Candlestick and candlestick pattern

Hello everyone, this blog is about the main element of the price chart which tells us about the direction that price might be going towards. Candlesticks, this is a Japanese concept that tells the main 4 elements of price at a particular time HLOC- High, Low, Open, and close. These elements can be a great guide to predicting where the price may go. 

So, let's get into what is the Candlesticks and candlesticks patterns which can help you predict what the next movement could be. 

What is Candlesticks?

A candlestick is a representation of price movements in financial markets, such as stocks, currencies, or commodities. It consists of a rectangular shape called the "body" that represents the price range between the opening and closing prices during a specific period, like a day or an hour. There are lines called "wicks" or "shadows" extending from the top and bottom of the body, which indicate the highest and lowest prices reached within the same period. Candlesticks are widely used in technical analysis to visually interpret market sentiment and predict potential future price movements.

Body of Candlestick

The body of the candlestick consists of  2 main parts. Wick or Shadow and Body. Let's have a detailed look into these parts of the candlesticks.

Body: The body is the rectangular area on a candlestick chart that represents the price range between the opening and closing prices during the chosen period.

The color of the body typically indicates whether the closing price was higher or lower than the opening price:

Green Candle: If the closing price is higher than the opening price, the body is often filled in or colored green/white, indicating a bullish trend.

Red Candle: If the closing price is lower than the opening price, the body may be left empty or colored red/black, suggesting a bearish trend.

Now, that we are done understanding what is candlestick pattern and now let's discuss the type of chart pattern.

There are three categories of candlestick patterns based on direction and 3 types based on the number of candles involved. we will be discussing these two by discussing the bullish and bearish patterns and involving the number of candle patterns and assorting them with bullish and bearish categories.

Bullish Candlestick patterns

A bullish candlestick pattern indicates a potential upward movement in the price of an asset. It typically forms when buyers are in control of the market, leading to higher closing prices compared to opening prices. 

The following are the candlestick patterns that exist on the number of candles:

1. Single candle stick pattern
2. Double candlestick pattern
3. Triple candlestick pattern.

For now, we will discuss their implication in the bullish candlestick patterns.

1, Single candlestick pattern: This candlestick pattern suggests that these patterns are just formed by one single candle. The following are the types of candles you can encounter when there is a bullish trend or a change of trend into a bullish trend.

Hammer 

The Hammer candlestick pattern often signals a potential reversal in market sentiment. It resembles a hammer, with a small body near the top of the candlestick and a long lower wick extending downwards. This formation typically occurs at the bottom of a downtrend, suggesting that sellers have dominated the market but were defeated by buyers.

The long lower wick of the Hammer candlestick indicates that despite a downward push in prices, buyers stepped in aggressively, pushing the price back up toward the closing level. This rejection of lower prices by the market participants signifies a shift in momentum, potentially marking the end of the downtrend. Traders often interpret the Hammer pattern as a bullish signal, anticipating a reversal and potential upward movement in prices.

White / Green Marubozu

The White Marubozu (Marubozu meaning dominance in Japanese) is characterized by a single candle that does not have any wick, presenting a solid and commanding presence on the price chart. This pattern symbolizes a market scenario where buyers assert their dominance from the opening bell to the closing hour, driving prices steadily higher without any significant retreats. Visually, it appears as a solid rectangular shape, with the opening price situated at the bottom of the candle's body and the closing price positioned at the top.

What makes the White Marubozu particularly compelling to traders is its representation of huge bullish momentum. The absence of upper and lower shadows indicates an unbroken ascent in prices, showcasing the good control of buyers throughout the entire trading session.

Inverted bullish candle

The inverted bullish hammer is a noteworthy candlestick pattern characterized by a single candlestick formation. It is a variation of the traditional hammer pattern and signifies a potential bullish reversal in the market. Unlike the regular hammer pattern where the long lower shadow is positioned below the body, the inverted bullish hammer has a long upper shadow extending above the body. The body is typically small and located near the bottom of the candle.

This pattern occurs during a downtrend when sellers are in control of the market, pushing prices lower. However, the inverted bullish hammer suggests that buyers have stepped in, creating buying pressure and rejecting lower prices. Despite the initial downward movement, the price ultimately closes near the opening level, indicating the potential exhaustion of selling pressure and a shift in momentum toward bullish sentiment.

