Candlestick charts are used by traders to establish possible price movement based on past patterns. This patterns get formed based on historical data gathered. Candlesticks are created by up and down movements in the price. While these price movements sometimes appear random but they are very useful. This helps technical analyst to set up a trade. You need not to be a technical analyst, but you can learn few very important candlestick patterns formed.
Moreover we will learn how you can apply these patterns in your daily trading or investing style. Candlestick charts gives you a lot of information. This can be very useful. As a matter of fact learning candlestick chart ,it’s patterns will change your trading psychology completely .
Today we will be learning Most Used Candlestick Patterns and how you can use them while trading or investing. In the previous blog Candlestick Chart Patterns Type And It’s Meaning we learned basics of candlestick pattern. We also came to know about most important single candlestick like :
- Bullish Marubozu
- Bearish Marubozu
- Paper umbrella
- Hanging man
You can read them by clicking the link above. In addition to this, today will read the remaining 4 most important single candlestick patterns with examples. These are given below :
- Shooting star
- Spinning Tops
- Inverted Hammer
Important Note :
If you are not aware of what is candlestick? How to read candlestick chart patterns? History of candlestick chart?please check our previous blogs and read them. It will be very useful to set your basic understanding on topic. Click Here
We will start with Shooting start & Inverted hammer first, reason being they belong to the same star family. In fact both candles look same in size, shape & overall body ratio. Also, I have used only day charts over here. You can use minute, hour, week, month etc. depending upon your trading style. As a matter of fact time frame is very important.
The shooting star Candlestick Patterns :
In the first place shooting star is a bearish reversal candle pattern that is found at the top of an uptrend. To recognize this pattern take a look at the top of the candle, its long upper shadow ,body at the end with no or little lower shadow. The body of candles ideally should be 1/3 of the entire candle.
The colour of the candle can be any green or red. However as it is a reversal pattern and the prior trend is an uptrend, best would be a red candle. Let us see how it looks :
Shooting Star Candlestick Pattern
As an illustration let us see a chart where this pattern has occurred and following result after that.
This a day chart of TATA MOTORS LTD. After a successive rally, bears make entry to the stock. They were able to reverse the trend in their favour and we can easily see that. First thing to remember while looking for shooting star is, prior trend should be bullish. The moment stock reached a high point, there were sellers keen to drag the stock down.
Knowing this pattern you can set up a trade. You entry can be after the confirmation of shooting star candle. It depends upon your nature of trading. Either you can wait for a confirmation or you can enter right away. Make sure you put the stop-loss at the high of shooting star. once a trade has been set up, you should wait for either the stop loss or the target to be triggered.
The Inverted Hammer Candlestick Patterns :
First thing to remember Inverted Hammer is a bullish reversal candle pattern that is found after the downtrend. The inverted hammer is a confirmation of the reversal created by the price support during downtrend. In like manner to shooting star you can recognize this pattern by looking at the top of the candle, its long upper shadow ,body at the end with no or little lower shadow.
The colour of the candle can be any green or red. However as it is a reversal pattern and the prior trend is an downtrend, best would be a green candle. Let us See how it looks :
As an illustration let us see a chart where this pattern has occurred and following result after that.
This a day chart of TATA MOTORS LTD. After a huge downward rally, you can observe the emergence of a Inverted Hammer. Bull Made entry to the stock and tried hard to reverse the current downward rally. In which they were successful. The moment stock reached a low point, there were buyer sitting with keen to drag the stock up.
However i would advise you to wait for the following candle just for confirmation. Read what is hammer candlestick pattern? i personally prefer that more. To explain a little the body of a simple hammer is at upwards, with high lower shadows. which make it a bullish pattern. However the inverted hammer has body towards down, which means the bears are trying hard and they might drag the stock further.
The Spinning Top Candlestick Patterns :
Before i start telling you about Spinning Top candle, as an illustration let me show you how it looks like .
