In this Blog our main focus will be on learning best candlestick patterns and implementing them while trading in stock market. After knowing how to read candlestick charts and best candlestick patterns one can increase thier chances of placing better trades with lot of confidence. Traders and investors uses these candlesticks patterns to observe the market movements.
Candlesticks also give signal about price action and the mood of the market towards a certain stock or index. It helps you in making trading decisions based on occurrence of different candlestick patterns. Steve Nison brought candlestick patterns in 1991 to the Western world by his popular book, “Japanese Candlestick Charting Techniques.”
Candlesticks are created by up and down movements in the price. Candlesticks are the most popular chart in comparison to line chart, bar chart & figure chart. Candlestick charts is part of technical analysis, following price movements and figuring out short-term market trend or stock direction.
If you want to read about the basics of candlestick chart, it’s history you can click here. In this blog we will be discussing best multiple candlestick patterns. In a single candlestick pattern, the trader needed just one candlestick to recognize a trading opportunity. However when you start reading multiple candlestick patterns, you will need 2 or 3 candlesticks to identify a trading opportunity.
What is Candlestick and How to Use It?
As as an illustration in above image of single candles, focus the length of the candle. 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.
- Open-to-close range represents the the body of a candle.
- The wick or shadow of a candle, indicates the intra-day high and low.
- The colour of the candle can be different, it depends upon the trading software you are using. Green usually refers to bullish (Increase in Price), whereas red candle reflects bearishisness(decrease in price). Understanding candlesticks are very easy, just know this basic details:
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
- As a matter of fact 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.
How many types of Candlestick Patterns are there?
First let me categorise them in two different ways:
- Single Candlestick Patterns
- Multiple Candlestick Patterns
Best Candlestick Patterns(Single):
Candles 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:
- Bullish Marubozu
- Bearish Marubozu
- Paper umbrella
- Hanging man
- Shooting star
- Spinning Tops
Best Candlestick Patterns(Multiple):
In multiple candlestick patterns, there are two or more candles to indicate the trading behavior of the stock. In this blog, we will discussing them in detail. There are various different types of multiple candlestick patterns that use several candles to portray the trading behavior.
Few most important Multiple candlestick pattern:
- Engulfing Pattern – (a). Bullish Engulfing Pattern (b). Bearish Engulfing Pattern
- Piercing Pattern
- Dark Cloud Cover
- Harami Pattern – (a). Bullish Harami (b). Bearish Harami
- Morning Star
- Evening Star
- Three White Soldiers
- Three Black Crows
There are numerous candlestick patterns, however it’s important to realize the best candlestick patterns one can use for maximum benefit. These patterns are separated into bullish and bearish. Bullish patterns indicate that the price is likely to rise, while bearish patterns indicate that the price is likely to fall.
There are various different types of multiple candlestick patterns that use several candles to portray the trading behavior. If you are not aware with the single candlestick pattern, i would advice you to read it first. It will become super easy for you to understand the best multiple candlestick patterns on chart.
When using any candlestick pattern, it is important to remember that although they are great for quickly predicting trends, they should be used alongside other forms of technical analysis to confirm the overall trend. In other words use them with other technical indicators like, Exponential Moving Average(EMA), Simple Moving Average(SMA), Fibonacci Retracements, Relative Strength Index(RSI), Moving Average Convergence Divergence(MACD), Support & Resistance etc.
Do read them, as it will certainly gain and expand your trading pyschology. Now, let us begin our journey to understand this best multiple candlestick patterns with examples. I would be using one day candlestick for explanation and examples.
What is Engulfing Pattern?
In simplest version an engulfing pattern uses two candles to indicate the trading behavior of two sessions. A classical engulfing pattern made of two candles, a small candle to show the trading behavior of day one and a longer candle to show the trading behavior of day two. Let us see how engulfing patterns look like:
If the engulfing pattern appears at the bottom of the trend, it is called the “Bullish Engulfing” pattern.
