No news or internet source can offer more valuable insights about a stock than its price chart. By analyzing candlestick charts, you can understand the trend of a stock and determine the right time to enter or exit the market.
A candlestick chart offers a clear representation of the price graph in the form of a series of candles. The chart offers valuable information about the trend, bullish or bearish market conditions, and volume in just one glance.
You can gain insight into market sentiment and potentially predict future price movements by understanding the different types of candlestick patterns,
In this post, I will cover the three main types of candlestick patterns: bullish reversal, bearish, and continuation. Before that, let’s understand the basic components of a candlestick
How Are Candlestick Patterns Composed
Each candlestick represents a specific period of time, such as one day, and has four main components: open, high, low, and close. The body of the candlestick represents the open and close, and the wicks or tails represent the high and low during the particular time period.
The color of the candlestick represents market sentiment. A green candlestick (bullish) represents that the price closed higher than the opening price, indicating bullish sentiment.
A red candlestick (bearish), represents that the price closed lower than the opening price, indicating bearish sentiment.
Let’s discuss each component of a candlestick and its relevance:
1. Body: The body of the candlestick represents the opening and closing price of the stock over a specified time period. If the closing price is higher than the opening price, the body is typically green in color. If the closing price is lower than the opening price, the body will be red in color.
2. 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.
3. 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.
4. Timeframe: The timeframe of a candlestick chart refers to the length of time represented by each candlestick. This can range from minutes to months, depending on the desired level of detail.
5. 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.
Candlestick patterns are divided into 3 categories
- Bullish reversal candlestick pattern
- Bearish candlestick pattern
- Continuation Candlestick Patterns
Bullish Reversal Candlestick Pattern
A bullish reversal candlestick pattern is a formation of one or more candles that indicate 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.
Note:- These patterns can be useful for identifying potential reversals, they should not be used in isolation. You should always consider other technical indicators and fundamental factors before making trading decisions.
Let’s dive into the details of each bullish reversal pattern.
1. Hammer
The hammer is a single candlestick pattern that has a small body and a long lower wick. The hammer pattern forms when the market opens trades lower, and then rallies to close near the open. This pattern shows that the buyers have stepped in and are willing to push the price higher.
2. Inverted Hammer
The Inverted Hammer is a single candlestick pattern that forms after a downtrend and has a small body and a long upper tail. This pattern indicates that the bulls are starting to take control of the market and could signal a potential reversal.
3. Judas Candle
The Judas Candle is a bearish candle that forms at the end of a downtrend, followed by a gap-up and a long bullish candle. The name comes from the biblical story of Judas Iscariot, who betrayed Jesus with a kiss, symbolizing the “kiss of death” for the downtrend. This pattern can signal a potential reversal and a change in market sentiment.
4. White Marubozu (Bullish Marubozu)
The white Marubozu is a long bullish candle with no upper or lower tail, indicating that the bulls have taken control of the market and pushed the price higher. This pattern is a strong indication of a potential reversal in a downtrend.
5. On-Neck Pattern
The On-Neck pattern consists of two candles: a long bearish candle followed by a small bullish candle. The closing price of the bullish candle must be near the low of the bearish candle. This pattern suggests that the bears are losing control, and the bulls are starting to take over.
6. Bullish Counterattack
The Bullish Counterattack pattern is a two-candle pattern consisting of a long bearish candle followed by a long bullish candle that completely engulfs the bearish candle. This pattern is a strong indication of a potential reversal and a change in market direction.
7. Bullish Engulfing Pattern
The Bullish Engulfing Pattern is a two-candle pattern where the second candle is a long bullish candle that completely engulfs the previous bearish candle. This pattern is a strong indication of a potential reversal and a change in market direction.
8. Piercing Pattern
The piercing pattern is a two-candlestick pattern that forms after a downtrend. The first candlestick is a long bearish candlestick, followed by a long bullish candlestick that closes above the midpoint of the first candlestick. This pattern shows that the buyers are taking control and pushing the price higher.
9. Bullish Harami
The Bullish Harami is a two-candle pattern consisting of a long bearish candle followed by a small bullish candle. The bullish candle must form within the body of the bearish candle. This pattern suggests that the bears are losing momentum, and the bulls are starting to take control of the market.
10. Tweezer Bottom
The Tweezer Bottom is a two-candle pattern where two candles have identical or nearly identical lows. The first candle is bearish, and the second is bullish, indicating a potential reversal in a downtrend.
