Point often overlooked by intraday trader, day trader, short-term trader or an investor is types of candlestick chart patterns and it’s meaning. We have come up with the compelte guide for you to learn it’s importance. Candlestick pattern can be graphically shown to predict a specific market movement. We will learn how you can apply these patterns in your daily trading or investing style. Candlestick charts gives you a ton of information . This can be very useful. As a matter of fact learning candlestick chart ,it’s patterns will change your trading pyschology completely .
How Candlestick chart Patterns will help you in your trading :
- You will be able to find Price action movement in market wether strong or weak?
- Help in knowing current Trend in market wether bullish or bearish?
- Who is controlling the market : buyers or sellers?
- If any particular price been tested & how it had reacted. Does it sustained or weaken more?
- Will be able to find if volumes are heavy for buyers or seller?
- Not to mention candlesticks are used to identify trading patterns.
- Based on patterns it help the trader to set up a trade.
History of Candlestick chart & patterns :
The concept of candlesticks helps in creating a simple graphic representation. Candlesticks holds a old long history. This comes from Japanese rice dealers. His name was Homma Munehisa. He is considered to be the father of the candlestick chart. In fact they have used various styles of charts. what we now call the candlestick was first introduced sometime in the 1860s.
Candlesticks were introduced to the West by Steve Nison 1980s. He was the author of several books including the classic “Japanese Candlestick Charting Techniques.” That is to say today, we will be learning how to construct as well as interpret candlestick charts. Learning candlestick types ,understanding its patterns considered as part of technical analysis. This will going to be very useful for intraday traders,day traders as well as investors in stock market. Although this requires patience and attention to small details. I would request you to be alert while reading the content.
Single Candlestick Chart Patterns & It’s Meaning :
Candle could be single or multiple forming a certain pattern. Candlestick patterns widely ranges from 1minute, hours, days, weeks, months, years etc. Larger timeframe candles provides significant amount of information about upcoming moves. A single candlestick pattern is formed by just one candle.
Few most important Single candlestick pattern, we will be learning are given below :
- Bullish Marubozu
- Bearish Marubozu
- Paper umbrella
- Hanging man
- Shooting star
- Spinning Tops
Do not get overwhlemed by the name of the candlesticks. As this been kept in it’s original form which comes from japenese. I personally feel they have cool names . In this articles we will be learning top 2 candles & remaining would be some other time .However before we learn this patterns formed by single candles, we need to know how how to read a candle?
How To Understand Candlestick Charts?
As as an illustration you can see in the above image of single candle in a chart .Pay attention to the length of the candle while trading based on candlestick patterns. The length denote the range for the day. Essentially, the longer the candle, the more heavy buying or selling activity. Another key point is of short candles can be considered that the trading action was gloomy for the day without much movement.
The colour of the candle can be different, it depends upon the trading software you are using. Green usually refers to bullish whereas red candle considered bearish.
The body of a candle & it’s shadow tells you this things:
- Opening price
- Closing price
- Whether the share price went up or down
- The lower shadow shows Lowest level for the time frame
- The upper shadow shows highest level for the time frame
- A red candlestick shows the open price at the top of the body
- A red candlestick shows closing price at the bottom of the body.
- A green candlestick shows the open price at the bottom of the body
- A green candlestick shows the closing price at the top of the body
- Candles with no shadow denote a strong trend in one direction
- You can consider the shadows as tests of a price range
Now you know as what exactly a candle means let us dive deep in to its pattern formation .
The Marubozu candlestick pattern :
Before we understand more marubozu candle i would like to quote “History tends to repeat itself”. You might have heard of this before as well. Similar to any other context in life, it is true indeed in stock market .The whole patterns formed by different candlesticks is showing us what has happenned in the past may happen again. So we get ready for right buying and selling oppotunities at correct level.
The word marubozu means “bald head” or “shaved head” in Japanese. Marubozu as a candlestick has no upper and lower shadow. A Marubozu candle has just the real body with some exceptions. Look at the image below to understand better.
As you can see, this candles do not have shadows attached, either they are highly bullish or bearish in nature.
The Bullish Marubozu Candle :
This type of candle gets formed when Open = Low, and High = Close. However it’s important to realize in reality there is a minor variation . The close of the candle can just be nearby not exactly at highest point. This type of candle get formed when buyer in market is buying stock actively at every price point. Seller in market does not have chance to counter buyer when such formation happens. Let us see same below in chart:
This is the chart of ICIC bank ltd. As you can clearly see the candle mentioned with black arrow is a bullish marubozu. Have you Noticed the bullish marubozu candle. It does not have a visible upper and a lower shadow. The OHLC (Open,High,Low,Close) data for the candle is: Open = 186.32, High = 200.27, Low = 186.32, Close = 198.50.
Now what to do with this information? You can do the trade setup given below :
Buy Price = nearby 199 and Stoploss = 186
However candlestick patterns do not give us a target. Depending upon your risk taking appetite you can either buy today at the close of the market or you can wait till tomorrow when market opens up. The benefit of buying tomorrow as it avoids any changes happened at night or news influence on stock. Moreover you will get a confirmation if the same trend is been continued or not.
Important note :
On the negative side there could be instances where the stoploss gets triggered. In other words your stop-loss gets hit & instead profit you suffered loss. Please remember, you need to put stop-loss while trading in share market. Even if gets hit ,& trust me it happens with everyone. This point is so often overlooked.
