The Ultimate Guide To Candlestick Patterns For Stock Trading

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.

Candlestick Chart Patterns

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.

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.

Candlestick Pattern
Typical Candlesticks

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.

Bullish Candlestick

How to Read Stock Charts Candlestick

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.

Bearish Candlestick

How to Read Stock Charts Candlestick

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.

However, you must remember that these patterns do not confirm the price prediction on their own.

Reading them along with other technical indicators like moving averages (importantly 50 day and 200 day simple moving average), relative strength index (RSI), stochastics oscillators makes much sense and gives more positive impetus for our trading decisions.

Moreover, the basic criteria of trading “trend is your friend” must be followed along with necessary risk management. Always trade in the direction of larger trend in the market.

Using bullish candlestick patterns in downtrend and bearish candlestick patterns in uptrend should be traded cautiously.

Let us have a look at important candlestick patterns –

Bullish Candlestick Patterns

The bullish candlestick patterns indicate potential bullish behavior in the prices of securities or stocks :-

Hammer Candlestick Pattern

Hammer is a bullish reversal pattern. It forms after a correction or fall in the market. Formation of hammer indicates that the down trend in prices is coming to an end and buying is emerging at lower levels.

Hammer Candlestick pattern

After a bearish red candle, next day the prices again opened lower, moved significantly lower during the day. Then, the buyers step in and push the prices higher. At the end of the day, prices close higher than the opening price after making an intraday high.

This price action leads to the formation of green or bullish candlestick which looks similar to a hammer. It has a small body, long lower shadow (indicating support at lower level) and a small upper shadow. For a hammer, the upper shadow should be smaller than the lower shadow.

Hammer Candlestick Patterns
Multiple Hammer Candlesticks On A Daily Chart

It needs a confirmation with a bullish candlestick next day. if it happens, the short term traders can buy the stock, keeping a stop loss just below the lowest price made by the lower shadow of the hammer.

Bullish Engulfing Candlestick Pattern

Bullish engulfing candlestick pattern, as the name indicates, is a bullish candlestick pattern. Usually, it is a reversal pattern but it may also happen as a continuation pattern.

This is considered as a powerful candlestick pattern. It has a big body candle which overlaps the body of previous day candle completely. This shows the power of the bulls or the buyers.

Bullish Engulfing Candlestick Pattern
Bullish Engulfing Candlestick Patterns
Bullish Engulfing Candlestick Pattern On A Daily Chart (At A Support Of 50 Day Simple Moving Average)

Read more details about this short term candlestick pattern and the method to trade it at this article.

Morning Star Candlestick Pattern

Morning star pattern is a reversal bullish candlestick pattern. It is named after the planet in our solar system, the Mercury.

Like hammer, this pattern also forms at the end of a market down trend. However, it is a three candlestick pattern. That means three candlesticks are needed for a morning star pattern.

Morning Star Pattern
candlestick pattern
Morning Star Candlestick Pattern On A Daily Chart

Read more details about this candlestick pattern and the method to trade it at this article.

Doji Dragonfly Candlestick Pattern

Generally, Doji candlestick has long shadows above and below with very small or no real body. The opening and closing prices are almost same. Doji shows the indecision in the minds of traders.

Doji candlestick can form in any trend, uptrend downtrend or sideways markets. Doji are the regularly seen candlesticks. They themselves do not indicate any trend.

However, another variant of Doji, the dragonfly, is also seen sometimes. That’s very infrequent, in fact. It indicates the potential change in trend in near term.

A dragonfly formed at the bottom after a downtrend indicates the trend is coming to an end and up trend may start. Formation of dragonfly in an ongoing up-trend indicates that the buyers are unable to control the prices and sellers are getting equally active.

Doji Dragonfly

The absence of upper shadow or a very small upper shadow is what makes a dragonfly different from a typical doji. It looks similar to the letter ‘T’. The colour of the candlestick is not of much significance.

Formation of a dragonfly doji after a downtrend indicates that the prior trend is coming to an end. The buyers are emerging at lower levels and prices may start moving higher in the short term.

On the day of formation of dragonfly, prices already in downtrend, start moving lower after opening. However, during the trading session, the buyers step in and push the prices higher towards the opening price. In the end, the closing is almost at the opening price.

You can trade a dragonfly doji candlestick pattern after the formation of the pattern or better after seeing a confirmation with a bullish candlestick in the next trading session.

The stock can be bought near the closing price of the dragonfly. Stop loss should be placed just below the lows of the dragonfly. Targets can be taken as the upper resistance levels.