Shapes of bearish and bullish Spinning Top Candlestick
The spinning top candle shows uncertainty and indecision in the market. The candles have a small real body.The upper and lower shadow are almost equal. There would be an equal probability of reversal or continuation of trend. The real body shows us that open and close of the candle are very close to each other. For ex. Open= 100, close= 102.
The colour of the candles does not matter much. However during uptrend if there is red candle you can consider consolidation in market. Similarly for a green spinning top candle in downwards.
This type of candle get formed when both bull and bear tried hard to drag the stock up & down. However none of them succeed in same.
How you can use spinning top in you trading ?
See spinning top candle and its pattern only gives you information on a chart. The market uncertain and in perplex situation. Now instead of going in to the trade, you first need to understand the whole trend in that stock. Based on which you can either enter right away or wait for any bullish or bearish candles.
Let us see what happens when a spinning top candlestick pattern appears during uptrend.
As you can see in the chart above of YES BANK LTD. After a huge rally by bulls, bears enter the market & change the current trend. Look closely this does not happened with just one attempt, After forming two candles with low demand at that particular price, bears were able to drag the stock towards down. As a result stock got beaten down.
I also wanted to inform you the above chart is perfect example of a multiple candlestick pattern, where we see DOJI (another type of candlestick pattern)with Spinning Top. We will learning the same some other time.
Spinning Top during downtrend :
During a downtrend, when you see the spinning top candlestick pattern occurring with small green and red candles it is a sign of consolidation in stock price. Prior trend was down & hence bears were controlling but with emerging spinning top bull have decided to enter the market. Let us see this through an chart :
This a chart of PC JEWELLERS LTD. The price were drag down by bears. In addition, you can see the couple of candlestick in green & red colour showing confusion in future. Either you can wait till you see clear occurrence of big green candle or can enter the trade right away.
Two situation are bound to happen. Either the stock will reverse and new trend will occur or Bears will try there best to not give away the chance. Until the situation becomes clear the traders should be cautious and they should minimize their position size.
Important Note : Whenever you see the charts and its patterns forming, make sure you see them together. You need to connect them together to come to final point of decision. Whether it Marubozu, hammer,Shooting Star, Inverted Hammer etc.
The Dojis Candlestick :
A Doji candlestick pattern occurs on chart, when the open and close are equal or at least very close together. To put it differently a Doji candle is very much similar to spinning top. Doji candle does have a body but very minor. This type of candle reflects confusion, perplexity,struggle, doubt in market. Mostly you will see doji & spinning top together on chart.
Moreover this candles shows neither buyer nor sellers are able to bring a trend. A trend can be downward or upward. If you see them keep in mind anything is possible whether reversal of trend or same continuous trend. The colour of the candles does not matter but green is sign of reversal in case of downtrend rally. Where as red shows the bears trying to drag a upward rally. Let us see how the Doji candle look like :
Let us see what happens when a doji appears after a rally :
As you can see in above chart of ICIC BANK LTD. After a continuous rally few doji candle makes a appearance, showing a pause in rally and bears trying to break the trend. It resulted in end of a upward rally. It can happen that even after the bear trying to change the trend they might failed. Its better to look for other single candlestick pattern appearing nearby doji.
In above chart of ICIC BANK LTD. You can see the classic example of how using combination different candlestick patterns one can initiate trade in market. Doji appearing with inverted hammer pausing the downward rally. The inverted hammer is found after a downtrend and it signals a bullish reversal. Do not trade till the candle make a complete formation. To be on the safer side during spinning top and doji check with any other signal from bullish or bearish candlestick patterns.
What we have learned today and if you have really paid attention to all this candlestick patterns on chart. It will certainly make a huge impact to you. When you will see the charts next time observe this patterns forming on it. Whichever type of trader you are Intraday, swing trader, mid term trader or even a investor can use this charts.
Most people thing a investor perspective should be too look fundamentals of the company, but the chart tells you the level to enter in it. I Hope you like the content, if you have any feedback or concern please comment in the box below.
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