If the engulfing pattern appears at the top end of the trend, it is called the “Bearish Engulfing” pattern.
Now let us see through some example and understand them in better way.
Bullish Engulfing Candlestick Pattern:
In a bullish engulfing pattern, the first candle is a bearish candle (Red) the second candle is a (Green)) bullish candle. The bullish candle is comparatively longer than the bearish candle and totally engulfs the real body of bearish candle. The bullish engulfing pattern occurs at the bottom of a trend. Check out this condition to remember whenever you see the candlestick chart next time.
- The prior trend should be a downtrend
- The first candle formed should be a red candle reconfirming the bearishness in the market
- The Second candle should be a green candle, relatively long enough to engulf the red candle
- You can either wait for the third candle to see if the bullish trend is continued or can take a position just after the confirmation from second green candle.
Let us see this in a real time chart of TATA MOTORS LTD.
Whenever control get shifted from sellers to buyers bullish engulfing pattern emerges. This help us in knowing that the trend may be reversing. The long body of the current candle that completely engulfs the body of the previous candle reflects the force with which buyers have taken over.
Do not get confused, the candle should engulf just the real body not the whole candle (including the lower and upper shadows) appearing prior to green candle. As long as the real bodies are engulfed it can be classified as a bullish engulfing pattern.
Once you have identified this pattern you should be looking for buying opportunities. Please note i have used day chart so the following candles will be formed within 2 sessions or days.
Bearish Engulfing Candlestick Pattern:
The opposite of a bullish engulfing candle is bearish engulfing candle pattern. In a bearish engulfing pattern, the first candle is a bullish (green) one and the second candle is a bearish (red) one. The bearish candle (red) is longer than the bullish (green) candle and it completely engulfs the real body of bullish candle. Primarily, the bearish engulfing pattern occurs at the top of a trend. Check out this conditions to observe the appearance of a bearish engulfing pattern on a chart.
- The prior trend should be a uptrend
- The first candle formed should be a green candle reconfirming the bullishness in the market
- The Second candle should be a red candle, relatively long enough to engulf the green candle
- You can either wait for the third candle to see if the bearish trend is continued or can take a position just after the confirmation from second red candle.
Let us see this in a real time chart of STATE BANK OF INDIA (SBIN).
The bearish engulfing pattern hints you to go for a short trade. As you can see in the chart above, first bearish pattern appears and price started to fall, however this time bulls were able to take control of the situtaion. After few trading session when the price of the stock again reached to a level, where sellers were waiting to enter. This time they compelety thrashed the bulls. The price dragged to new low within few days of session. This is what you as an trader should look for, better oppotunities on technical ground.
Whenever control get shifted from buyers to sellers bearish engulfing pattern emerges. One important thing to mention is whenever you enter in to any trade, please put a stop-loss. See the best of traders or analyst in this world cannot gurantee the success of a trade with 100% accuracy. Understanding and observing this patterns closely will give you lot of ideas and new startegies to build.
Occurrence of a Doji’s Candlestick Pattern:
A Doji candlestick pattern occurs on chart, when the open and close are equal or at least very close together. Doji candlestick 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. The pattern signifies uncertainty, indecision, and is waiting for either the bulls or bears to take control. Can you see the body is very minor but the length of the shadows can be of any size.
The reason i am telling you about doji’s as you will observe this candles for sure while following the above patterns. You can combine two different patterns to develop a comprehensive view on the market. Let us see this in the chart below:
As you can see in the chart above India Bull Housing Finance, after the appearance of a bearish engulfing a confirmation from a Doji’s gives double thumbs up for the upcoming downtrend. Hence the long red candle following the Doji, can be identified as an attempt to go short in upcoming trading sessions.
whenever a doji follows a noticeable candlestick pattern, chances of a new trend will open up. It can be uptrend or downtrend. That is why i have said in the beggining to combine two different patterns to develop a extensive view on the market.