In case the dragonfly doji forms in an ongoing up-trend, it indicates the buyers are unable to close prices higher than the opening prices. Selling or profit booking is setting in. Thus buyers need to be careful.

Piercing Line Candlestick Pattern

Piercing line is a bullish candlestick pattern. This is a powerful reversal pattern. It forms after a downtrend in the prices.

Piercing line pattern has a big body green candlestick. The upper and lower shadows are small. This shows the power with which the bulls or buyers taken the control after initial selling.

Big body bullish candlestick gives confidence to the buyers that the downtrend has come to an end and the prices are likely to move higher.

Piercing Line Candlestick Pattern

After the day of a strong selling shown by a big red candlestick, the prices open lower in the next trading session. However, soon the bulls or the buyers get active and prevent prices moving further lower.

During the day, the buying gathers pace. At the end of the day, the prices close higher than the mid-point of the previous day bearish or red candlestick body.

Piercing Line Candlestick Pattern
Piercing Line Candlestick Pattern On Daily Chart Reverting The Price Fall

For piercing line pattern, it is important that the closing is above the mid-point of the previous day red candlestick real body.

Short term traders can consider buying on the next day keeping stop loss just below the lows of the previous trading session.

Bullish Marubozu

Morubozu candlesticks are very easy to find on candlestick charts. Marubozu is a japanese term which means baldness.

They are solid body candles with no upper or lower shadows or wicks. Sometimes, you may see a very small wick on upper or lower side of a marubozu.

A bullish marubozu is a big body green candlestick. It may appear during an ongoing uptrend or after a downtrend. In uptrend, it indicates that the price rise may continue for some more time. A marubozu after a downtrend shows that the selling is over and the buyers have made their entry with full force.

Marubozu Bullish

On the day of formation of marubozu, the prices open at a price, do not move any lower or very small downward movement. After that, the buying continues and it is so strong that buyers want to buy at any price. At the end, prices open at the highest level of the day with very small or no upper shadow at all.

Bullish Marubozu Candlesticks
Bullish Marubozu Candlestick Patterns On Daily Chart

Marubozu shows that price rise may continue for few more days. It may or may not rise in coming days, that is another thing. But as a trader, you can decide to go long the next day, keeping your stop loss at the lowest price made by the marubozu.

Very small or very big marubozu in comparison the average candlestick size should be avoided for trading. The small marubozu does not give the confidence the buyers need while in a big candle, the stop loss will be very deep and risk will be more.

Rising Three Candlestick Pattern

Rising three candlestick pattern is a five candlestick bullish pattern. This is seen as a continuation pattern in already present uptrend.

The pattern tells us that the bullish momentum in prices is likely to continue still further.

Rising three pattern consists of first big green body candle, followed by three or sometimes four small red body candles and the fifth candlestick again having a larger green body.

Rising Three Candlestick Pattern

During the formation of rising three pattern, first candlestick signifies strong buying momentum. Prices close at day’s high. For the next three days, the prices keep closing lower consecutively. This is usually due to the profit booking by the already long traders.

All the three red candles remain contained within the body of the first green candlestick.

However, on the day of fifth candlestick formation, the bulls come with full strength. Prices open near or above the closing price of fourth day red candlestick. Finally, the bulls succeed in pushing the prices higher and giving close above the level of first day green candlestick.

Important things in rising three candlestick pattern:

  • First candlestick is big body green candle.
  • The red candles remain contained within the body of the first green candle.
  • The fifth big green candle closes above the closing price of the first candlestick.

Traders can consider buying the stock on the day of formation of fifth candle, just before the market closing, if the prices are trading near day’s high. However, it is better to go long the next day, keeping stop loss at the most recent swing low. You may get a low price to buy on next day, usually near the middle of the fifth candlestick.

Bullish Harami Candlestick Pattern

Bullish harami candlestick pattern is a reversal pattern. It appears after a sustained downtrend in stock prices.

This patterns is just opposite of the bullish engulfing candlestick pattern.

Harami is a Japanese word which means pregnant. Harami is a two candlestick pattern. First candle (mother) is a big bearish or red candle and the second candle (baby) is small bullish or green candle contained within the body of first candle.

Bullish Harami Candlestick Pattern

The bullish harami candlestick pattern is formed when the prices are in a downtrend. A big bearish candlestick is formed with closing near day’s low.

