You need a good understanding of candlestick chart patterns to analyze price action using Technical Analysis . Compared to other forms of representing price action, many traders consider candlestick chart patterns more visually appealing and easier to interpret. Each candlestick chart pattern provides an easy-to-decipher picture of price action. A trader can immediately compare the relationship between the open and close as well as the high and low. The relationship between the opening and closing price level is vital information and forms the essence of candlestick chart pattern. The following article will help you in understanding 13 Candlestick chart patterns every trader should know.
What is a Candlestick?
Firstly, let us understand what is candlestick. It is a price or financial chart which displays price movements i.e. high, low, opening and closing prices of a security/ stock. The main components of the candlestick chart are:
- The body, which represents the open-to-close range
- The wick, or shadow, that indicates the intra-day high and low
- The color, which reveals the direction of market movement – a green (or white) body indicates a price increase, while a red (or black) body shows a price decrease
The fat rectangular part of the candle shows the specific price action related to the opening and closing price of the stock.
How to analyze (read) candlestick chart patterns?
The candlestick chart pattern indicates high, low, opening and closing prices of stock which helps to make buying or selling decisions.
There are generally two types of marketing situations: bearish and bullish. There are various types of candlestick patterns in bearish and bullish market situations which helps to predict whether prices movement will go up or down.
The main advantage of candlestick patterns that you can draw candlestick patterns for one minute, five minutes, hourly, daily, monthly or yearly. It helps to take a calculated risk for every type of investor.
What are the types of candlestick and its meaning?
There are various types of candlestick patterns but this article covers the most popular candlestick patterns which will come handy even for a beginner to start the analysis of the stocks.
- There are generally three types of Candlestick Patterns:
- – Bullish Candlestick Patterns
- – Bearish Candlestick Patterns
- – Continual Candlestick Patterns
Bullish Candlestick Chart Patterns
Firstly, the bullish candlestick patterns signal a point of support and are formed after the downtrend. There are various types of bullish candlestick patterns but the famous five patterns are listed below:
This bullish candlestick pattern is created when there is selling pressure in the market but the strong buying pressure leads to an increase in the prices. It consists of a short body with a long lower wick at the bottom of the downward trend.
Inverse/ Inverted Hammer
This bullish candlestick pattern indicates the inverse or inverted hammer. This pattern is created when the buying pressure is strong and it seems the buyers will soon have the control of the market, the inverse hammer pattern is created. Hence, the upper wick is long and the lower wick is short.
This bullish candlestick pattern consists of two candlesticks in which there is a short red body followed by a large green candle. The second day might open lower than the first, but the bullish market results in increases in prices.
The morning star as the name suggests is considered as a ray of hope in the downward moving trend of the market. It is a three stick pattern that includes long red, long green and one short-bodied candle between them. It is created in a situation when the selling pressure is decreasing and the bull market is on the horizon.
Three white soldiers
This bullish candlestick pattern indicates a steady increase in buying pressure over three days. The candlestick consists of long green candles with small wicks which open and close higher progressively. It is created when there is an increase in buying pressure in the market.
Bearish Candlestick Chart Patterns
Secondly, the bearish candlestick patterns signal a point of resistance formed after the uptrend. There are various styles of bearish candlestick patterns. The most important five patterns are explained below
This bearish candlestick pattern suggests that the market price will open slightly higher than the previous day but will close at a lower price like a shooting star. The shooting star pattern looks the same as an inverted hammer but it is in an uptrend. It consists of a small lower body and a long upper wick.
This bearish candlestick pattern suggests that there was a significant amount of selling on a particular day but the buying pressure was able to push the prices up again. It is the bearish version of the hammer. Having the same shape as the hammer, it is formed after the end of the uptrend.
This bearish candlestick pattern suggests that there is market correction and signals downturn of the market as the slowdown of price movement occurs. It consists of a small green candle followed by a long red candle. The lower the red candle the more significant the trend is going to be.
This bullish candlestick pattern suggests that there will be a reversal of the uptrend. The reversal will happen as a result of the cyclical movement of stock prices. Hence, the downward movement in price will result in the loss of gains from the first candle. It consists of a short candle between a long green candle and the large red candlestick.
Three black crows
This bearish candlestick pattern shows three continuous long red candles with short or nonexistent wicks. It is the bearish version of three white soldiers. Each day, a new session opens with the same price as the previous day but the selling pressures push the prices down.
Continuation Candlestick Chart Pattern
Thirdly, the continuation candlestick pattern indicates there is not much change in the opening and closing price of the stock and the pattern continues on a given particular day. The following patterns are the types of continuous candlestick patterns:
The Doji candlestick pattern is suggests that the opening and the closing price levels of the market are almost the same, . There is no significant difference between opening and closing price levels. The pattern might look like a simple cross, inverted cross or plus sign. Hence, it shows that there is a strong tie between buyers and sellers and no one is in a gain position.
This continuous candlestick pattern shows that there is indecision in the market. As the name suggests, no one knows where the spinning top will fall. As a result, there might be a significant uptrend or downtrend.
Falling and Rising three methods
The three methods is a continuation pattern of trends in an upward or downward trend.
Falling Three Method
The falling three methods is a bearish, five candle continuation pattern that signals an interruption, but not a reversal, of the current downtrend.
Rising Three Method
Rising three methods is a bullish continuation candlestick pattern that occurs in an uptrend and whose conclusion sees a resumption of that trend.
Why candlestick charts are useful?
- It captures the four important data points for the given period namely open, high, low and close which tell us the strength of the market movement for the day and foretell the possible movement for the next day.
- Take a calculated risk by calculating the risk-reward ratio
- Analysis of the price movement for every type of time frame.
It is an effective tool for intraday trading.
Thus, the candlestick chart patterns form an important part of Technical Analysis and help in taking a calculated risk.
You can also read about the Fundamental Analysis of stocks and how it is different from Technical analysis in our next blogs.
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