Traders often interpret the inverted bullish hammer as a signal to consider long positions or to tighten stop-loss orders on existing short positions. 

2. Double candlestick pattern: This candlestick pattern suggests that these patterns are just formed by two Candlesticks. The following are the types of candles you can encounter when there is a bullish trend or a change of trend into a bullish trend.

Bullish Kicker

The bullish kicker is a candlestick pattern with two candles. The first candle is bearish, indicating a downward trend, while the second candle is bullish, opening higher than the first candle and closing above its opening price. 

The second candlestick opens higher than the previous candlestick's high and continues to climb throughout the trading session, closing well above the previous candlestick's opening price. This strong upward momentum is indicative of aggressive buying pressure, overpowering the preceding bearish sentiment. The bullish kicker pattern often occurs after a period of downtrend or consolidation, signaling a potential reversal and the beginning of a new bullish trend.

Bullish Engulfing

The bullish engulfing pattern is a widely recognized candlestick pattern in technical analysis, indicating a potential reversal of bearish sentiment to bullish sentiment in the market. It consists of two candles, where the first candle is bearish and the second candle is bullish. The body of the second candle completely engulfs or swallows the body of the first candle.

This pattern suggests a shift in market sentiment from bearish to bullish, as the second candle demonstrates strong buying pressure, overpowering the preceding bearish sentiment represented by the first candle. The bullish engulfing pattern often occurs after a downtrend or consolidation period, signaling a potential reversal and the beginning of a new bullish trend.

Bullish Harami

The bullish harami (harami means pregnant lady in Japanese) is a candlestick pattern signaling a possible shift from a downtrend to an uptrend in the market. It consists of two candles: the first one is larger and bearish, indicating downward momentum, while the second one is smaller and bullish. What's distinctive about this pattern is that the second candle's body is completely within the range of the first candle.

This pattern suggests a change in sentiment from bearish to bullish. The first candle reflects continued selling pressure, and the smaller second candle indicates a potential weakening of this downward trend and hints at emerging buying interest. Traders often see the bullish harami as a sign to consider buying or adjusting their short positions. However, it's wise to confirm this pattern with other indicators and market factors before making trading decisions.

Tweezer bottom

The Tweezer Bottom is a candlestick formation indicating a possible change from a downtrend to an uptrend in the market. It emerges when consecutive candlesticks show similar or nearly identical lows, creating a double bottom pattern visually. This formation suggests that despite efforts by sellers to drive prices lower, buyers have repeatedly stepped in to maintain the price at that level.

The Tweezer Bottom signifies a strong support level at the matching lows, indicating buyers' determination to defend that price point. It often hints at a shift in market sentiment, as the consistent rejection of lower prices suggests growing buying interest. Traders typically view the Tweezer Bottom as a potential opportunity to buy, anticipating a reversal and a subsequent uptrend.

3. Triple candlestick pattern: This pattern consists of three candlestick patterns and creates the patterns that may predict the upward move.

Morningstar

The Morning Star is a bullish candlestick pattern seen in technical analysis, indicating a possible shift from a downtrend to an uptrend. It comprises three candles: 

• A bearish candle marks the prevailing downtrend.
• The second candle is small, often a Doji or spinning top, reflecting market indecision.
• A bullish candle follows, closing beyond the midpoint of the first candle, signaling a momentum change from bearish to bullish.

This pattern suggests that after a decline, sellers lose steam, and buyers gain control. The small-bodied middle candle shows uncertainty, while the bullish third candle hints at renewed buying interest and a potential reversal.

Traders view the Morning Star as a bullish signal, anticipating a turnaround. However, confirming the pattern with other indicators is crucial for validation and risk reduction.

Bullish Abandoned Child

The Bullish Abandoned Baby is a rare but potent candlestick pattern signaling a potential reversal from a downtrend to an uptrend in the market. It typically consists of three candles:

• The first candle is a long bearish candle, showing a downtrend.
• The second candle is a Doji, characterized by a small body and significant wicks, indicating indecision and a potential market reversal.
• The third candle is a bullish candle that opens with a gap up from the previous close, leaving a space between the first and second candles, symbolizing a break from the downtrend.