What is Piercing Candlestick Pattern?
A piercing candlestick pattern is known to be a potential signal for a bullish reversal. The piercing pattern is quite similar to the bullish engulfing pattern with a slight variation. The Piercing Candlestick Pattern occurs at the bottom of a trend. The prior trend should be bearish.
As we have learned above in a bullish engulfing pattern the green candle(2nd) engulfs red candle (1st) completely. Whereas in a piercing pattern green candle(2nd) partially engulfs red candle (1st) real body. Morever the engulfing should be between 50% and less than 100%. This pattern is formed by the two consecutive candlesticks. Take a look at the image below:
As you can see the green second candle is engulfing the red candle more than 50%. This indicates that selling pressure is reducing with more buying. Let us look this in a chart of a stock to understand it better.
In this chart, you can observe after the downtrend in stock, The first candle(red) is halfway engulfed by the 2nd candle(green). One this pattern formed, a change in price reversal occurs. As a trader you can buy the stock after occurence of second candle to benefit from the forthcoming uptrend. You may also choose to buy an (ITM) in the money call option with a strike price below the current market price. Whatever stratergy you follow, please do not forget to put stop-loss.
What Is Dark Cloud Cover Candlestick Pattern?
The dark cloud cover is a bearish reversal candlestick pattern. Dark cloud cover is opposite of a piercing pattern. It is very much similar to the bearish engulfing pattern with a slight variation. As we know now in a bearish engulfing pattern the red candle (2nd) engulfs green candle(Ist) completely.
However in a dark cloud cover, the red candle on (2nd) engulfs about 50 to 100% of green candle(1st) real body. Dark Cloud Cover Candlestick Pattern occurs at the top of a trend. The prior trend should be bullish. The pattern emerges by an up candle followed by a down candle. This pattern is formed by the two consecutive candlesticks.
As you can see the green second candle is engulfed by the red candle by more than 50%. This indicates that selling pressure is increasing with more bears entering the trade. Let us look this in a chart of a stock to understand it better.
Above image of chart for ICIC BANK LTD. shows clearly the dark cloud cover pattern, after an uptrend followed by significant downtrend. A further price decline following the bearish candle is called confirmation. This is what as a trader one should look for oppotunity to short. The first candle(green) is halfway engulfed by the 2nd candle(red). One this pattern formed, a change in price reversal occurs. So if you want to trade observing this pattern, put stop-loss above the high of bearish candle.
What is Harami Candlestick Pattern?
The Harami is a Japanese word for ‘pregnant’. On a lighter note the word ‘Harami’ does not mean (हरामी), what we mean it in our hindi language. This pattern is consists of two Candlesticks. They are just opposite to engulfing candlestick patterns.
As we have learned about engulfing, the first candles gets compelety engulfed by the second candle, however in a harami candlestick pattern the first candle is long and second is small. You can say the second small candles is stuffed in first long candle. The second candle is usually opposite in colour to the first candle. There are primarily two types of harami patterns. The bullish harami and the bearish harami. Let us discuss and understand them one by one.
Bullish Harami Candlestick Pattern:
The bullish harami candlestick pattern is a bullish pattern appearing at the bottom end of the chart. It suggests that a bearish trend may be coming to end. Bullish harami signals to enter in to a long position on an security. The bullish harami pattern develop over a two day period, same as the engulfing pattern.
A bullish Harami occurs when there is a large bearish red candle on Day 1 followed by a smaller bullish candle on Day 2. Check the image below to find out how does bullish harami candlestick pattern on chart looks like?
Can you observe that the first candle is long Red compelety engulfing the body of second green candle. You have to look for this pattern after an downtrend. If this pattern appears either you can wait for the confirmation from the third day candle opening above the second day candles or you can take position just after the formation. In both the cases you need to keep a strict stop-loss which will be the lowest low of the pattern.
Let us see a chart of YES BANK ltd.
