Candlestick Chart Patterns in Stock market: An Introduction

Updated: Apr 21



At least once in your trading life, you must have seen these charts wondering what these really are. These complex yet simple charts are the backbone of any trader and are known as Candlestick Patterns. Candlestick Patterns are financial technical analysis tools that visually presents daily price movement data.


These patterns are broadly classified into three types

  1. Continuation Candlestick Patterns

  2. Bearish Candlestick Pattern

  3. Bullish Reversal Candlestick Patterns


Before Proceeding in this journey remember the fact that the Green color represents that the share price has gone up and the Red color represents that Share Price has decreased.


  1. Continuation Candlestick Pattern


A continuation pattern indicates that the price will continue to move in the same trend as it did before the pattern was completed.


Various form of Continuation Candlestick Pattern discussed in this blog includes:


  1. Doji

  2. Spinning Top

  3. Falling Three Methods

  4. Rising Three Methods


1. DOJI




These candlesticks have the shape of a cross, an inverted cross, or a plus sign depicting that the starting and closing prices are nearly identical. Practically these kinds of figures are rare to be observed. The bearish traders reject the higher price and drive it back down, while bullish traders push prices up.


2. Spinning Top



These Doji similar-looking candlesticks also imply uncertainty about the asset's future path. But In Spinning top, the tussle between Bears and Bulls is higher as compared to Doji.


3. Falling Three Methods


Two long candlesticks in the direction of the trend, one at the beginning and end, and three shorter counter-trend candlesticks in the center define a falling three methods pattern. The falling three ways pattern indicates that the bulls lack the confidence to reverse the trend.


4. Rising Three Methods


As the name suggests this Candlestick Pattern is the opposite pattern of the Falling Three Method, i.e this time the bears lack the confidence to reverse the trend.



B) Bearish Candlestick Pattern


A bearish candlestick pattern is a pattern that indicates lower prices are on the way and a good time for bears is coming soon.



Various form of Bearish Candlestick Pattern discussed in this blog includes:

  1. Hanging man

  2. Dark cloud cover

  3. Bearish Engulfing

  4. The Evening Star

  5. Three Black Crows


1. Hanging Man



The hanging man is a sort of candlestick pattern that relates to the form and appearance of the candle and represents a probable reversal of the ongoing uptrend. The Hanging Man depicts that the market opened, and the vendor drove the prices down.


2. Dark cloud cover


Following a price climb, Dark Cloud Cover is a candlestick pattern that suggests a shift in momentum to the negative.

It is constructed from two candlesticks. The first is a bullish candlestick, whereas the second is a bearish candlestick. A bearish candlestick indicates a trend reversal as well as the end of the uptrend.


3. Bearish Engulfing


At the end of certain upward market rises, a bearish engulfing pattern can be noticed. The initial candle of rising momentum is overrun, or engulfed, by a bigger second candle, signalling a price change to the downside.


4. The Evening Star




This stock-price chart pattern known as an evening star is employed to predict when a trend is poised to reverse. Three candles make up the design consisting of a tall white candlestick, a small-bodied candle, and a red candle.


5. Three Black Crows


The shade and size of the three black crows candles can be used to determine if the reversal is likely to retrace.

This pattern appears near the top of an uptrend and suggests a significant price reversal. The bears' power is shown by the stock's continual downward trajectory, and they currently control the stock.



C) Bullish Reversal Candlestick Patterns


Bullish candlesticks can assist identify when a downturn is going to turn over to the upside by indicating entry locations for long and big trades, as the Bull in the name suggests.


Various form of Bullish Reversal Candlestick Pattern discussed in this blog includes:



  1. Hammer

  2. Piercing Pattern

  3. Bullish Engulfing

  4. The Morning Star

  5. Three White Soldiers

  6. Bullish Harami



1. Hammer


Another Doji similar-looking candlestick pattern, but signalling a possible upward price reversal.

When buyers enter into the market amid a price decrease, the hammer candlestick appears.

By the time the market closes, buyers have absorbed all of the selling pressure and the market price has returned to its opening level.


2. Piercing Pattern


The piercing pattern is a multi-candlestick chart pattern that appears after a decline and signals a bullish turnaround.

A piercing pattern is indeed a two-day candlestick pattern that indicates a possible upward trend reversal from a negative trend.


3. Bullish Engulfing



A bullish engulfing pattern is formed when a little black candlestick is followed by a massive white candlestick the next day, the body of which totally “engulfs” the body of the former day's candlestick. When multiple black candlesticks precede a bullish engulfing pattern, it is more likely to predict a reversal.


4. The Morning Star


As the name suggests, The Morning Star is the opposite of The Evening Star, marking a reversal towards the uptrend.

The morning star's middle candle depicts a period of market hesitation when bears start giving way to bulls. The reversal is confirmed by the third candle, which might signal the start of a new uptrend.


5. Three White Soldiers


Again, the opposite of Three Black Crows, in a price chart, this pattern is utilized to indicate the turnaround of the present decline.

When a candle closes with little or no shadows, it means the bulls were successful in keeping prices at the top of the line for the session.


6. Bullish Harami


The bullish harami signal is shown on the chart by a lengthy candlestick with a smaller body.

A smaller body on the next Doji must end high within the core of the previous day's candle to form a bullish harami, indicating a larger possibility of a reversal.


P.S Harami is derived from a Japanese term that means "pregnant."


 

To learn more about the stock market you can check out the course structure of our next Lakshya batch which will start in the month of March 2022.

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