Candlestick patterns are the backbone of technical analysis. They predict future price movements more accurately. We will learn about them and various candlestick patterns to make your trading more rewarding.
Candlestick charts are the most popular charts used in technical analysis. The reason is that the candlesticks display more information about the stock price action.
Candlesticks make an extremely important part in the arsenal of a technical analyst. There are four types of technical charts available for stock analysis. These are line, mountain and OHLC and Candlestick Charts.
The information the candlestick charts provide about a security earns them a special place in the technical analysis arena.
This is the information used to predict the future market behavior from the stock charts. Each candle is a source of information. So it is very important that you learn to read each individual candlestick and the candlestick pattern.
Candlestick charts originated in Japan, hence popularly called as Japanese Candlestick Charts. They were named as candlesticks due to their appearance to a candle.
These charts consist of combination of candles plotted on a graph. A candlestick depicts the behavior of a security in a specific time frame. In a daily candlestick chart, a single candle shall shows the behavior of the security in a single day of trading. Likewise, we can select candlesticks for hourly, weekly, monthly or yearly time frames.
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What are Candlesticks ?
If you see a candlestick chart, you will find that a typical candlestick consists of a middle thick body and two shadows – on the upper and the lower end of the body (see the figure).
The whole length of the candle shows the entire price range of the security in a particular time frame. Here we talk of a candle formed by single trading session movement of a security or a stock.
When the market opens, the stock also opens at a particular price level. This is the opening price of the stock. After that, the stock touches the highest and the lowest price of the day. It is represented by the upper and lower shadow respectively, before closing at a price, the closing price.
Depending upon this price action, the candle can be green (bullish) or red (bearish) in color.
When a stock opens at a lower price and closes at a higher price at the end of the day, it makes a green candle on the daily candlestick chart. Some charting software represent the green candle by blue colour. All in all, these candles make Bullish Candles. It means that stock prices have moved higher at the end of the day.
If a stock opens at higher price level in the morning and after making highs and lows closes at lower price level than the opening price, a red candlestick is formed on the candlestick chart. This is called a Bearish Candle and it indicates that the price of the stock has moved lower in the trading session.
How to Read Stock Charts Candlesticks?
A candlestick in itself explains the behaviour or psychology of the majority of the traders and thus provides cues to a trader in taking trading decisions.
A green candle with a large body and short shadows indicates that buyers are very aggressive in that particular stock.
Similarly, a large body red candle with small or no shadow indicates that sellers are dominating in the particular script.
A candle with small body and large shadows on upper and lower end depicts indecision in the minds of traders.
Long shadow on the upper end shows that stock moved higher but could not sustain there and closed at lower price. Thus it indicates resistance or supply at higher levels.
Similarly, long shadow at lower end depicts that after touching lows for the day, the stock moved up and closed above the lows. This indicates that buying support is there at lower levels. Hence, the stock can be considered for buying for short-term swing trading.
Candlestick patterns tell about the psychology of market participants or traders on the chart.
Although Bar charts also reveal the same information. But the candlestick charts do that in a more appealing and illustrative way.
Candlesticks make some short term patterns on a chart. If you can identify these patterns, that is going to be really useful to you for taking informed trading decisions.
That will keep you ahead of majority of the market traders and increase your success rate in trading.
Candlestick patterns can be bullish or bearish depending upon the formation.
A bullish pattern tells us that the stock prices or any security prices are likely to move higher in near future.
A bearish pattern predicts the price declines in stock prices in future.
We know there are two types of candlesticks on a chart :-
- White (or Green or Blue) Candlestick forms when the prices close higher than opening price
- Black (or Red) Candlestick forms when the prices close lower than opening prices.
The names of these Japanese candlestick patterns are really interesting and a joy to read and learn.
Let us have a look at important candlestick patterns –
Bullish Candlestick Patterns
The following patterns indicate potential bullish behavior in the prices of securities or stocks :-
4. Doji ( At Bottom)
5. Piercing Line Pattern
6. Bullish Marubozu
7. Rising Three Method
8. Bullish Harami
9. Gap Ups
Bearish Candlestick Patterns
The bearish patterns indicate potential bearish behavior in stock prices.
1. Bearish Engulfing Candlestick Pattern
2. Evening Star Pattern
3. Gravestone Doji
4. Doji (At Top)
5. Bearish Marubozu
6. Three Black Crow Pattern
7. Bearish Harami
8. Hanging Man
9. Shooting Star
10. Gap Downs
These are the main Candlestick Patterns which you can consider to take your trading decisions.
Identifying these patterns and applying in our trading system gives you an edge over other traders.
Market moves can never be predicted accurately. But using these candlestick patterns gives an insight into the markets at least.
Using these patterns, we actually follow what markets tell us. This is definitely good for us for taking our trading decisions.
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The Ultimate Guide To Candlestick Patterns For Stock Trading
2. Bullish Engulfing Candlestick Pattern
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