This pattern suggests a sudden shift in market sentiment, with buyers taking control after a period of selling pressure. The presence of the Doji indicates uncertainty and a potential change in direction, while the bullish gap-up on the third candle confirms the reversal.

Traders often interpret the Bullish Abandoned Baby pattern as a strong bullish signal, anticipating a turnaround in the market. However, confirming the pattern with other technical indicators and factors such as trading volume and market context is essential to validate the signal and reduce the risk of false signals.

Three white soldier

The Three White Soldiers is a bullish candlestick showing a potential reversal from a downtrend to an uptrend in the market. It typically consists of three consecutive bullish candles, each closing higher than the previous candle's close. 

This pattern suggests a strong and sustained buying pressure, with each candlestick opening within the previous candle's body and closing near its high. The consecutive bullish candles reflect a significant shift in market sentiment, as buyers take control and drive prices higher.

Traders often interpret the Three White Soldiers pattern as a robust bullish signal, indicating a reversal and the beginning of an uptrend. Still, confirming the pattern with other technical indicators and factors such as trading volume and market context is essential to validate the signal and reduce the risk of false signals.

Bearish Candlestick patterns

Bearish candlestick patterns are representative of a potential shift from uptrend to downtrend. This can indicate a time to book profits or short-sell the stock or indices depending on your holdings.

Just like bullish candle patterns, they have 3 types:

1. Single bearish candlestick Pattern
2. Double bearish candlestick pattern
3. Triple bearish candlestick pattern

1. Single bearish candlestick pattern: similar to the bullish single candlestick pattern this formation only has one single candle indicating a potential downtrend in the financial instrument.

Hanging-Man

A hanging man candlestick is a single candlestick pattern that looks like a small body with a long lower shadow or wick. This pattern occurs during an uptrend and suggests that despite some upward movement, sellers managed to push the price down significantly by the end of the trading session. It's called a "hanging man" because it looks like a person hanging from a ceiling. Traders often see it as a warning sign that the uptrend might be weakening, and there could be a potential reversal in the market, especially if it's followed by confirming bearish price action.

Red / Black Marubozu

A red marubozu is a bearish candlestick pattern characterized by a long red body with no upper or lower shadows. This means that the opening price of the candle is the highest price reached during the trading period, and the closing price is the lowest. it indicates strong selling pressure throughout the entire session, with bears dominating the market from open to close. Traders often interpret this pattern as a signal of strong downward momentum and anticipate further declines in the price of the asset. However, as with any trading signal, it's important to consider other factors and confirmatory indicators before making trading decisions.

Shooting star

A shooting star is a bearish candlestick pattern consisting of a single candlestick with a small body located at or near the bottom of the candle and a long upper shadow or wick. The appearance of the shooting star suggests that despite the initial attempt by buyers to push the price higher, sellers entered the market and pushed the price back down, resulting in a long upper shadow.

This pattern indicates a potential reversal in the market, as it shows that buyers were unable to maintain control and that selling pressure overwhelmed the buying pressure by the end of the trading session. Traders often interpret the shooting star as a warning sign that the uptrend may be losing momentum and that a downtrend or consolidation could follow.

2. Double bearish candlestick pattern: These patterns are bearish in nature and consist of 2 candles and give a bearish sentiment to the market.

Bearish Kicker

The bearish kicker indicates a potential shift from an uptrend to a downtrend in the market. Just like the Bullish kicker, first, a bullish candle is formed that reflects the prevailing upward movement, followed by a bearish candle opening below the prior candle's low and closing even lower than its open. This abrupt transition suggests a robust change in market sentiment, with sellers entering forcefully and overpowering the prior bullish momentum. Traders often interpret the appearance of the bearish kicker as a signal to consider short positions or to tighten stop-loss orders on existing long positions.

Bearish Engulfing

The bearish engulfing pattern is an indicator of a potential reversal from an uptrend to a downtrend in market analysis. This pattern unfolds over two candles initially, a smaller bullish candle illustrating the ongoing upward momentum, followed by a larger bearish candle that entirely engulfs the prior candle's body. Opening above the previous candle's high and closing below its low, the second candle displays robust selling pressure, effectively overpowering the prior bullish sentiment. Traders often perceive the appearance of the bearish engulfing pattern as a signal to contemplate short positions or tighten stop-loss orders on existing long positions. Nonetheless, validating this pattern with additional technical indicators and market context is imperative before making trading decisions, as seeking confirmation from other sources aids in validating the signal and mitigating the risk of false signals.