Zoom in to see that after a strong decline in price, bullish harami pattern evolves, which is a signa of trend reversal. Buyers got attracted after the formation which lead to sharp upmove.
Bearish Harami Candlestick Pattern:
The bearish harami pattern appears at the top end of an uptrend. The pattern consists of a long green(bullish) candle followed by a small red(bearish) candle. The opening and closing prices of the second candle(red) must be stuffed within the body of the first candle. This pattern gives you a opportunity to initiate a short trade.
A bearish Harami evolves when there is a large bullish green candle on Day 1 followed by a smaller bearish red candle on Day 2. The stop loss for the trade would be the highest high between both the candles. Check the image below to find out how does bearish harami candlestick pattern on chart looks like?
You can increase the effectiveness of Bearish harami candlestick pattern pattern by combining it with other technical indicators as told you above. As an illustration let us see bearish harami pattern emerging on a chart.
As you can see in above chart of TATA MOTORS LTD. after the formation of a bearish harami pattern, sudden decline started which lead to heavy selling. You as a trader you should look for this opportunity to short. As a matter of fact after the confirmation candle, which is the third candle if you are risk averse trader you can short. Where as the risk taker will initiate the trade on day 2 of candle formation.
Morning Star Candlestick Pattern:
The Morning Star candlestick Pattern is known as a bullish reversal pattern. This pattern generally occurs at the bottom of a downtrend. The pattern consists of three consecutive candlesticks:
Large Bearish (red) Candle on Day 1
Small Bullish (green) or Bearish (red) Candle on Day 2 (preferably a doji or a spinning top)
Large Bullish (green) Candle on Day 3
Take a look at the image below to understand it better.
As you can see in the image above, the first part of a Morning Star reversal pattern is a large bearish red candle. The second day begins with the bears showing supermacy with a gap down opening. The formation of second candlestick can be of bearish, bullish or neutral in nature. Like a doji or a spinning top as we know the presence of doji/spinning top represents indecision in the market.
The colour of the second candle can be of both(green or red). However as morning star is a reversal pattern, if it is green in colour it signifies more buying. Generally a bullish candle on Day 2 is viewed as a stronger sign of an reversal.
On Day 3 which holds the most significance the stock opens with a gap up followed by a large green candle. This third candle which manages to close above or near day 1 red candle opening shapes the compelete formation of a morning star candlestick pattern. A trader should look at buying opportunities in the market once observing this pattern. Let us now look at the chart of a stock to see how does it look like:
Below is the chart of BRITANNIA:
Please take a closer look on the chart above of britannia. After a solid downtrend, morning star pattern evolves. This lead to a trend reversal, making buyers go long on the trade. As a trader you do not need to wait for a confirmation on the 4th day candle while you are trading based on a morning star pattern. You can put the lowest low in the pattern as a stop loss for the trade (second candle).
Evening Star Candlestick Pattern:
The Evening Star Pattern is seen as a bearish reversal pattern. The evening star candlestick pattern appears at the top end of an uptrend. Likewise the morning star, the evening star is a three candle formation. The pattern consists of three candlesticks. This pattern signifies that the uptrend is nearing its end. You can consider Evening Star pattern as a reliable indicator that a downward trend has begun.
Large Bullish (green) Candle on Day 1
Small Bullish(green) or Bearish(red) Candle on Day 2 (preferably a doji or a spinning top)
Large Bearish (red) Candle on Day 3
Take a look at the image below to understand it better.As you can see in the image above the first part of an Evening Star reversal pattern is a large bullish green candle. The 2nd day begins with a bullish gap up. The market opens with a gap reconfirming the bull’s dominance in the market. However, bulls were not able to push prices much higher.Hence formation of a spinning top or doji candlestick. The candlestick on Day 2 is very small and can be bullish, bearish, or neutral.