There can be situations when stock could reverse it’s direction and start going up after you pulled out of the trade. But unfortunately you can’t help it. This is all going to happen but you need to try and stick to some strategies.
The Bearish Marubozu Candle :
Opposite to bullish, bearish marubozu candle indicates huge bearishness. However here the open is equal to the high and close is equal to the low. Open = High, and Close = Low. A bearish marubozu happens with selling pressure in the stock. This happens when market participants sold stock at every price point during the day. Such type of candle can make a new sentiment in market. It will advisable to look for selling opportunities. Let us see same below in chart:
This is the chart of ICIC bank ltd. As you can clearly see the candle mentioned with black arrow is a Bearish Marubozu. Have you Noticed the bearish marubozu candle. It does not have a visible upper and a lower shadow. The OHLC (Open,High,Low,Close) data for the candle is: Open = 323.40, High = 323.40, Low = 312.10, Close = 313.50.
You can consider the minor variation between the OHLC figures ,only if it’s limited to a extent. The upper or lower shadows can vary a little bit.
You can do the trade setup given below :
Sell Price = nearby 313 and Stoploss = 324, Do not forget to put stop-loss while you enter any trade. It can happen that trade can go wrong . But till you are sticking to rules made by you on ground let it happen. Make sure to enter trade with your risk taking appetite.
You can wait for a confirmation tomorrow when stock market opens up . As you can see in the chart next day the trend continues. Once you are confirmed can easily enter the trade. If you are risk taker trader than you can enter this trade setup same day before market closes.
Important note :
As discussed above the types of candles small and lenthy, you need to avoid trading during an extremely small (below 1.5% range) or long candle (above 9% range). In case of very small candles it would be really hard to identify direction of the trade. On the other hand a long candle indicates extreme volatility. The placement of stop loss would be bigger problem with them and losses would be very huge in case if it gets triggered.
The Paper umbrella Candlestick chart pattern :
While trading in share market you might have seen the trend getting reverse ,within few minutes you enter the trade. You have no clue why it happened & mostly we thing this happens always with me. However in the background if you have paid little attention to the candlestick pattern formation ,that is what called as “paper umbrella“. It helps in setting up the directional trades. This is consist of two trend reversal patterns know as “Hanging Man and Hammer“. Let us see what exactly these candles look like and how we can get more accurate trades with them.
Take a close look to both candles,they look alike in terms of size shape etc. The difference between both hammer and hanging man depends up on the prevailing trend. In other words if there is continuous decline in a stock & hammer patter appears, it means a trend is ready to reverse . Buyers are getting interested again in the stock. On the other hand if there is continuous uptrend & a hanging pattern appears, means trend is going to reverse.
Hence the hammer is also known as bullish pattern . While hanging man refers to as bearish pattern.
The Hammer candlestick pattern :
Paper umbrella appears at the bottom end of a downward rally, than it is called the ‘Hammer’. Can you see the emergence of not 1 but 3 hammers continuously very well suggesting the end of the downtrend in stock. This is the chart of YES BANK LTD.
If we talk about the colour of hammer it can be green or red candle . Green candle means very strong reversal upcoming for bulls. Green body is more prefered than red .while a red means the buyers are trying best to change direction of the market & it will happen after few attempts. Prior trend should be a downtrend.
The shadow of the hammer is long downwards with no or little upward. While the body is one third of the entire candle. A hammer formation suggests a long trade. A trader can opt for going long (buying). You can put stop-loss to low of the hammer for the trade . It might trigger your stop-loss, but you have to take chances based up on your stratergy. Else you can wait for the confirmation by following the next candle.
The Hanging Man candlestick pattern :
When a paper umbrella appears at the top of an uptrend rally, it is called the ‘Hanging man’. Hanging man is a bearish reversal pattern that appears after a steady uptrend. Please check the chart below confirming the reversal in the trend. After a strong uptrend there are 3 continuous candle forming the “Hanging man”. Bearish hanging man pattern signals selling pressure in market for a stock.
If we talk about the colour of hanging man it can be green or red candle . The colour is not that important but the pattern is, bearish hanging man pattern signals selling pressure. Red candle means very strong reversal is upcoming for bears. The body should be one-third of the entire candle with no upper shadow. The downwards shadow is long.
A hanging man formation suggests a short trade. A trader can opt for going short (selling). The prior trend for the hanging man should be an uptrend. You can put stop-loss to high of the hanging man for the trade.
The above Types Of Candlestick Chart Patterns And It’s Meaning can change the way you have looked towards trading and investing in stock market. With this you can include various technical indicators like Exponential Moving Average (EMA) ,Moving Average Convergence Divergence (MACD), Simple Moving Average (SMA), Relative Strength Index (RSI) for better trade .This is just the beginning of reading charts. I might have included all the remaining candlestick patterns remaining:
- Shooting star
- Spinning Tops
However it would be very tough for a beginner to learn all at once. Instead learn this single pattern formation and instead of applying first observe while reading charts. Once you understand deeply, than suddenly you would find a new confidence and change in your trading psychology. We will be continuing the remaining candlestick patterns in other blog till than “keep learning keep earning”.
Important Note: I have used day charts in all the explanation given above .
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