Next day, out of nowhere, there is a gap-up opening. The buying continues and never returns to previous day lows. In the end, prices close higher than the opening prices but lower than the previous day’s opening. Consequently, a small green body candlestick is formed, contained within the body of previous day candlestick.

Gap-up opening with higher closing after a sustained downtrend indicates the potential trend reversal. Bears loose control and bulls take charge of the price control.

Bullish Harami Candlestick Pattern
Bullish Harami Candlestick Pattern On Daily Chart (More Powerful Near 200 Day SMA- Blue Line)

Bullish harami is a offers a very good trade from risk reward ratio point of view if it is confirmed on the next day with a green candlestick. This is because our stoploss is not very deep and we are buying almost at the bottom.

Buying can be initiated on confirmation of the pattern, keeping stoploss just below the big bearish red candlestick (mother candle).

Important things to remember in bullish harami pattern-

  • There must be a prior downtrend in force.
  • The bullish green candlestick must be enclosed within the body of the previous red candle.
  • Position of green candlestick should be in the middle or more towards the upper half of the red candlestick for more reliability of the pattern.
  • Position of green candlestick more towards the lower half of red candlestick shows lower strength of the bulls.

Bearish Candlestick Patterns

The bearish patterns indicate potential bearish behavior in stock prices. Some of these patterns are reversal patterns while other are continuation patterns.

Like bullish candlestick patterns, some are single candle patterns while some are multiple candle patterns.

Bearish Engulfing Candlestick Pattern

Bearish engulfing candlestick pattern can be a continuation pattern or a reversal pattern.

In this pattern, there is a formation of a big body bearish or red candle which completely covers or engulfs the previous day candle body.

On the day of formation of bearish candlestick pattern, the prices open with gap up above above the previous day closing price. However, unable to sustain due to selling pressure, the price falls down and close below the previous day opening price.

Bearish Engulfing Candlestick Pattern

Consequently, a big red body candlestick is formed which shows the rule of bears or the sellers on that day. This indicates that the coming trend may be bearish for stock prices.

Traders may watch next day trading session to confirm the pattern with another red body candlestick formation.

Aggressive traders can take the short selling position on the same day, 15-30 minutes before the market close. Others may go for short selling on the next at prices somewhere near the middle (if market gives the chance) of the bearish engulfing candlestick.

Stop loss for the trade is the high price of the day of the formation of bearish engulfing candlestick pattern.

Bearish Engulfing Candlestick Patterns
Bearish Engulfing Candlestick Patterns on Daily Chart Leading The Reversal In Stock Prices

It is important to watch the trading volumes on the day of formation of this pattern. it should be higher than the average trading volumes to make it more significant.

Evening Star Pattern

Evening star candlestick pattern is a bearish pattern and is a short term trend reversal pattern. This pattern is just the opposite of morning star pattern which is a bullish pattern.

Evening star pattern is a three-candlestick pattern. The first candle is big bullish green candlestick from the prior up trend in prices. On the day of second candlestick, prices open higher with gap up and start moving higher.

Evening Star Candlestick Pattern

However, during the later part of the trading session, the sellers or the bears become active and make price close below the opening price. On the day of formation of third candlestick, prices open with gap down and start moving lower. At the end of the day, prices close near lows of the day while negating the gains of first big bullish candlestick.

The pattern indicates that the bullish momentum is over for the short term. The trend has reversed and stock prices are likely to head lower.

Short term traders can initiate short selling positions with stop loss above the highest level seen during the day of formation of second candlestick of the pattern. The target for the trades is lower support price levels.

Evening Star Candlestick Pattern
Evening Star Candlestick Pattern Leading To Price Fall After An Up move (Daily Charts)

Gravestone Doji

Doji Gravestone
Doji Candlestick Pattern
Gravestone Doji Candlesticks Leading To Significant Price Decline

Bearish Marubozu

Marubozu Bearish Candlstick Pattern
candlestick pattern
Bearish Marubozu Candlestick Pattern

Bearish Harami

Bearish Harami Candlestick Pattern
candlestick pattern
Bearish Harami Candlestick Pattern Leading Bearish Momentum In Stock Price

Hanging Man

candlestick pattern
Hanging Man Candlestick Pattern
Hanging Man Candlestick Pattern Leading To Bearish Trend

Shooting Star

candlestick pattern
Shooting Star Candlestick Pattern
Shooting Star Candlestick Pattern Leading To Stock Price Fall

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.

The Ultimate Guide To Candlestick Patterns For Stock Trading
candlestick pattern

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.

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