However as evening star is a reversal pattern, if it is red in colour it signifies more selling at top. Generally a bearish candle on Day 2 is viewed as a stronger sign of an reversal in a trend. This third candle which manages to close below or near day 1 red candle closing shapes the compelete formation of a evening star candlestick pattern. A trader should look at selling opportunities in the market once observing this pattern. Let us now look at the chart of a stock to see how does it look like:
Below is the chart of FEDERAL BANK:
Please take a closer look on the chart above. After a solid uptrend, evening star pattern evolves. This lead to a trend reversal, making sellers to go short. As a trader you do not need to wait for a confirmation on the 4th day candle while you are trading based on a evening star pattern. You can put the highest high in the pattern as a stop loss for the trade (second candle).
Three White Soldiers Candlestick Pattern:
The three white soldiers candlestick pattern is a bullish three candle reversal pattern. It is formed when three long bullish candles (green) appears after a downtrend consecutively. To check the validation of the pattern, First candle should be a bullish green candle with long real body followed by the second candlestick, which should be bigger than the previous candle’s body. Moreover the last candlestick should be at least the same size as the second candle and have a small or no shadow.
Let us take a look on this pattern mentioned below:
As you can see in the image above all the three bullish candle appearing at the top of one another. When a candle is closing with small or no shadows, it suggests that the bulls have managed to keep the price at the top on trading session. This pattern appears usually after a downtrend. Sometime you might see it evolving during the middle of an uptrend. As an trader you should be looking for buying oppotunities on seeing three white soldier candlestick pattern on chart.
Below is the chart of PUNJAB NATIONAL BANK(PNB):
As you can see in the chart above of PNB, after a mamoth of selling pressure from the bears, there is a sudden change in the sentiments of bulls. This lead to the formation of three white soldier candlestick pattern. This typically occurs with strong buying from the bulls in share market. You can put the stop-loss for the trade to be lowest of the 1st candle appearing. Traders who are short on the market look to exit and traders who are waiting to take up a bullish position see the three white soldiers as an entry opportunity.
Three Black Crows Candlestick Pattern:
Three black crows is a bearish candlestick pattern that forecast the reversal of an uptrend. The three black crows candlestick pattern is just the opposite of the three white soldiers we studied above. This pattern appears at the end of an uptrend.
The black crow pattern consists of three consecutive long-bodied bearish (red) candlesticks. It opens up within the real body of the previous candle and closes lower than the previous candle. This pattern predicts that the decline will continue to even lower lows.
Let us take a look on this pattern mentioned below:
As you can see in the image above three black crows is nothing but the three bearish candles appearing in succession. Let us look at the chart to understand it in better way.
Below is the chart of UNION BANK OF INDIA:
As you can see in the above chart not once but twice the pattern evolves on chart. This certainly gives the trader a oppourtunity to go short. One thing you need to keep in mind while trading this pattern is to avoid the oversold zone. Which you can eaisly get from the other technical indicator like Relative Strength Index (RSI).
I am not concluding because there are no more patterns to explain, on the other hand there are numerous other patterns one can learn. However, i have choosen to explain only the best candlestick patterns any begginer can understood.
The best way to observe a pattern while you trade is to open this blog and several other releated on this website and check which one is appearing at what time on a chart. Before ending this blog i want you to take a look on some of the brief points to keep in mind while using candlestick patterns in stock market in india.
- You need to check the prior trend while following any trend reversal candlestick patterns.
- Depending upon your risk taking ability, either place a trade just after the completion of pattern formation or wait for one more candlestick appearing to the same direction.
- Keep an eye on volume, if the pattern is forming with low volume, you might need to wait for some time.
- Always keep a strict stop-loss, and exit the trade as soon as it hits.
- Do not blindly follow the candlestick pattern without confirmation from any other technical indicators.
- Last but not the least once you have enter any trade, do not try to correct it, you need to have patience.
I hope you have learned lot of new thing from above, if you have any questions or feedback please let us know in comment box below. Till than “keep learning keep Earning”.