Bearish Harami

The bearish harami, a notable candlestick pattern, often signifies a potential reversal from an uptrend to a downtrend in market analysis. This pattern comprises two candles: firstly, a larger bullish candle that reflects the prevailing upward momentum, followed by a smaller bearish candle that is entirely engulfed by the body of the preceding bullish candle. The smaller bearish candle opens within the body of the prior bullish candle and closes above its low. This pattern suggests a shift in market sentiment from bullish to bearish, as the second candle demonstrates emerging selling pressure, overriding the prior bullish momentum. Traders typically interpret the appearance of the bearish harami as a signal to contemplate short positions or tighten stop-loss orders on existing long positions. 

Tweezer top

The tweezer op is a candlestick pattern features two candles with similar highs, forming what looks like a double top. The first candle is bullish, showing the ongoing upward movement, while the second candle is bearish and opens within the body of the previous candle before closing lower. This suggests a change in market sentiment from bullish to bearish, as the second candle indicates emerging selling pressure that overpowers the prior bullish momentum. Traders often see the appearance of the tweezer top as a cue to consider short positions or to tighten stop-loss orders on existing long positions. However, it's important to validate this pattern with additional technical indicators and market context before making trading decisions. Seeking confirmation from other sources helps confirm the signal's validity and reduces the risk of false signals.

3. Triple bearish candlestick pattern: These patterns consist of 3 candlesticks and indicate a downtrend.

Evening star

The evening star often serves as a precursor to a potential reversal from an uptrend to a downtrend. This pattern unfolds across three candles, each playing a crucial role in signaling the shift in market sentiment. Initially, a large bullish candle sets the stage, reflecting the prevailing upward momentum in the market. However, the subsequent candle, often smaller in size and with a narrow range, indicates a period of indecision among traders as the market hesitates to commit to a clear direction.

Following this period of uncertainty, the final candle in the pattern emerges as a significant bearish candle, closing well into the body of the preceding bullish candle. This decisive bearish movement suggests a notable shift in sentiment, with selling pressure overcoming the prior bullish momentum. Traders frequently interpret the appearance of the evening star as a signal to consider short positions or to tighten stop-loss orders on existing long positions, anticipating a potential downtrend.

Bearish Abandoned baby

The Bearish Abandoned Baby is a potential reversal from an uptrend to a downtrend. It comprises three candles: an initial bullish candle, a small candle indicating uncertainty, and finally, a bearish candle that opens with a gap down from the prior candle's close. This gap signifies a decisive shift in sentiment, with selling pressure overpowering the previous bullish momentum. Traders often see this pattern as a strong signal to consider short positions or tighten stop-loss orders on existing long positions. 

Three Back Crows

The Three Black Crows is a bearish candlestick pattern that often signals a potential reversal from an uptrend to a downtrend in market analysis. This pattern consists of three consecutive long bearish candles, each closing lower than the previous one. As each candle forms, it reflects increasing selling pressure and a sustained downtrend.

The appearance of the Three Black Crows pattern suggests a strong shift in market sentiment, with sellers dominating the market and driving prices lower. Traders often interpret this pattern as a signal to consider short positions or to tighten stop-loss orders on existing long positions, anticipating further downward movement.

In conclusion

Understanding candlestick patterns is essential for traders and investors alike as they provide valuable insights into market sentiment and potential price movements. Whether bullish or bearish, these patterns offer valuable clues about the direction in which asset prices may be heading.

By learning to recognize and interpret various candlestick patterns, traders can make more informed decisions about when to enter or exit positions, manage risk, and capitalize on trading opportunities. However, it's important to remember that candlestick patterns should be used in conjunction with other technical indicators and market analysis techniques for more robust trading strategies.

Mastering candlestick patterns requires practice, patience, and a willingness to continually learn and adapt to changing market conditions. With dedication and a solid understanding of these patterns, traders can enhance their ability to navigate the complexities of the financial markets and achieve their trading goals.

in the next blog, we will be discussing the trading psychology. so stay tuned and keep reading more of our blogs.

this blog is just to provide theoretical knowledge about the stock market. Apply the methods in this on your own risk as the stock market is subject to market risk.