11. Morning Star
The morning star is a three-candlestick pattern that signals a potential reversal. The first candlestick is a long bearish candlestick, followed by a small bullish or bearish candlestick that gaps lower, and the third candlestick is a long bullish candlestick. This pattern shows that the sellers are losing control, and the buyers are taking over.
12. Three White Soldiers
The three white soldiers are a three-candlestick pattern that indicates a potential reversal. This pattern forms when three long bullish candlesticks follow a downtrend. This pattern shows that the buyers have taken control and are pushing the price higher.
13. Abandoned Baby
The Abandoned Baby pattern consists of three candles: a long bearish candle, a doji or spinning top candle, and a long bullish candle. The Doji or spinning top candle represents a period of indecision, followed by a strong bullish candle, indicating a potential reversal.
14. Three Inside Up
The Three Inside Up pattern consists of three candles: a long bearish candle, a small bullish candle that forms within the body of the bearish candle, and a long bullish candle that completely engulfs the bearish candle. This pattern is a strong indication of a potential reversal and a change in market direction.
15. Three Outside Up
The Three Outside Up pattern consists of three candles: a long bearish candle, a small bullish candle that forms within the body of the bearish candle, and a long bullish candle that completely engulfs the bearish candle and closes above its high. This pattern is a strong indication of a potential reversal and a change in market direction.
You can read our article on the best technical indicators used in trading that might help you in picking the right trend.
Bearish Candlestick Pattern
A bearish candlestick pattern is a series of one or more candlesticks that indicate 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.
There are several different types of bearish candlestick patterns, each with its own unique characteristics and implications. Let’s check each bearish candlestick pattern.
16. Shooting Star
The shooting star pattern is a single candlestick pattern that has a long upper tail and a small body. The candlestick can be either bullish or bearish, but it is more reliable as a bearish reversal pattern. The pattern signals a potential reversal in an uptrend.
17. Hanging Man
The hanging man is a single candlestick pattern that is characterized by a long lower tail and a small real body. This pattern suggests that the buyers were in control during the trading session, but the sellers stepped in towards the end and drove the price down. This pattern is often seen as a warning sign that a potential reversal is on the horizon.
18. Black Marubozu
The Black Marubozu pattern is a single candlestick pattern that is entirely bearish. The candlestick has a long red body with no upper or lower tail. The pattern signals a potential reversal in an uptrend.
19. Dark Cloud Cover
The dark cloud cover is a two-candlestick pattern that consists of a long bullish candlestick followed by a long bearish candlestick. This pattern suggests that the buyers were in control during the first trading session, but the sellers took over in the second session and drove the price down. The long bearish candlestick in this pattern is a sign that the bears are gaining momentum, and that a reversal is likely.
20. Bearish Harami
The bearish harami pattern consists of two candlesticks, the first of which is a large bullish candlestick. The second candlestick is a small bearish candlestick that is completely inside the range of the first candlestick. The pattern signals a potential reversal in an uptrend.
21. Tweezer Top
The tweezer top is a bearish reversal pattern that consists of two candles with identical highs. The first candle is usually bullish, while the second candle is bearish. The pattern signifies a potential reversal in an uptrend, as it suggests that buyers are struggling to push prices higher, and sellers are starting to take control.
To confirm the pattern, you should look for a long upper tail on the second candle, which indicates that prices have been rejected at the high. The longer the upper tail, the more significant the rejection, and the more likely the reversal.
22. Bearish Engulfing Pattern
The bearish engulfing pattern is a bearish reversal pattern that consists of two candles. The first candle is usually bullish, while the second candle is bearish and engulfs the first candle. The pattern suggests that buyers have lost their momentum, and sellers are taking control.
To confirm the pattern, you should look for a long upper tail on the first candle, indicating that prices have been rejected at the high. The second candle must have a long bearish body.
23. Evening Star
The evening star pattern consists of three candlesticks, the first of which is a large bullish candlestick. The second candlestick is a small-bodied candlestick, which can be bullish or bearish. The third candlestick is a large bearish candlestick. The second candlestick should have a gap up from the first and third candlesticks. The evening star pattern signals a potential reversal in an uptrend.
24. Three Black Crows
The three black crows’ pattern consists of three long bearish candlesticks, each with a lower close than the previous day. The pattern signals a potential reversal in an uptrend.
25. Three Inside Down
The three inside down pattern consists of three candlesticks, the first of which is a large bullish candlestick. The second candlestick is a bearish candlestick that is completely inside the range of the first candlestick. The third candlestick is a bearish candlestick that closes below the low of the second candlestick. The pattern signals a potential reversal in an uptrend.
