing pattern and the MACD histogram crosses below the signal line, it can be a reliable signal to enter a short position.

Common Mistakes to Avoid while Interpreting Candlestick Chart Patterns

You should avoid the following common mistakes while interpreting candlestick chart patterns, 

  • Focusing on individual candlesticks without considering the larger trend or market sentiment.
  • Ignoring the time frame, as different time frames can provide different signals.
  • Not confirming candlestick patterns with other technical indicators.
  • Being too eager to enter or exit a trade without waiting for confirmation from other factors.

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Final Advice

You should not blindly enter a trade only by spotting mentioned a candlestick pattern. For instance, a bullish hammer formation at the bottom of a downtrend cannot ensure that you will make a profit by going long. It is crucial to wait for a few candles to confirm the view about the trade, particularly in the starting phase.

You should look at the market conditions to formulate a trading strategy. In case there is some breaking news that can cause sudden positive or negative sentiment in the market, such as a trade war, or regulatory changes, the prices will react, irrespective of what the technical chart earlier indicated.

You should use technical indicators in addition to candlestick patterns to plan your trades.

About Rajan Dhawan

Rajan has covered personal finance and investing for over 5 years. Previously, he was in the IT field for 8 years after completing his MCA but his deep interest in personal finance led him to become an investing expert. He is passionate about investing, stocks, startups, and cryptos.

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