26. Three Outside Down
The three-outside down pattern is a bearish continuation pattern that forms after a downtrend. It consists of three candles, with the first two being bullish and the third being bearish. The bearish candle must close below the low of the first candle, confirming the pattern.
The pattern suggests that after a brief pause in the downtrend, sellers have regained control and are pushing prices lower. You should look for high trading volumes and long bearish candles to confirm the pattern.
27. Bearish Pennant
The bearish pennant pattern is a continuation pattern that signals a potential reversal in an uptrend. The pattern consists of a small symmetrical triangle that forms after a sharp price movement upwards. The triangle is formed by two trend lines, one of which is a downtrend line that connects the highs, and the other is a horizontal line that connects the lows.
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 are price patterns that 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.
Let’s discuss the most used continuation candlestick patterns that you can use to identify pauses in a trend
28. Doji Pattern
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.
29. Spinning Top Pattern
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.
30. Falling Three Methods
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.
31. Rising Three Methods
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.
32. Upside Tasuki Gap
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.
33. Downside Tasuki Gap
The downside Tasuki gap pattern is the opposite of the upside Tasuki gap pattern and occurs during a downtrend. It is represented by two consecutive red candlesticks. The second red candlestick opens below the close of the first red candlestick, creating a gap between the two candlesticks. The third candlestick is a green candlestick that opens within the gap and closes below the close of the first red candlestick. This pattern suggests that the market is taking a brief pause before continuing its previous downtrend.
34. Mat-Hold Pattern
The Mat-Hold pattern is a continuation pattern that occurs during an uptrend. The pattern consists of a long green candlestick, followed by a small red candlestick that gaps up, and then another long green candlestick. The small red candlestick should not close below the midpoint of the first green candlestick. This pattern indicates that the stock is likely to continue its uptrend.
35. Rising Window
The Rising Window pattern is a continuation pattern that occurs during an uptrend. The pattern consists of two green candlesticks, with a gap up between them. This gap-up represents a support level and indicates that the stock is likely to continue its uptrend.
36. Falling Window
The Falling Window pattern is a continuation pattern that occurs during a downtrend. The pattern consists of two red candlesticks, with a gap down between them. This gap down represents a resistance level and indicates that the stock is likely to continue its downtrend.
37. High Wave
The High Wave pattern is a continuation pattern that can occur during both uptrends and downtrends. The pattern consists of a candlestick with a small real body and long upper and lower tails. This pattern indicates indecision in the market and can indicate that the stock is likely to continue its current trend.
How to Use Candlestick Patterns
You can use Candlestick charts to analyze price movements in the financial markets. This charting technique provides a lot of information about the price action and helps you to make better decisions.
You can use candlestick patterns with other strategies for analyzing candlestick charts, including identifying support and resistance levels, using moving averages, and combining candlestick patterns with other technical indicators.
1. Identifying Support and Resistance Levels
Support and resistance levels are important levels in a market that can provide you with valuable information about the market’s direction. Support levels are the price levels at which demand is strong enough to prevent the price from falling further. Resistance levels are the price levels at which supply is strong enough to prevent the price from rising further. You can identify these levels on a candlestick chart by looking for areas where the price has previously stalled or reversed. Once these levels have been identified, You can use them to make trading decisions.
2. Using Moving Averages
You can use moving averages in conjunction with candlestick charts to confirm trends and identify potential entry and exit points. For example, if you are looking to buy a stock, you may wait for the price to cross above a moving average before entering the trade. Similarly, if you are looking to sell a stock, you may wait for the price to cross below a moving average before exiting the trade.
3. Combining Candlestick Patterns with Other Technical Indicators
You can combine candlestick patterns with other technical indicators to confirm their trading decisions.
For example, if you see a bullish engulfing pattern on a candlestick chart, you may look for confirmation from a momentum indicator such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD). If the RSI or MACD is also showing bullish signals, it can provide you with additional confidence in their decision to buy the stock.
Conclusion
Analyzing candlestick charts require a combination of knowledge, experience, and technical analysis skills. You should focus on identifying support and resistance levels, using moving averages, and combining candlestick patterns with other technical indicators to make informed trading decisions.
Always remember trading involves risk and you should always use proper risk management techniques to protect your capital.
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You can start with the following articles
– https://investingexpert.in/how-to-predict-next-candlestick/
– https://investingexpert.in/how-to-trade-morning-star-candlestick/
– https://investingexpert.in/how-to-trade-hammer-candlestick/